Grupo Financiero Banorte, S. A. B. de C. V. CONTENTS

Transcription

1 Grupo Financiero Banorte, S. A. B. de C. V. CONTENTS GLOSSARY... 3 I. Background Information... 5 What does GFNORTE stand for?... 5 When was GFNORTE founded and how did it evolve into its current structure?... 5 What is the corporate structure of GFNORTE? (As of September 30 th, 2011)... 7 Who is the Chairman of the Board of GFNORTE?... 8 How many Board Members does GFNORTE have and how many are independent?... 8 Who is the CEO of GFNorte?... 9 What are GFNorte s main business units and staff? Who are the contact persons at Investor Relations? What were the recent developments? II. Stock Information In which market is your stock listed? What is the ticker symbol for your shares in the Mexican Stock Exchange? How many shares outstanding does GFNORTE have? Do you have and ADR program listed? Is GFNORTE listed in any other major exchange? How do you fund your capital requirements? What is our dividend policy? In which securities can foreigners invest in the banking system and are there any restrictions to their ownership of financial institutions? Are there any filing requirements for the ownership of GFNorte s shares? Who is the contact person at the Ministry of Finance (SHCP) in order to carry out the required notifications to the authorities? Has the company had certificate changes? III. Financial legislation and accounting standards Regulation Accounting Changes and Regulations Other relevant Accounting Changes before the year IV. Products and Services What are Banorte and Ixe s main deposit and lending products offered to its clientele? V. Infrastructure VI. Banorte USA Inter National Bank Uniteller Motran VII. Recovery Bank What is Solida?

2 How does the asset recovery unit work? VIII. Other Business Units a) Other Finance Companies b) Broker Dealer and Mutual Funds c) Long Term Savings IX. IXE Ixe Banco Ixe Casa de Bolsa Fincasa Hipotecaria Ixe Automotriz Ixe Fondos Ixe Soluciones e Ixe Servicios X. Alliances and Strategic Initiatives Banorte Generali Telecomm Telegrafos Banco Do Brasil China Development Bank Correspondent Banking Cardtronics X. Reserve Requirements Why did Banorte s Coverage Ratio decline in the period ? How are the quarterly provision charges being determined under the new criteria? What are the new reserve requirements for the credit card loans that the authorities put in place in ?.. 45 What are the main changes to the rating methodology for the loan portfolio of States and their Municipalities? XI. Capitalization What is the minimum required level of Capitalization and which level is acceptable for Banorte? What is the main source of Capital Consumption? What is your strategy to increase the bank s capitalization? XII. Risk Management i) Credit Risk ii) General rules for risk diversification in asset and liability operations applicable to loan institutions iii) Market Risk iv) Ixe s Market Risk v) Liquidity Risk and Balance vi) Ixe Liquidity Risk vii) Operational Risk viii) Technology risk ix) Legal risk x) Ixe Operational Risk

3 GLOSSARY ABM Afore XXI ADR s Afore Banorte Almacenadora Banorte Arrendadora y Factor Banorte Bancen Bancrecer Banorte Banpaís Banxico BMV Casa de Bolsa Banorte CNBV CNSF CONSAR DOF Asociación de Bancos de México, A.C. (Mexican Bankers Association) Afore XXI, S.A. de C.V., (Mexican Social Security Institute s pension fund manager) American Depositary Receipts Banorte Generali, S.A. de C.V. AFORE (Pension Funds) Almacenadora Banorte, S.A. de C.V. Organización Auxiliar de Crédito, Grupo Financiero Banorte (Warehouse) Arrendadora y Factor Banorte, S.A. de C.V., SOFOM E.R., Grupo Financiero Banorte (Leasing and Factoring) Banco del Centro, S.A. Institución de Banca Múltiple Bancrecer, S.A., Institución de Banca Múltiple Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte Banpaís, S.A., Institución de Banca Múltiple Banco de México (Central Bank) Bolsa Mexicana de Valores, S.A.B. de C.V. (Mexican Stock Exchange) Casa de Bolsa Banorte, S.A. de C.V., Grupo Financiero Banorte (Broker Dealer) Comisión Nacional Bancaria y de Valores. (National Banking & Securities Commission) Comisión Nacional de Seguros y Fianzas (National Insurance and Bonding Commission) Comisión Nacional del Sistema de Ahorro para el Retiro (Mexican National Commission for the Retirement Savings System) Diario Oficial de la Federación (Mexican Official Gazette of the Federation) 3

4 Fincasa GFNorte INB IMSS IPAB Indeval Fincasa Hipotecaria, S. A. de C.V. SOFOM E.R., Grupo Financiero Banorte Grupo Financiero Banorte, S.A.B. de C.V. Inter National Bank Instituto Mexicano del Servicio Social (Mexican Social Security Institute) Instituto para la Proteccion de Ahorro Bancario (Institute for the Protection of Banking Savings) S.D. Indeval, Institución para el Depósito de Valores, S.A. de C.V. (Securities Depository) Ixe Ixe Grupo Financiero, S.A.B. de C.V. Ixe Automotriz Ixe Automotriz, S. A. de C.V. SOFOM, E.R., Grupo Financiero Banorte Ixe Banco Ixe Banco, S.A. Institución de Banca Múltiple, Grupo Financiero Banorte Ixe Casa de Bolsa Ixe Fondos Ixe Servicios Ixe Soluciones Ixe Casa de Bolsa, S.A. de C.V., Grupo Financiero Banorte Ixe Fondos, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Banorte Ixe Servicios, S.A. de C.V., Grupo Financiero Banorte Ixe Soluciones, SOFOM E.R. Grupo Financiero Banorte Law to Regulate Financial Groups Pensiones Banorte Seguros Banorte SHCP the Law to regulate financial groups. Ley de Agrupaciones Financieras. Pensiones Banorte Generali, S.A. de C.V., Grupo Financiero Banorte (Annuities) Seguros Banorte Generali, S.A. de C.V., Grupo Financiero Banorte (Insurance) Secretaría de Hacienda y Crédito Público. (Ministry of Finance & Public Credit) 4

5 Information as of September 30 th, 2011 I. Background Information What does GFNORTE stand for? Grupo Financiero Banorte is one of the leading financial institutions in Mexico. After the merger with Ixe, it has a network of 1,277 branches, 6,176 ATMs and more than 85,000 POS terminals. GFNorte offers banking services, premium banking, Wholesale banking, and through its correspondent agreements with Telecomm-Telegraph and 7-Eleven Mexico, serves more than 9.7 million customers, while 8 million additional customers are served by the Group s pension fund manager (AFORE) and Insurance companies. GFNorte also offers the following products and services: Brokerage House, private banking, mutual funds, leasing and factoring, warehousing, insurance, pensions and retirement savings. Banorte also has presence in Southern Texas, through Inter National Bank as well as in New Jersey and California, through the remittance companies of Uniteller and Motran; and in New York through Banorte Securities International. Banorte s strategic partners are the International Financial Corporation (IFC) subsidiary stakeholder in the subsidiary Banco Mercantil del Norte, and leading Italian insurance company in its insurance and long-term savings operations. Banorte has some of the best loan quality indicators in Mexico s financial system and presents high capitalization and liquidity levels. For further information about the company is available on the website: When was GFNORTE founded and how did it evolve into its current structure? Banorte was founded in 1899 as Banco Mercantil de Monterrey. In 1986, four years after the bank s nationalization by the Mexican Government, Banco Mercantil de Monterrey merged with Banco Regional del Norte, creating Banco Mercantil del Norte. Six years later, in 1992, during the banking system s re-privatization process, Banorte was acquired by a group of shareholders led by Roberto Gonzalez Barrera. One year later, with the integration of the broker dealer and other finance companies (factoring, warehousing, leasing and bonding), Grupo Financiero was incorporated as it is known today. After being privatized, Banorte was mainly a regional bank with presence only in the northern area of the country. After the 1996 financial crisis, it began a rapid expansion with the acquisition of Bancentro, a bank based in central Mexico, and Banpaís in 1997 which was located mainly on the southern part of the country, it became a national bank with presence throughout the country. On that same year, the Long Term Savings Sector was created, through the alliance with Assicurazioni Generali S.p.A. that provides Annuities, Retirement Savings Funds and Insurance. Generali became a strategic partner since the creation of this company, with a 49% stake in the business. In 2002, Banorte continued its expansion through the merger with Bancrecer. 5

6 In 2006, Banorte expanded its operations into the United States, formalizing the acquisition of Inter National Bank, based in Texas and Uniteller, a remittance company based in New Jersey. In 2007, Banorte acquired Motran Services, a remittance company based in California. In 2009, Banorte consolidated its presence in the AFORES market through the acquisition of Afore IXE, Afore Ahorra Ahora y Afore Argos assets. On November 17th, 2010 GFNORTE and IXE Grupo Financiero announced that they had reached a binding agreement to pursue an integration mechanism. They also informed that after having carried out the corresponding audits, both institutions had reached a binding merger agreement, this agreement was approved by the Ministry of Finance and Public Credit (SHCP) through the communiqué UBVA / 012 / 2011 on March 8, 2011 and by the Ixe and GFNorte s Shareholders Assemblies on March 30, On April 15th, 2011 the merger became effective when the authorization and the merger agreements with Ixe were registered in the Public Registry of Commerce in Monterrey, Nuevo León. In order to carry out the capital stock increase and share exchange, that same day GFNORTE: Increased the variable portion of its capital stock by Ps 1,078,035, (one billion seventy-eight million thirty-five thousand eight hundred nineteen 00/100 Mexican Pesos), by issuing 308,010,234 (three hundred eight million ten thousand two hundred thirty-four) Series O common shares with a nominal value of Ps 3.50 (three Pesos 50/100 Mexican Pesos) each, considering an exchange ratio of GFNorte shares per Ixe share; Replaced all of its outstanding shares in circulation with new securities representing the total shares issued by GFNorte, including those issued as a result of the capital stock increase resulting from the merger, through S.D. Indeval, Institución para el Depósito de Valores S.A. de C.V.; and Carried out the exchange of Ixe s shares for GFNorte s shares, according to the conditions approved by the Shareholders Assemblies, which established that once the merger came into effect, Ixe shareholders would receive through S.D. Indeval, Institución para el Depósito de Valores, S.A. de C.V., 300,420,101 (three hundred million four hundred twenty thousand one hundred one) shares to be distributed in proportion to shareholdings of each Ixe shareholder, and GFNorte would deliver the remaining 7,590,133 (seven million five hundred ninety thousand one hundred thirty-three) shares to an irrevocable Trust to be held between GFNorte, acting as Trustor and as Primary Trustee and The Bank of New York Mellon,S.A. Institución de Banca Múltiple, as Fiduciary; and all of IXE s shareholders would be appointed as Secondary Trustees, as established in the Trust. The shares will be deposited in the Trust for a period of 12 months as of April 15th, 2011, and could be used to cover certain contingencies that could arise during the merger process. At the end of this term, the shares held in trust will be delivered to each Ixe shareholder proportionally to their shareholdings in Ixe Grupo Financiero at the time of the share exchange. Requested the cancellation of securities issued by Ixe, as a result of the merger. 6

7 GFNORTE s capital stock, as of that date, is composed as follows: No. of previous shares No. of shares issued No. of actual shares Fixed 252,157, ,157,233 Variable 1,766,190, ,010,234 2,074,200,549 Total Capital Stock 2,018,347,548 2,326,357,782 What is the corporate structure of GFNORTE? (As of September 30 th, 2011) GFNORTE s main subsidiaries are: GFNorte Ow nership of Subsidiaries 3Q11 Banco Mercantil Del Norte, S.A. (1) 92.72% Banorte USA (2) % Retirement Funds Afore (2) 51.00% Brokerage House-Banorte % Leasing and Factoring % Warehouse % Annuities 51.00% Insurance 51.00% Ixe Banco, S.A % Brokerage House- Ixe % Ixe Fondos % Ixe Servicios % Ixe Automotriz % Ixe Soluciones % Fincasa Hipotacaria % 1) As a result of merging Pronegocio on August 31,2009. Reflects the IFC s investment in Banco Mercantil del Norte because the operation was concluded on 4Q09. 2) Subsidiary of Banco Mercantil del Norte. Banorte USA owns 100% of Uniteller and 100% of INB. 7

8 Grupo Financiero Banorte Banking Sector Long Term Savings Other Finance Companies Brokerage Banco Mercantil del Norte 1 Ixe Banco 3 Seguros Banorte Generali 5 Arrendadora y Factor Banorte 3 Ixe Fondos 3 Banorte Casa de Bolsa 3 Ixe Casa de Bolsa 3 Banorte USA 2 Ixe Tarjetas 4 Pensiones Banorte Generali 5 Almacenadora Banorte 3 Ixe Servicios3 Afin Int. Holding 9 Ixe Holding 11 1) 92.72% GFNorte. 2) 100% Banco Mercantil del Norte. 3) 99.99% GFNorte. Afore Banorte Generali 6 IxeSoluciones 3 Banorte Securities 10 Ixe Securities 12 4) 50% Ixe Banco, 50% CMC Holding Delaware Inc. (subsidiaria de JPMorgan Chase). Ixe Automotriz 3 5) 51% GFNorte, 49% Generali. 6) 51% Banco Mercantil del Norte, 49% Generali. 7) 100% Ixe Automotriz. 8) 99.99% Fincasa Hipotecaria. 9) 100% Casa de Bolsa Banorte. 10) 100% Afin International Holding. 11) 100% Ixe Casa de Bolsa. 12) 100% Ixe Holding. Ixe Fleet 7 Casa Servicios Administrativos 8 Fincasa Hipotecaria 3 Who is the Chairman of the Board of GFNORTE? During the General Shareholders Meeting held on February 18, 2011, Guillermo Ortiz Martínez was appointed as Chairman and Related Proprietary Member of the Board of Directors. Also, Roberto Gonzalez Barrera, a renowned Mexican businessman, the controlling shareholder of GFNORTE, and one of the original shareholders that purchased the bank when it was privatized in 1992, who is also Chairman of the Board of Grupo Maseca was appointed as Chairman Emeritus. How many Board Members does GFNORTE have and how many are independent? On July 21 st, the Shareholders Assembly formalized changes to the Board of Directors, designating 5 new Board Members, including highly recognized personalities in the business and financial sectors, as well as some of Ixe Grupo Financiero s former Board members. Therefore, the board has 15 members, of which 53% are independent. The Stock Market Law which is effective since 2005 requires that at least 25% of the board members be independent. Article 24.- The Board of Directors of Public Listed Companies will be conformed of a maximum of twenty one members, out of which, at least twenty five percent must be independent. Each patrimonial member may have a substitute, in the agreement that these members substitutes must have the same characteristics. 8

9 The Board of Directors is comprised of the following members: PROPRIETARY MEMBERS Name Position Status 1. Roberto Gonzalez Barrera Chairman Emeritus Patrimonial 2. Guillermo Ortiz Martinez Chairman Related 3. Bertha Gonzalez Moreno Patrimonial 4. David Villarreal Montemayor Patrimonial 5. Manuel Saba Ades Patrimonial 6. Francisco Alcala de Leon Independent 7. Herminio Blanco Mendoza Independent 8. Everardo Elizondo Almaguer Independent 9. Patricia Armendariz Guerra Independent 10. Armando Garza Sada Independent 11. Hector Reyes Retana Independent 12. Juan Carlos Braniff Hierro Independent 13. Eduardo Livas Cantu Independent 14. Enrique Castillo Sanchez Related 15. Alejandro Valenzuela del Rio Related ALTERNATE MEMBERS Name Status 1. * 2. Roberto Gonzalez Moreno Patrimonial 3. Juan Antonio Gonzalez Moreno Patrimonial 4. José G. Garza Montemayor Patrimonial 5. Alberto Saba Ades Patrimonial 6. Manuel Aznar Nicolin Independent 7. Javier Martinez Abrego Independent 8. Carlos Chavarria Garza Independent 9. Isaac Becker Kabacnik Independent 10. Ramón A. Leal Chapa Independent 11. Julio César Mendez Rubio Independent 12. Guillermo Mascareñas Milmo Independent 13. Alfredo Livas Cantu Independent 14. Javier Molinar Horcasitas Related 15. José Marcos Ramirez Miguel Related *The Chairman Emeritus has no Alternate Who is the CEO of GFNorte? Alejandro Valenzuela was appointed as Acting CEO of GFNorte on April 2008, and ratified by the board as CEO on July of the same year. He has a professional experience of over 20 years in the public and private financial sector, having held the positions of Director of International and External Relations of Banxico; Economic Spokesman for the Federal Government and the Ministry of Finance; Director of International Treasury Affairs; Director of Public Debt and Director of Foreign Credit, Investment and Trade in the Treasury Department [SHCP], among others. Over the last 5 years, Mr. Valenzuela was the Senior Managing Director of Treasury Operations and Head of Investor Relations at Grupo Financiero 9

10 Banorte, as well as CEO of the Broker Dealer. Previously, he was Managing Director of Investor and Institutional Relations. Before joining GFNorte, he was Country Head in Mexico for EADS, Airbus holding company. Mr. Valenzuela holds a postgraduate degree from the ENA in Paris, a PhD in Economics from the University of Paris Dauphine and M.A. and B.A degrees in Economics from the University of California in Los Angeles (UCLA). What are GFNorte s main business units and staff? NAME Alejandro Valenzuela del Río BUSINESS UNITS Enrique Castillo Sánchez Mejorada Marcos Ramírez Miguel Patricio Rafael Rodríguez Chapa Luis Ernesto Pietrini Sheridan Víctor Antonio Roldán Ferrer José Armando Rodal Espinosa Carlos Eduardo Martínez González Alejandro Eric Faesi Puente Carlos Alberto Arciniega Navarro René Gerardo Pimentel Ibarrola Javier Molinar Horcasitas Jesús Garza Martínez Manuel Romo Villafuerte Fernando Solís Soberón To be designated Luis Fernando Orozco STAFF Alejandro Garay Espinosa Benjamín Vidargas Rojas Carla Juan Chelala Héctor Martín Ávila Flores Armando Rivero Laing Javier Márquez Diez-Canedo Guillermo Güemez Sarre Sergio García Robles Gil Group Officers 3Q11 CURRENT POSITION Chief Executive Officer, Grupo Financiero Banorte Co- Managing Director Wholesale Banking Co- Managing Director Wholesale Banking Managing Director Wealth and Asset Management Managing Director Private Banking Managing Director Transactional Corporate Banking Managing Director Business & Corporate Banking Managing Director Government Banking Managing Director Markets & Institutional Sales Managing Director Treasury Managing Director Business Development & Research Managing Director Banorte-Ixe s Integration Managing Director Retail and Commercial Banking Managing Director Ixe Bank Managing Director Long Term Savings Managing Director Banorte USA Managing Director Asset Recovery Managing Director Corporate Services Managing Director - Audit Managing Director - Marketing Co- Managing Director - Legal Co- Managing Director - Legal Managing Director - Risk Managing Director Technology Chief Financial Officer 10

11 Who are the contact persons at Investor Relations? David Ricardo Suárez Deputy Managing Director of Investor Relations Av. Prolongación Reforma No. 1230, 4 th Floor Santa Fe, México D.F Tel: +52 (55) [email protected] Mariana Amador Investor Relations Deputy Director Av. Prolongación Reforma No. 1230, 4 th Floor Santa Fe, México D.F Tel: +52 (55) x [email protected] Ana Lydia Cespedes Investor Relations Manager Av. Prolongación Reforma No. 1230, 4 th Floor Santa Fe, México D.F Tel: +52 (55) x [email protected] Anabel Torres Resendiz Investor Relations Analyst Av. Prolongación Reforma No. 1230, 4 th Floor Santa Fe, México D.F Tel: +52 (55) x [email protected] Mayra Mota Najera Investor Relations Analyst Av. Prolongación Reforma No. 1230, 4 th Floor Santa Fe, México D.F Tel: +52 (55) [email protected] What were the recent developments? For the past nine months, Banorte continued its efforts to strengthen its fundamentals and emerge a more solid institution that will take advantage of growth opportunities under a more favorable economic environment despite growing competition. These efforts are reflected in the following events: Reclassification of Grupo Financiero Banorte and Banco Mercantil del Norte s Financial Information as of September On November 22nd, 2011 GFNORTE informed that as a result of the changes in the general dispositions applicable to Credit Institutions (Accounting Criteria B-6 "Loan Portfolio"), published on October 5th, 2011 in the Diario Oficial de la Federación (Mexican Official Federal Gazette), Banco Mercantil del Norte, S.A., Institución de Banca Múltiple has decided to adhere to such dispositions until they become effective in early As a result of the above, the Financial Statements reported last October 27, 2011 by GFNORTE and Banco Mercantil del Norte, have been modified. There were no material changes on such Financial Statements. The financial ratios that were modified as a consequence of these re-classifications are: Past Due Loan Ratio: 2.4% from a previous level of 2.2% Coverage Ratio: 132.6% from a previous level of 135.8% 11

12 It is important to emphasize that GFNORTE's quarterly Net Income, as well as the expected results for 2011, remain unchanged as a result of this accounting reclassification. Regulatory Capitalization Ratio remains at 15.6%. Merger of Mutual Funds through the purchase of Banorte s Series A Shares by Ixe Fondos. On November 4th, GFNORTE reported that as a result of the merger between GFNORTE and IXE Grupo Financiero, and as part of the integration process and the expected synergies, GFNORTE consolidated the mutual funds managed by Ixe Fondos, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Banorte (Ixe Fondos) and Operadora de Fondos Banorte, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (Operadora Banorte). This consolidation took place last November 1st, 2011, with the authorization of the CNBV, through the purchase of the series "A" shares by Ixe Fondos, of the 19 mutual funds that were managed by Operadora Banorte. As a result, IXE Fondos currently manages 43 funds with assets of approximately $83 billion pesos. We are convinced that the unification of the administration and operation of our mutual funds under the same structure, will offer better value for the benefit of GFNorte's mutual fund customers. The IMSS, Grupo Financiero Banorte and Generali sign the purchase agreements to formalize the Imss Participation in the Merged Afore. On October 20th, 2011 GFNORTE informed that the necessary agreements have been signed in order for the IMSS to acquire Generali s 49% ownership in Afore Banorte Generali and an additional 1% of the shares owned by Banorte, translating into a 50% ownership by the IMSS in the Afore resulting from the merger. This transaction represents a further step for the IMSS and Banorte to proceed with the definitive merger of their respective Afores, which is still subject to customary regulatory approvals. Strategic merger with Afore XXI. After the announcement on August 16th that GFNorte and the IMSS (Mexican Social Security Institute) had signed an agreement to pursue the merger of their respective retirement savings funds companies (Afores), on October 20th, GFNorte informed that Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, signed a purchase agreement to acquire Prudential s shareholdings in Afore XXI. This purchase agreement is still subject to meeting certain conditions and the customary regulatory approvals. The amount paid by Banorte for Prudential s shares amounts to approximately US$ 200 million. Banorte and Banjército join forces. On September 20th, the Banco Nacional del Ejército Fuerza Aérea y Armada, S.N.C. and Banco Mercantil del Norte, S.A. (Banorte), signed a Collaboration Agreement that will provide access to personnel of Mexico s armed forces to Banorte s wide nationwide infrastructure, as well as other benefits, such as access to the acquisition of Banorte s foreclosed properties with important discounts, and also assistance in Banjército s treasury operations. Refinancing of some of GFNORTE s Subnational government exposures and results of applying the new methodology to reserve loans in this sector according to expected losses. On October 19th, 2011 GFNORTE informed that following the material event published on September 30th announcing its participation in the debt refinancing of the State of Coahuila, Banorte had also recently participated in the debt refinancing of the States of Aguascalientes and Sonora. The total amount of the refinanced debt with these three States amounts to Ps. $13.21 billion pesos, which represents 4% 12

13 of GFNORTE s total Loan Portfolio at closing of September The main goal to refinance these liabilities was to provide the States with better terms and financial conditions, which will provide them with flexibility in the management of their fiscal resources. The maturities of the new loans range from 20 to 27 years 4 months, they have adequate coverage and in all cases the Federal Transfers (Participaciones Federales) are the main repayment source. It is also worth noting that no charge-offs or discounts were offered as part of these refinancings. On the other hand, after applying the new methodology for the creation of Loan Loss Reserves for States and Municipalities according to expected losses, the impact on Banorte was a decrease in reserves. This was a result of the following strengths in Banorte s Loan Portfolio: 87% of the loans are secured by a Trust Guarantee and have Federal Transfers or other local source of income as a payment source. 79% have interest rate hedging during the term of the loan. 92% of the total portfolio are long-term loans and only 8% of the loans are unsecured short term loans. All loans have high coverage ratios of at least 2 to 1 times the debt service. The long-term loans are registered in the Public Debt Registry of the Ministry of Finance and Public Credit (SHCP). GFNORTE also reported that it will continue to participate in future debt refinancing of other States and Municipalities as part of its strategy to provide comprehensive solutions to its customers and maintain the leadership that has characterized Banorte in financing to this sector. Changes to the rating methodology for the loan portfolio of States and their Municipalities. On October 5th, 2011, the CNBV published a resolution modifying the general applicable dispositions to Credit Institutions, changing the rating methodology for the loan portfolio granted to States and their Municipalities. This resolution modifies the current model for reserves based on public ratings, in order to establish a methodology which rates and reserves the portfolio according to expected losses for the following 12 months taking into consideration the probability of non-fulfillment, severity of the loss and exposure to each client's nonfulfillment, included in Annex 18 of the mentioned Resolution. The resolution went into effect on October 6th, 2011 and is applicable optionally either during the third or fourth quarter of GFNorte opted to apply this methodology with figures for Banorte s loan portfolio to September 30th, As a result, GFNorte released Ps 87 million pre-tax in excess reserves which were calculated under the previous methodology. This cancellation of excess reserves was reflected in the fiscal year s results in accordance with such methodology. The amount of preventive reserves for credit risks in Banorte s loan portfolio calculated using the methodology referred in Annex 18 of the Resolution was Ps 961 million, and the amount of reserves required under the previous methodology was Ps 1,048 million, both using figures to September 30th, GFNorte s Ordinary and Extraordinary Shareholders Meetings. On October 17th, the Extraordinary and Ordinary Shareholders Meetings were held in order to approve the creation of the Designations Committee, changes to the Dividend Policy, payment of dividends and an increase in the amount for the Shares Repurchase Fund. The most relevant resolutions approved were: 1. Creation of a Designations Committee. In the Extraordinary General Shareholders Meeting, the creation of a Designations Committee was approved with the following functions: propose the candidates that will integrate the Board of Directors to the Shareholders Assembly; issue an opinion about the candidates proposed for the CEO position; propose remunerations for members of the Board of Directors and Committees; as well as propose the removal of members of the Board of Directors, among others. The Committee will be comprised of 3 13

14 Board of Directors members with 1 year terms, having the possibility of re-election. The Designations Committee will hold sessions at least once a year or whenever convened by the President. 2. Change in the Dividend Policy. The Ordinary General Shareholders Meeting approved to modify the Dividend Policy in order to align dividend payments to the Financial Groups business performance. As of this year, dividend payments will be as follows: i. 16% of recurring net income in the event that profit growth is between 0% and 10% during the year. ii. 18% of recurring net income in the event that profit growth is between 11% and 20% during the year. iii. 20% of recurring net income in the event that profit growth is greater than 21%. 3. Cash Dividend Payments. During the same Shareholders Meeting, a cash dividend payment was decreed for the amount of Ps 0.17 per share, payable as of October 24th from the Retained Earnings account. The decreed dividend corresponds to the first of three payments that will cover the amount of Ps 0.52 per share, the amount approved by the Board of Directors in its session held on July 25th.The Board of Directors will propose in subsequent Shareholders Assemblies to decree additional dividends for a total amount of Ps. $0.35 per share, to be covered in two installments of Ps. $0.17 and Ps. $0.18 in February and May of 2012, respectively. 4. Increase in the amount of the Share Repurchase Fund. In order to have a share repurchase fund that represents a greater percentage of the Group s market capitalization, an increase is proposed to the maximum amount of financial resources that may be applied for share repurchases during The proposal is to allocate the amount of Ps billion, charged against equity, in accordance with the Treasury s Policy for Stock Acquisitions and Sales. Banco Mercantil del Norte s Extraordinary Shareholders Meeting. The Shareholders Meeting was held on October 3rd, to obtain authorization for the issuance of nonconvertible preferred subordinated Obligations up to an amount equivalent to $600 million US dollars, to be issued and placed in international markets according to Rule 144-A and Regulation S of the Securities Act of 1933 of the United States of America, and according to applicable legislation in the different jurisdictions in which the Subordinated Obligations are placed. Banco Mercantil del Norte exercised the prepayment option of the Nonconvertible Subordinated Obligations expiring in In October, Banorte exercised the call option on the Non Convertible Subordinated Notes issued in 2006 and maturing in 2016 for an amount of $400 million US dollars, registered in the Luxemburg Stock Exchange. The payment of these Subordinated Obligations was carried out on October 13th. This prepayment demonstrates Banorte s financial strength in spite of the weak conditions of other financial systems and the volatility in international financial markets. Changes in Organizational Structure. During the month of October, Sergio Garcia Robles Gil, who has 17 years of service in this Institution, was designated as Managing Director of Corporate Affairs in charge of GFNorte s Regional Boards. Rafael Arana was named Chief Financial Officer in substitution of Mr. Garcia Robles Gil. Mr. Arana has a successful professional trajectory of more than 16 years in the financial sector, during the last five years 14

15 as Deputy Chief Executive Officer of HSBC s Retail Banking Division for Latin America. He also served as Deputy Managing Director and Director of HSBC Mexico. On September 23rd, changes were also announced in the organizational structure of Wholesale Banking. Alejandro Faesi, was designated as Managing Director of Markets and Institutional Sales; Carlos Arciniega Navarro as Managing Director of Treasury and René Pimentel as Managing Director of Business Development and Fundamental Analysis. Investment Banking and Structured Financing was assigned to Arturo Monroy, and Capital Markets Investment Banking to Gerardo Tietzsch, both of whom will report directly to Marcos Ramírez and Enrique Castillo, Co-Managing Directors of Wholesale Banking. Changes in Corporate Governance The Ordinary and Extraordinary Shareholders Meetings held on July 21st formalized changes to the Board of Directors and proposals to adopt the best international practices in Corporate Governance. The most relevant resolutions passed by the Assembly were: 1. Changes to the Board of Directors It was approved that the Board of Directors will be integrated by a maximum of 15 members, with at least 50% of the Board being Independent members in accordance to international best practices. Board members may be appointed for terms of up to 3 years, with the possibility of being re-elected, seeking to establish a generational balance. As part of these changes, it was proposed to designate 5 new Board Members, seeking also to include some of Ixe Grupo Financiero s former Board members. As a result, Grupo Financiero Banorte s new Board of Directors is comprised of the following members: PROPRIETARY MEMBERS Name Position Status 1. Roberto Gonzalez Barrera Chairman Emeritus Patrimonial 2. Guillermo Ortiz Martinez Chairman Related 3. Bertha Gonzalez Moreno Patrimonial 4. David Villarreal Montemayor Patrimonial 5. Manuel Saba Ades Patrimonial 6. Francisco Alcala de Leon Independent 7. Herminio Blanco Mendoza Independent 8. Everardo Elizondo Almaguer Independent 9. Patricia Armendariz Guerra Independent 10. Armando Garza Sada Independent 11. Hector Reyes Retana Independent 12. Juan Carlos Braniff Hierro Independent 13. Eduardo Livas Cantu Independent 14. Enrique Castillo Sanchez Related 15. Alejandro Valenzuela del Rio Related ALTERNATE MEMBERS Name Status 1. * 2. Roberto Gonzalez Moreno Patrimonial 3. Juan Antonio Gonzalez Moreno Patrimonial 4. José G. Garza Montemayor Patrimonial 5. Alberto Saba Ades Patrimonial 6. Manuel Aznar Nicolin Independent 15

16 ALTERNATE MEMBERS 7. Javier Martinez Abrego Independent 8. Carlos Chavarria Garza Independent 9. Isaac Becker Kabacnik Independent 10. Ramón A. Leal Chapa Independent 11. Julio César Mendez Rubio Independent 12. Guillermo Mascareñas Milmo Independent 13. Alfredo Livas Cantu Independent 14. Javier Molinar Horcasitas Related 15. José Marcos Ramirez Miguel Related *The Chairman Emeritus has no Alternate 2. Advisory Board and Regional Boards In the same Shareholders Meeting, the creation of these bodies was authorized and their respective operating rules were established. The Advisory Board will serve as a consultation and advisory body to the Chairman of the Board, on topics related to the bank s development, new business opportunities or those issues that the Chairman of the Board submits to its consideration. It will have 10 members who will be elected by the Shareholders Assembly or by the Board of Directors, as proposed by the Chairman or the Chairman Emeritus, and their term will last for 3 years with the possibility of re-election. Their remuneration will be established by the Shareholders Assembly or the Board of Directors. The Advisory Board will meet when convened by its Chairman. The members approved by the Board of Directors to be part of this Advisory Board are: Name Position 1. Guillermo Ortiz Martinez Chairman 2. Francisco Alcala de Leon 3. Enrique Castillo Sanchez Mejorada 4. Javier Molinar Horcasitas 5. Rodolfo F. Barrera Villareal 6. Manuel Aznar Nicolin 7. Jose G. Garza Montemayor 8. Eugenio Clariond Reyes-Retana 9. Jacobo Zaidenweber Cvilich 10. Isaac Hamui Mussali Five Regional Boards were also established: Northwest, Monterrey, Jalisco, Mexico City Metropolitan area and Merida. These Boards will provide opinions and advisory to the Board of Directors on the trends and opportunities of the region, and will function as links within the region s business community. Each Regional Board will have up to 20 members with activities in the respective regions and who are not members of the Board of Directors. Members will be elected by the Chairman of the Board of Directors for terms of 1 year with the possibility of being re-elected any number of times, and their remuneration will be determined by the Shareholders Assembly or the Board of Directors. Sessions will be held twice a year or when convened by the Chairman of the Board of Directors. New Mortgage Offering. During July, Banorte launched its new mortgage offering with the objective of being positioned as a specialized mortgage bank that offers various home acquisition options with excellent payment conditions, differentiated product offering and accessible interest rates for all needs. Through this concept, the market needs will be met appropriately through a competitive offering, defining differentiated products for each type of client: 16

17 HIPOTECA ELITE BANORTE High income clients with low risk. HIPOTECA FIJA BANORTE Clients requiring Fixed Rates and fixed payments. HIPOTECA FLEXIBLE BANORTE Clients seeking Flexibility when payments are timely. HIPOTECA ACCESIBLE BANORTE Clients requiring Accessible monthly installments. Insurance Sales through Ixe s network. Since July, Seguros Banorte-Generali began offering its products through Ixe s branch network. Products were designed to meet the specific needs of Ixe s clients under the best service guarantee. Among those being offered are: Ixe Car insurance Ixe Life insurance Ixe Home insurance Ixe Integral Protection Insurance Ixe Insurance in the United States Ixe SME car insurance Ixe SME damage insurance At a later stage, educational and savings insurance will be offered. Euromoney and World Finance Recognitions. Banorte - IXE was recognized in July by EuroMoney magazine s 20 th edition of its "Awards for Excellence" as the Best Bank in Mexico 2011" and last May by World Finance magazine as the Best Commercial Bank in Mexico 2011." These recognitions were given for the high level of service, innovation and specialization in attention to clients, as well as for the quality of our products and services, among other attributes. Organizational Designations. In May, Hector Avila Flores and Armando Rivero Laing were appointed as Co- Managing Directors of the Legal Department of Grupo Financiero Banorte. Merger between Grupo Financiero Banorte and Ixe Grupo Financiero (Ixe). During the quarter, a series of material events happened related to the merger process between GFNorte and Ixe. On April 15 th, 2011 the merger became effective when the authorization and the merger agreements with Ixe were registered in the Public Registry of Commerce in Monterrey, Nuevo León. In order to carry out the capital stock increase and share exchange, that same day GFNORTE: i. Increased the variable portion of its capital stock by Ps 1,078,035, (one billion seventyeight million thirty-five thousand eight hundred nineteen 00/100 Mexican Pesos), by issuing 308,010,234 (three hundred eight million ten thousand two hundred thirty-four) Series O common shares with a nominal value of Ps 3.50 (three Pesos 50/100 Mexican Pesos) each, considering an exchange ratio of GFNorte shares per Ixe share; 17

18 ii. iii. iv. Replaced all of its outstanding shares in circulation with new securities representing the total shares issued by GFNorte, including those issued as a result of the capital stock increase resulting from the merger, through S.D. Indeval, Institución para el Depósito de Valores S.A. de C.V.; and Carried out the exchange of Ixe s shares for GFNorte s shares, according to the conditions approved by the Shareholders Assemblies, which established that once the merger came into effect, Ixe shareholders would receive through S.D. Indeval, Institución para el Depósito de Valores, S.A. de C.V., 300,420,101 (three hundred million four hundred twenty thousand one hundred one) shares to be distributed in proportion to shareholdings of each Ixe shareholder, and GFNorte would deliver the remaining 7,590,133 (seven million five hundred ninety thousand one hundred thirty-three) shares to an irrevocable Trust to be held between GFNorte, acting as Trustor and as Primary Trustee and The Bank of New York Mellon,S.A. Institución de Banca Múltiple, as Fiduciary; and all of IXE s shareholders would be appointed as Secondary Trustees, as established in the Trust. The shares will be deposited in the Trust for a period of 12 months as of April 15 th, 2011, and could be used to cover certain contingencies that could arise during the merger process. At the end of this term, the shares held in trust will be delivered to each Ixe shareholder proportionally to their shareholdings in Ixe Grupo Financiero at the time of the share exchange. Requested the cancellation of securities issued by Ixe, as a result of the merger. GFNORTE s capital stock, as of that date, is composed as follows: No. of previous shares No. of shares issued No. of actual shares Fixed 252,157, ,157,233 Variable 1,766,190, ,010,234 2,074,200,549 Total Capital Stock 2,018,347,548 2,326,357,782 During the quarter, the following authorizations were obtained to carry out the merger: National Banking and Securities Commission (CNBV) - On April 15 th, the CNBV authorized to update the registration of shares issued by GFNORTE as a consequence of the capital increase resulting from the merger. Shareholders Assemblies On March 30 th, 2011, GFNorte s Shareholders Assembly voted by a majority in favor to merge with Ixe Grupo Financiero, thereby receiving the authorization by this corporate body. Since the Shareholders Meeting of Ixe Grupo Financiero also approved the merger on that date, both institutions join as a single group on that date under the name of "Grupo Financiero Banorte, S. A. B. de C. V.". Ministry of Finance and Public Credit (SHCP) - On March 8 th, 2011, according to Article 10 of the Law to Regulate Financial Groups and with the prior positive opinion from the National Banking and Securities Commission (CNBV) and the Bank of Mexico (Banxico), SHCP authorized, through the communiqué UBVA / 012 / 2011, the merger of Grupo Financiero Banorte as the merging 18

19 entity and Ixe as the merged entity, in accordance to the terms and conditions of the proposals presented to SHCP regarding the Shareholders Assemblies and the merger agreement. Antitrust Commission (COFECO) - On February 3 rd, 2011 COFECO authorized the concentration, through a merger of the twofinancial Groups, since the concentration ratios resulting from the transaction between GFNORTE and Ixe in the markets where they have joint operations (banking and credit services, brokerage, investment and leasing companies) are within the thresholds established by the COFECO to be considered with low risks of antitrust practices and, therefore, it is not anticipated that the transaction may have adverse effects on competitors and on free competition. The rating agency Standard & Poor's ratified Banorte s rating. On March 22 nd, 2011 the rating agency Standard and Poor's ("S&P") affirmed its rating for Banco Mercantil del Norte S.A with a "Stable" outlook, and affirmed the BBB- / A-3 global scale counterparty credit and certificate of deposit ratings. It also affirmed the BBB rating of Banorte s Senior Unsecured Debt. This report was the result of an analysis made by the rating agency on the current performance of the Bank and its business perspectives after the merger of Grupo Financiero Banorte with Ixe Grupo Financiero. In relation to the merger with Ixe, S&P estimates that Banorte s above-average business profile and its increasing market position with a penetration strategy, will provide the merged bank with more geographical and customer diversification. In 2011, Banorte will continue its moderate and cautious growth strategy to adequately adapt to the merger and to maintain its asset quality, continuing Banorte's conservative underwriting practices and a favorable macroeconomic outlook for Mexico in The rating agency Fitch confirmed its rating for GFNorte and upgrades ratings of Ixe Grupo Financiero and its subsidiaries. In April, the rating agency Fitch confirmed Grupo Financiero Banorte s with a "Stable" outlook ratifying the rating of BBB. This confirmation reflects Fitch s opinion that there will be a moderate effect on GFNorte s financial profile, since the merger with Ixe Grupo Financiero (Ixe GF) was completed under a shares exchange mechanism, and because it did not involve any cash disbursement, there will be no negative impact to GFNorte s liquidity and capitalization profiles. Fitch also upgraded Ixe GF s national scale rating from A-(mex) to AA+ and those of its subsidiaries to align them with the GFNorte s ratings. Fitch withdrew Ixe GF s ratings since the merger became effective on April 15 th. Banorte formalizes strategic alliance with Cardtronics to add 2,000 ATMs its existing network. On March 30 th, Banorte and Cardtronics reached an agreement in order to integrate 2,000 ATMs into GFNorte s existing network. With this strategic alliance, and the merger of Ixe in GFNorte, it will have one of the largest ATM networks in Mexico, offering clients from Banorte and Ixe access to more than 7,000 ATMs free of service fees, by yearend. The implementation will be carried out in two phases: first, 1,000 ATMs will be installed between April and May 2011, and the remaining 1,000 ATMs will be enabled during the second half of this year. Therefore, this Alliance with Cardtronics will allow Banorte to continue its ongoing technological expansion. The alliance with Cardtronics will start operations once the National Banking and Securities Commission (CNBV) authorizes the agreement. 19

20 Roberto Gonzalez Barrera was appointed as Chairman Emeritus of Grupo Financiero Banorte s Board of Directors and Guillermo Ortiz Martinez as Chairman of the Board of Directors. On February 18 th the Shareholders Assembly approved by a majority of 86% to appoint Roberto Gonzalez Barrera as Chairman Emeritus of the Group and Guillermo Ortiz Martinez as Chairman and Related Proprietary Member of the Board of Directors. These changes are part of the institutionalization of the Group and its corporate organs. Roberto Gonzalez Barrera, as well as being a majority shareholder of the Financial Group and main contributor during its most important era of development, also has a wide experience in the Mexican business sector, being the majority shareholder and Chairman of the Board of Directors of Grupo Maseca. Guillermo Ortiz Martinez has an extensive professional trajectory in the Mexican and international financial and banking system, having served as Governor of the Bank of Mexico, Minister of Mexico s Finance and Public Credit, Minister of Communications and Transportation, Undersecretary of Finance and Credit Public and Director at the International Monetary Fund (IMF). Appointment in the New Business Development Unit. On 15th March, Jorge Alejandro Chavez Presa joined GFNorte as Deputy Managing Director for New Business Development. He holds a degree in Economics from the Instituto Tecnologico Autonomo de Mexico and has a Master in Arts and Ph. D. in Economics from The Ohio State University. In his career, he has held several positions in the Public Sector, as: i) Member of the Governing Board of the Instituto para la Protección al Ahorro Bancario (IPAB) ( ) ii) Representative in Congress ( ), where he chaired the Finance and Budget Committee, iii) Undersecretary for Energy Policy in the Ministry of Energy ( ), iv) in the Ministry of Finance held various position, as the Head of the Budgetary Policy and Control Unit ( ), General Director for Budget ( ), Director of Public Debt ( ) and Director of Financial Planning ( ). Payment of a cash dividend corresponding to the 2009 fiscal year. The Ordinary General Shareholders Meeting held on February 18 th, 2011, approved to distribute a cash dividend of Ps $ 0.17 pesos per share paid on February 28 th In the Annual General Shareholders Meeting to be held on April 29 th, a proposal will be presented to distribute a cash dividend of Ps $ 0.18 pesos per share to be paid in May These two payments correspond to the second and third payments in order to cover the total of Ps $ 0.52 per share, which was the total amount of the dividend corresponding to profits for 2009 decreed by the Shareholders Assembly in October Sale of Gruma's Stock in GFNorte. On February 14 th, 2011, GFNorte announced the sale of 161,405,905 (one hundred sixty-one million four hundred five thousand nine hundred five) shares, excluding the over-allotment option, at a price of Ps $ (fifty-two 00/100 Mexican Pesos) per common share through an international offering and a public offering in Mexico by the selling shareholder Gruma, S. A. B. de C. V. (GRUMA). GFNORTE also informed that the Mexican and International underwriters decided to exercise the over-allotment option fully on February 11 th, 2011, as a result of this, all of the shares included in the Global Offering were settled on February 15 th, Consequently, the total proceeds from the Offering of 177,546,496 (one hundred seventy-seven million five hundred forty-six thousand four hundred ninety-six) shares were delivered to the selling shareholder GRUMA. Following the offering and the exercise of the over-allotment option by the initial purchasers and the Mexican underwriters, GRUMA no longer owns any of GFNorte s share capital. The offering in Mexico was carried out through the Mexican Stock Exchange (BMV), while the international offering was carried out in the United States under Rule 144A of the U.S. Securities Act of 1933 and outside the United States under Regulation S of the same Securities Act and in accordance to applicable legislation in jurisdictions where the international offering was carried out. The common 20

21 shares offered in the international Offering were not registered under the Securities Act of 1933, and were not offered or sold in the United States without registration or an applicable exemption from registration requirements. Fund Pro awards the best investment funds in Mexico in On March 16th, Fund Pro Platinum Performance Award 2010 recognized NTEGUB as one of the best Debt Mutual Funds in the category of Non Taxable Short Term Debt. Once again Banorte demonstrates its commitment to clients by offering competitive products and services. Changes to Accounting Criteria In January 2011 the CNBV issued a series of regulations to modify the accounting criteria of the controlling companies of financial groups and financial institutions. The main changes were: Controlling Companies Criteria A-2 Application of particular norms. The facility of not consolidating permanent investments in Insurance or Annuities companies has been eliminated with this criteria. As of February 1 st, such institutions must be consolidated with the financial statements of the controlling companies. As a consequence, the consolidation of Seguros y Pensiones Banorte Generali (the Insurance and Annuities companies) has initiated. Credit Institutions: Criteria B-2 Investments in Securities Regulations were added for the reclassification of securities held to maturity and Negotiable instruments as Securities available for sale, which allow the reclassification under extraordinary circumstances (the lack of market liquidity, no active market for the reclassification, among others), which will be evaluated, and if the case, validated through authorization by the CNBV. Criteria B-5 Derivatives and hedging transactions Implicit Derivatives are no longer valued in currencies commonly used in trading contracts for unfinanced items in the economic environment in which the transaction is carried out. The use of margin accounts is specifically explained in transactions with derivatives in markets or recognized stock exchanges. The accounting of collateral in operations with derivatives carried out in markets or unrecognized stock exchanges (OTC), is carried out outside of margin accounts and is registered in an account receivable and an account payable respectively. Criteria B-6 Loan Portfolio Charged Fees for restructured loans must be deferred, amortizing them in the Income Statement as Interest Income during the new term of the loan, among other changes. Criteria D-2 Income Statement The way the Income Statement is modified, mainly eliminating the items of "Non Operating Income (Expenses), net" and the accounts that were previously registered there will now be registered under "Other Operating Income (Expenses)" in the Income Statement. 21

22 Changes of the rating methodology for Consumer and Mortgage portfolios. On October 25 th, 2010, the Commission published a resolution that modifies the methodology for rating non-revolving consumer and mortgage loans, so that preventive provisions for loan risk will be calculated based on the expected loss instead of the incurred loss. This change went into effect on March 1 st, In response to this change, on March 31 st, 2011, the Financial Group recognized in Shareholders Equity (results of previous fiscal years), the initial accumulated financial effect of applying the rating methodologies to non-revolving consumer and mortgage loans. The impact was Ps 582 million to the "Retained Earnings" account under the item Preventive Loan Loss Reserves in the Balance sheet. Deferred taxes corresponding to this change were charged to the asset account of "Deferred Taxes" for Ps 233 million, against a credit to the "Retained Earnings " account in the stockholders equity. 22

23 II. Stock Information In which market is your stock listed? The Mexican Stock Exchange (Bolsa Mexicana de Valores) and the Madrid Stock Exchange (Latibex) Website: and What is the ticker symbol for your shares in the Mexican Stock Exchange? BMV: GFNORTE.O How many shares outstanding does GFNORTE have? The number of shares outstanding is 2,326,357,782 (as of September 30 th, 2011). Do you have and ADR program listed? Grupo Financiero Banorte (BMV ticker: GFNORTEO) announced on June 2009 the establishment of a Level 1 Sponsored American Depositary Receipt (ADRs) Program in the United States, as a consequence of the changes to Rule 12g3-2b by the Securities and Exchange Commission (SEC) on October 10, 2008, that facilitates the establishment of sponsored and non-sponsored ADR programs for companies not operating in US stock markets. Since GFNORTE is one of the BMV's most liquid stocks, it has attracted interest by international institutional funds seeking exposure to the Mexican financial system. In this respect, the ADR program complements the bank's efforts to increase its presence in the world's main financial markets. It has been established as a Level 1 ADR Program, which means that GFNorte will operate in "Over the Counter" market without being listed in the NYSE or NASDAQ. It operates in the pink sheets market under the symbol GBOOY. On July 15, 2010 GFNorte began operations in OTCQX International Premier, an electronic platform to operate OTC Level I ADR programs. Each ADR is equivalent to 5 shares of GFNORTE and at closing of September 30 th, 2011 there were 2,654,056 ADR s outstanding. Bank of New York Mellon is the depository bank for this program. Is GFNORTE listed in any other major exchange? On June 9th 2009, GFNorte s common shares were listed in the Madrid Stock Exchange through the Latin American Stock Market "Latibex" and began trading successfully under the symbol XNOR. GFNorte s shares were included in the FTSE Latibex All Share index upon listing, and were incorporated in the FTSE Latibex TOP Index as of June 10, an index comprised of the 16 most important Latin American companies listed in this market. One XNOR share is equivalent to 10 shares of GFNORTEO. How do you fund your capital requirements? The main source of funding for our capital requirements has been the reinvestment of profits and the issuance of subordinated debt, both domestically and internationally. In November 2009, the IFC (International Finance Corporation) invested US $150 million in Banco Mercantil del Norte s equity. The 23

24 IFC is a member of the World Bank, with a mission to foster private sector sustainable development in emerging markets. Through this investment, the IFC aims to contribute to the development of the Mexican financial system. It will also contribute Banorte with its expertise in world class corporate governance practices, as well as standards for social responsibility and environmental protection. Moreover, the IFC and Banorte will collaborate in various expansion programs for Banorte in sectors with high potential to foster social and economic development in Mexico. This investment will also increase the bank s Tier 1 capitalization ratio. What is our dividend policy? The Ordinary General Shareholders Meeting held on October 17, 2011, approved to modify the Dividend Policy in order to align dividend payments to the Financial Groups business performance. As of this year, dividend payments will be as follows: i. 16% of recurring net income in the event that profit growth is between 0% and 10% during the year. ii. 18% of recurring net income in the event that profit growth is between 11% and 20% during the year. iii. 20% of recurring net income in the event that profit growth is greater than 21%. Previously, GFNorte s Board of Directors approved a dividend payment policy in which the Board proposed to the General Shareholders Meeting each year a dividend consisting of at least 15% of GFNorte s recurring Net Income. In which securities can foreigners invest in the banking system and are there any restrictions to their ownership of financial institutions? Even though Mexican legislation allows financial institutions to issue different types of shares, GFNorte s equity consists only of series O shares which provide equal voting rights to all shareholders. There are no limitations to the amount of securities that foreigners can own of a Mexican financial institution. The only prohibition of ownership is to governments, or any governmental body or agency, which exercise authority powers in their respective countries. Are there any filing requirements for the ownership of GFNorte s shares? 1. Mexican Regulations: According to the current Mexican regulations for financial institutions, shareholders whose ownership exceeds 2% of the company s O Shares must comply with certain regulatory filings. Such filings maybe reviewed at the Law to Regulate Financial Groups and the Stock Market Law (Ley del Mercado de Valores). Any shareholder is responsible for complying with these filing requirements, and it is usually their broker-dealer in Mexico who takes care of the process. As a reference, Article 18 bis 1 of the Law for Regulating Financial Groups states that any person acquiring or transferring O Series shares representing over 2% of a Financial Group must notify the SHCP within 3 business days of the acquisition or transfer. This means that once your holdings of GFNorte exceed 2%, you must notify the SHCP regardless of how you built up your position on our bank s shares. In case you are in violation of this filing requirement, we cannot register your holdings in our shares registry and therefore you could lose your corporate rights at shareholder s assemblies. We must also notify the authorities about this situation and you could be liable to sanctions and also forced to sell 24

25 the shares back to us. Further filing requirements apply if you want to acquire more than 5% of O Shares of a Mexican financial group (article 20 of the Law for Regulating Financial Groups), and also if you want to gain full control of a financial group (more than 30% ownership of shares). Also, the General Rules applicable to the acquisition of securities and share purchases through public offerings point out that depending on the percentages of the controlled shares and the new acquisition intended for increasing such percentages, there is an obligation to disclose the details to the CNBV and to the BMV. Moreover, any group of persons controlling 25% or more of the shares must reveal to the CNBV the number of shares that each of the group s members owns. Furthermore, the aforementioned persons shall inform whether or not it is their intention to acquire 30% or more of the shares. 2. Corporate Bylaws: Corporate Bylaws state that in order for any shareholder or related group of shareholders or third parties to acquire ownership of 5% or more of GFNorte's total shares, they must first receive the approval of the Board of Directors. This is also applicable to the acquisition, whether through public offering or any other means, of each of the following percentages: 10%, 15%, 20%, 25% and up to 30% minus one share of the total outstanding shares of stockholders equity in circulation. Whoever acquires ownership of shares representing 4%, 8%, 16% or 24% or any amount over this limit should notify the company within 30 business days following the date that these percentages are reached or exceeded. Finally, should the applicant intend to acquire 30% or more of the stockholders equity additional requirements, established in the bylaws and applicable legal ordinances, must be met. Who is the contact person at the Ministry of Finance (SHCP) in order to carry out the required notifications to the authorities? Your broker dealer in Mexico should be responsible for doing the necessary notifications to the authorities. In case you do not use a broker dealer to carry out your transactions in the Mexican stock exchange, you may send a written communication to the Ministry of Finance and Public Credit at the following address: Juan Manuel Valle Pereña Jefe de Unidad de Banca, Valores y Ahorro Secretaria de Hacienda y Crédito Público Palacio Nacional, Edificio No. 12, Piso 4 Col. Centro, C.P , México D.F. Tel , [email protected] For further information, you may also contact Jesús Vázquez at the Ministry of Finance and Public Credit at (52)

26 Has the company had certificate changes? Yes, the Company had two certificate changes in 2007 and 2008: 1. In 2008, the issuer name was changed from Grupo Financiero Banorte S.A. de C.V to Grupo Financiero Banorte S.A.B. de C.V. in order to comply with the new Stock Exchange Law effective as of In 2007, the information related to the rights and obligations of shareholders was modified in order to comply with the new legislation for Financial Groups, Credit Institutions and Deposit Insurance. The new regulation contemplates that shareholders accept that the shares purchased of a financial group can be used as guarantee in favor of the Institute for the Protection of Banking Savings (IPAB), according to the stipulations of article 28 (fractions IV and VI) of the Law to Regulate Financial Groups, in order to secure the payment of losses covered by the Institute that were incurred by banks belonging to a financial group. Also, in case of untimely payment by the controlling company of these obligations, ownership of those shares can be transferred in favor of the IPAB. 26

27 III. Financial legislation and accounting standards Regulation GFNORTE was authorized by the SHCP to operate as a financial service holding company, regulated by the Law to Regulate Financial Groups, being under the supervision and regulation of the CNBV. GFNorte and its subsidiaries are regulated (according to their activities), by the CNBV, CNSF, CONSAR, Banxico and other applicable laws. The subsidiaries main activity is conducting financial transactions through multiple banking services, brokerage, asset management, leasing, factoring, general warehousing services, pensions and insurance. Legal Framework Banking Sector Banking (Banco Brokerage Dealer Mercantil Sectordel Norte, SA) Other Finance Long Term Companies Savings (Afore, Other Term (Leasing and Insurance, Banorte USA Companies Factoring, Savings Annuities) Warehousing) Código de Comercio X X X X Ley de Instituciones de Crédito (Adicional: legislación mercantil, usos y prácticas bancarias y mercantiles, legislación civil federal, Ley Federal de Procedimiento Administrativo, Código Fiscal). X Ley de la Comisión Nacional Bancaria y de Valores y reglamento. X X X Disposiciones de carácter general aplicables a las Instituciones de Crédito. Ley de Protección al Ahorro Bancario. X X Ley de Protección y Defensa al Usuario de Servicios Financieros. X X X X Ley de Sistema de Pagos. X X X X Ley del Banco de México y circulares. X X X X Ley del Servicio de Tesorería de la Federación. X Ley General de Títulos y Operaciones de Crédito. X X X X Ley Monetaria de los Estados Unidos Mexicanos. Ley para la Transparencia y Ordenamiento de los Servicios Financieros. Ley para Regular las Agrupaciones Financieras y Reglas generales para la Constitución y Funcionamiento de Grupos Financieros. Ley de los Sistemas de Ahorro para el Retiro (Adicional: Ley del Seguro Social, Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores y Ley del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado). Ley General de Instituciones y Sociedades Mutualistas de Seguros. Ley sobre el Contrato de Seguro. Ley General de Organizaciones y Actividades Auxiliares de Crédito. Ley de Sociedades de Inversión. Ley del Mercado de Valores. (Adicional: Legislación mercantil, usos bursátiles y mercantiles, legislación civil federal). Disposiciones de Carácter General aplicables a las Casas de Bolsa. X X X X X X X X X X X X X X X X Ley de Inversión Extranjera. X *Banking Sector includes a Banco Mercantil del Norte and Ixe Banco; Brokerage includes Casa de Bolsa Banorte, Ixe Casa de Bolsa and Ixe Fondos; Long Term Savings includes Afore, Aseguradora (Insurance) and Pensiones (Annuities); Other Companies: Arrendadora y Factor (Leasing and Factoring), Almacenadora (Warehousing), Ixe Automoriz, Fincasa Hipotecaria, Ixe Soluciones e Ixe Servicios. 27

28 Accounting Changes and Regulations a) General regulations applied to controlling companies of financial groups subject to supervision by the CNBV. On January 31st, 2011 the CNBV issued general regulations applicable to controlling companies of financial groups, in order to compile into one single legal instrument the dispositions applicable to these entities, as well as the modification of diverse regulatory reports to take into consideration homogeneous accounting approaches applicable to other financial entities such as banking, insurance and bonding sectors. As a consequence of the work carried out jointly by the CNBV and the National Insurance and Bonding Commission in accordance with the Financial Reporting Standards issued by the CINIF and the International Financial Reporting Standards of the International Accounting Standards Board. Once these dispositions come into effect, the "General Dispositions applicable to financial reporting standards for controlling companies of financial groups subject to supervision by the CNBV" will be cancelled as published in the Diario Oficial de la Federación on April 28th, 2005 and its diverse modifications, as well as the "General accounting dispositions applicable to controlling companies of financial groups subject to supervision by the CNBV", published in the Diario Oficial de la Federación on August 14th, 2006 and its diverse modifications. b) Main changes in accounting criteria for controlling companies. Criteria A-2 "Applications of special norms ", was modified by eliminating the ability to avoid consolidating permanent investments in controlled insurance or bonding institutions, and as of February 1st, such institutions must be consolidated in the financial statement of the controlling companies. Likewise with Criteria D-1, D-2, D-3 and D-4 relating to basic financial statements, there were changes in their presentation in accordance with the changes of the mentioned criteria. c) Main changes in accounting criteria for credit institutions. On January 27th, 2011 the National Banking and Securities Commission issued changes to applicable accounting criteria for credit institutions to make them consistent with financial reporting standards established in Mexico and abroad, as well as facilitating the comparison of information provided to authorities, the public and markets in general. These changes were adopted and applied in the financial statements as of January The following are the most relevant changes. With regards to Criteria B-2 "Investments in Securities", rules were added for the reclassification to the category of securities held to maturity, or securities available for sale, which can be effected under extraordinary circumstances (for example: lack of market liquidity, no active market, among others), which will be evaluated and if the case, validated through the express authorization of the CNBV. In relation to Criteria B-5 "Derivatives and hedging operations": Dollar denominated derivatives are no longer valued when the currency commonly used in trading contracts for buying or selling non financial items in the economic environment in which the transaction is carried out (for example, a stable and liquid currency commonly used in local transactions, or, in foreign trade). In those cases where it is necessary to recognize and value embedded derivatives, the obligation to present them in the balance sheet together with the contract host was eliminated, which is why the embedded derivative must be registered under the item of Derivatives. 28

29 The use of margin accounts is specified in operations with derivatives in recognized markets or stock exchanges. Accounting of collateral in OTC operations is carried out outside of margin accounts, registering both an account receivable and an account payable respectively. In relation to Criteria B-6 Loan Portfolio Fees charged for restructured loans will be deferred and recognized in results in accordance with the new term of the loan. Commissions, origination fees and annual fees must be presented on a net basis. Renewal and restructuring of loans with characteristics different to that stipulated in paragraph 52 will be considered valid only when the borrower liquidates in a timely fashion all interest charged and covers 25% of the original loan. Criteria D-1" "Balance Sheet" and D-2 "Income Statement" presents changes in their presentation in accordance with changes in the mentioned criteria, additionally the items of "Non Operating Income" are eliminated and are now registered under "Other Operating Income (Expenses) " as part of the Operating results in the Income Statement. d) Changes to the rating methodology for the commercial portfolio granted to federal entities and their municipalities. On October 5th, 2011, the CNBV published a resolution modifying the general applicable dispositions to Credit Institutions amending the qualification rating methodology for the commercial loan portfolio granted to federal entities and their municipalities. This resolution modifies the current model for reserves based on public qualifications, in order to establish a methodology which qualifies and reserves the portfolio based on potential expected losses for the next following 12 months taking into consideration the probability of non-fulfillment, severity of the loss and exposure to each client's nonfulfillment which is in Annex 18 of the mentioned Resolution. The resolution came into effect on October 6th, 2011 and is applicable in an optional way to during the third or fourth quarter of GFNorte opted to apply the methodology mentioned with figures to September 30th, As a result, GFNorte released Ps 87 million in excess reserves which were calculated under the previous methodology. This cancellation of surplus reserves was charged to the fiscal year s results in accordance with such methodology. The amount of preventive reserves for credit risks calculated using the methodology referred to in Annex 18 contained in the aforementioned Resolution was Ps 961 million, and the amount of reserves required under the previous method of calculation was Ps 1,048 million, both using figures to September 30th, e) Changes to rating methodology for consumer and housing mortgage portfolios. On October 25th,2010 the Commission published a resolution modifying general dispositions for Credit Institutions in which the methodology for rating non-revolving consumer portfolios and mortgage portfolios is changed in such a way that the estimated preventive reserves for credit risks is calculated based on the expected loss instead of the incurred loss. This change went into effect on March 1st, In response to the aforementioned change, on March 31st, 2011, the Financial Group recognized in the equity of previous fiscal years, the initial accumulated financial effect of the application of the rating methodologies for non revolving consumer loan portfolios and mortgage portfolios, referred to in Paragraph A of the First Section and Second Sections, in Chapter V of the Second Title of applicable General Dispositions for Credit institutions, in accordance with Provisional Article Three. 29

30 The accounting booking to recognize the effect generated a charge of Ps 582 to the "Retained Earnings" account of previous fiscal years in equity, against a loan for the same amount to the "Estimated preventive reserves for credit risks" account under the item of loan portfolio in the balance sheet. Deferred taxes resulting from the changes were also registered with a charge of Ps 233 to the "Deferred Taxes" account in the balance sheet against a loan charged to the "Retained Earnings" account in equity. If recognition of the aforementioned effect in the results of the fiscal year had been made, the items that would have been affected and amounts that would have been registered and presented in the balance sheet as well as in the Income Statement on June 30th, 2011, would be: Balance Sheet Originally presented Originally presented New presentation Equity Results of previous fiscal years $30,966 $349 $31,315 Majority Net Income 6,004 (349) 5,655 Total Equity $75,215 $- $75,215 Financial Statement Originally Originally New presented presented presentation Estimated reserves for credit risks 4, ,888 NII adjusted for credit risk 16,572 (582) 15,990 Deferred income taxes (net) (74) (233) (307) Net Income $6,004 (349) $5,655 f) Changes to accounting criteria for Mutual Funds and the individuals providing services On August 31st, 2009 changes to accounting criteria for mutual funds were announced, to make them consistent with financial reporting standards set in Mexico as well as abroad. These changes are similar to changes made for Credit Institutions and Brokerage Houses in 2Q09. g) Change in rating criteria for Credit cards On August 12th, 2009 the National Banking and Securities Commission issued changes in accounting criteria applicable to credit institutions which modify the rating methodology for revolving consumer portfolios, so that the parameters used to estimate preventive reserves reflect an estimated12 month loss for credit cards, based on the current environment. h) Changes to accounting criteria for other finance companies On July 30th, 2009 the National Banking and Securities Commission issued changes among others, to accounting criteria applicable other regulated finance companies, SOFOLs and SOFOMs. i) B-10 Bulletin Inflation Effects. Comparisons of 2008 results vs. reported figures for previous periods are not fully comparable, as a result of the NIF B10 Inflation Effects norm taking effect in January of this year. This norm indicates that the economic environment is non-inflationary when the accumulated inflation rate over the last three years is less than 26%. Under this context, it is not necessary to re-express financial statements as of January,

31 What is Repomo? Repomo was a quarterly inflationary adjustment that all Mexican companies had to reflect on their monetary and non-monetary assets. Effective as of January 2008, these adjustments will no longer be necessary. In the case of Banorte, this means that no Repomo charges will be made to Net Interest Income or to Other Income and Expenses. j) Changes in Securitizations Transactions. Among the main changes resulting from the new measures and norms issued or modified by the Commission and CINIF that became effective as of January 1st, 2009 are: The C-2 criteria, "Securitizations", establishes that in this type of transaction, the assigner can decide to transfer the risks and benefits and/or control of financial assets or not to the assignee. It establishes that the benefits from the assignee's surplus will be recognized as "benefits to be received in securitization transactions" and remain valued since its initial registration, at a reasonable value, with any valuation adjustments recognized in the results of the exercise. This valuation must be consistent with Entity with a Specific Purpose, Entidad de Propósito Especifico (EPE) accounting policies established as the securitization medium. If an assigner provides administrative services for transferred assets, an asset or liability must be registered initially from management of assets and liabilities, at its reasonable value according to the C-1 measure as follows: i. An asset is registered if payment exceeds the cost and expenses incurred in providing the service; to the contrary a liability is registered. ii. Later, such asset or liability will be valued at a reasonable value, registering the effects of its valuation in the results of the exercise. Benefits of the remaining balances of securitization operations and the asset from management of financial assets transferred will be exhibited under the heading "Benefits to be received in securitization operations". The valuation of benefits to be received, as well as the asset or liability from management will be exhibited under the heading of "Other products" or "Other expenses", as appropriate. The effects of said measure, applied to securitizations effective December 31st, 2008, are as follows: In realized securitization operations, the financial assets were eliminated from the balance sheet based on the effective accounting measures to date, C-1 "Transfer of financial assets" and C-2 "Securitization". Given that the new accounting measures that substitute the previous ones are applied prospectively, no retroactive recording will apply for operations performed prior to applying this measure, which is why the re-valuation of financial asset transfers previously registered is not required. Notwithstanding, in accordance with these new accounting measures, securitized loans for mortgage, state and municipal government portfolios that Banorte carried out during 2006 and 2007, 31

32 respectively, did not fulfill the requirements of the new accounting measures for elimination from the balance sheet, given that in both operations most of the inherent risks and/or benefits are retained. The C-5 measure "Consolidation of Entities with a Specific Purpose" defines the particular norms related to the consolidation of EPEs. It establishes that an entity must consolidate an EPE when the economic substance of the relationship between both entities indicates that it controls said EPE. k) D-8 Bulletin: Stock based compensation Banorte grants GFNORTE shares to its executives through different structured payments plans based on those shares. These plans are managed by trusts that Banorte constitutes and gives the necessary resources so that at the beginning of each plan, they can purchase directly in the financial markets the shares needed to fulfill these stock based plans. The Financial Norm D-8, Stock based Payments, which is effective for fiscal exercises that began as of January 2009, requires those entities that grant stock based payment plans to recognize an expense for the services received by the executives that are beneficiaries of the plans. When a subsidiary grants stock plans of its holding company, the NIF D-8 establishes that the accounting recognition of the expenditure must be made as if the plan was settled in cash at reasonable value, each period that the financial information is presented along with the assumptions known at that date. On the other hand, the Holding must recognize such expenditure as if the plan was to be settled with shares. Under this scheme, the plan is valued in the beginning at the Holding level and must be later revalued. In the consolidated financial statements with the Group s subsidiaries, the items recognized in its banking subsidiary derived from the recognition and valuation of the share plans granted have been eliminated through consolidation movements of Ps 20 million. In this sense, an expense incurred by the Financial Group of up to Ps 42 million has been recognized, which results at 4Q10 in a net negative effect in the financial statements of the holding company of Ps (22) million. At 1Q11 results in a net negative effect in the financial statements of the holding company of Ps (17) million. At 2Q11 results in a net negative effect in the financial statements of the holding company of Ps (21) million. At 3Q11 results in a net negative effect in the financial statements of the holding company of Ps (26) million. Other relevant Accounting Changes before the year Year 2009 (Extract from the Audited Financial Statements) On April 27, 2009, the Commission issued a resolution that modifies the General Provisions Applicable to Banking Institutions thereby updating all accounting criteria. These provisions went into effect on April 28, Among the major changes implemented, Employee Profit Sharing (PTU) should be recorded in 2009 as part of Operating Expenses and not as part of Income Taxes. On August 12, 2009, the Commission issued a resolution modifying the General Provisions applicable to Banking Institutions, which modifies the consumer loan rating methodology to show the 32

33 expected loss in these operations based on the current environment. This new methodology requires separating the consumer loan portfolio into two groups: those that refer to credit card operations and those that do not. The consumer loan portfolio that does not include credit card operations will consider the number of unpaid billing periods established by the Financial Group as well as the probability of nonpayment and the severity of the loss according to percentages established by the Commission. If this portfolio has collateral or means of payment in favor of the Financial Group, the covered balance will be considered to have zero unpaid periods for provisioning purposes. Regarding credit card related consumer loans, such portfolio shall be provisioned and rated on a loan-by-loan basis taking into consideration the probability of nonpayment, the severity of the loss and the exposure to nonpayment. If there are less than 10 consecutive delinquent payments at the calculation date, the severity of the loss will be considered as 75%; if there are 10 or more, it will be 100%. Exposure to nonpayment is determined by applying a formula that considers both the total balance of the creditor s debt and the credit limit. In the case of inactive accounts, a provision equivalent to 2.68% of the credit limit must be constituted. Year 2008 (Extract from the Audited Financial Statements) On October 13, 2008, the CNBV issued another resolution that modifies the General Provisions Applicable to Banking Institutions thereby replacing accounting Circular B-3, Repurchase or Resale Agreements, B-4, Securities Loans, and C-1, Recording and Cancellation of Financial Assets, as well as Circular D-1, Balance Sheet, D-2, Income Statements, and D-4, Statement of Changes in the Financial Position. This resolution became effective as of October 14, 2008 for which Banorte certified that it had the necessary systems to implement the aforementioned accounting criteria. B-3 Criteria Repos This is a transaction by which the purchaser acquires ownership of credit titles for a sum of money and is obliged to transfer titles of the same kind to the seller of the securities within the agreed term and in exchange for the same price plus a premium. The purchaser keeps the premium unless otherwise agreed. Until September 30, 2008, when the Financial Group acted as the seller, the repurchase agreement transactions were recorded net and represented the difference between the fair value of the securities given under the repurchase agreement (asset position), which represented the securities to receive in the operation pursuant to the trading securities valuation criteria, and the current value of the maturity price (liability position). When the Financial Group acts as the purchaser of securities, the net position represents the difference between the present value of the price at maturity (asset position) and the fair value of the securities received under the repurchase agreement (liability position), which are valued according to the method discussed in the preceding paragraph. Since October 1, 2008, repurchase transactions are recorded as follows: Repurchase transactions are recorded according to their economic substance, which is financing with collateral, by which the Financial Group, acting as purchaser, gives cash as financing in exchange for financial assets as guarantee in case of non-compliance. On the repurchase agreement transaction contract date, the Financial Group acting as the seller, records the cash income or outlay, or a liquidating debtor account as well as receivable or payable 33

34 account at its fair value, initially at the agreed price, which represents the obligation of restoring the cash to the purchaser. The payable account will be valued subsequently throughout the life of the repurchase agreement at its fair value by recognizing the repurchase agreement interest in the earnings of the year according to the effective interest method. As to the collateral, the Financial Group classifies the financial asset in its balance sheet as restricted, valuing it according to the criteria mentioned above in this note through the repurchase agreement s maturity. The Financial Group, acting as the purchaser, on the repurchase transaction contract date cash and cash equivalents are recorded or a creditor liquidating account, recording an account receivable at its fair value, initially at the agreed price, which represents the right to recover the cash that was given. The receivable account will be valued subsequently throughout the life of the repurchase agreement at its fair value by recognizing the repurchase agreement interest in the earnings of the year according to the effective interest method. As to the collateral received, the Financial Group records it in memorandum accounts through the repurchase agreement s maturity, following the guidelines of Circular B-9, Asset Custody and Management, issued by the CNBV. Change in for loan loss reserves requirements rules According to the new provisions of the CNBV published on August 22, 2008 in the DOF regarding the percentage of credit card reserves when there are no delinquent payments, and according to the second transitory article which makes it possible to make such adjustments by October, the impact of the change will be gradual. The percentage applied to reserves for zero delinquent payments for September is 1.72%, and at the close of October the change will be completed by applying a 2.5% reserve percentage for zero delinquent payments. l) Provisions for implementation of the new Basel Capital Agreement. On October 3, 2005, the CNBV published the agreement signed by financial authorities and the ABM in order to implement the new capital guidelines that contain the standards and principles known as Basel II that will enable the bank s capital to reflect with greater precision credit, market and operational risks. m) New rules for banking institutions capital requirements. On December 28, 2005, the Ministry of Finance (SHCP) issued new regulations for capital requirements, establishing a greater number of bands and higher capital requirements. These new regulations came into effect on January,

35 IV. Products and Services What are Banorte and Ixe s main deposit and lending products offered to its clientele? a) Electronic Channels Banorte Movil (Mobile Banking) An innovative service channel of e-banking developed in 2009 that operates through any mobile phone or device with access to the Internet, and provides access to banking services (including balance inquiries, transfers, payments, special credit cards and the purchase of cellular phone air time), as an additional service to our e-banking customers at no additional charge. Banorte Movil has demonstrated its leadership in the market, which is not tied to only one service provider; in 2009 it received the "Best Solution in the Mobile category" award granted by the Mexican Internet Association and the Latin American Institute of Electronic Commerce, as well as the "E-Commerce Award Mexico 2010". b) Deposit Products Banorte Fácil Banorte Fácil is an entry level product for individuals who had never had a bank account. It does not charge commissions or requires a minimum balance. Suma Nómina Suma Nómina is a payroll account that does not charge commissions and does not require a minimum monthly balance. Enlace Global (Corporates and Individuals) Enlace Global is a tailor made local currency checking account which also offers an international visa debit card. Commissions on these accounts are charged either through a monthly fixed payment or payments per transaction. Cuenta Fuerte An account that includes a package of products and services created for middle-income customers, was introduced in September 2009, it includes 6 products in one at a much lower cost than if they hired individually. It offers tangible benefits to customers such as withdrawals, inquiries and free unlimited check privileges, among others. Includes free life insurance for accidental death with coverage of Ps $ 150 thousand pesos and an immediate credit card without charge for the first year s annual fee. In 28-day promissory notes, it provides a rate 50% higher than a traditional CD pays during the same period. For a monthly fee, the account holder enjoys an attractive variety of services and financial products that includes a checking account, Banorte via Internet (online banking), Banorte Móvil, life insurance, investment products and an optional credit card. 35

36 Ganamás and Pagamás Ganamás is a short term (28 days) and Pagamás a medium term (up to 6 month) promissory note that is offered to clients through the branch network and pays a percentage of the Cetes rate. One of its main features is that it offers an additional bonus that can increase the yield obtained according to the maturity of the investments. Enlace Dolares A Visa electronic debit card launched in 2009, which is denominated in U.S. dollars for residents of the U.S.-Mexican border, featuring free of charge withdrawals in more than 600 Banorte dual-currency ATMs located along the Mexican side of the border, and a preferred fee in approximately 40,000 ATMs in the U.S. through the AllPoint Network, allowing our customers to make transactions on both sides of the border in U.S. dollars with a single account at a low cost. b) Lending Products i. Loans to Families Payroll These are unsecured loans offered to Banorte s payroll clientele. Banorte offers different loan amounts between 6, 8 and 12 month s salary, as well as flexible maturities, ranging from 12 to 48 months. There is also the mode of payroll advance, which is a credit line in cash for up to 10 thousand pesos deducted automatically in the following two months after disbursement in accessible fixed payments. It is processed at the branches and, once amortized; it can be renewed at any ATM or Internet banking without further paperwork or credit check, and is available 24 hours a day. Adelanto Nómina is an innovative loan option linked to direct payroll deposits. The product offers a short term (two-month) credit line linked to a customer s payroll deposit account, which can be disbursed to cover emergency cash requirements. Customers can draw-down on the credit line by using ATMs and online banking. Introduced in July 2010, Banorte is the first bank to offer this product in the Mexican market. The potential market for this product consists of Banorte s 2.8 million payroll deposit account customers. As of September 30, 2010, Banorte had approximately 381,040 payroll loan customers who are now eligible to participate in this new credit line. Car Banorte offers fixed rate car loans for purchasing new cars, as well as leasing schemes for purchasing used cars. Maturities range from 12 to 60 months, according to each customer s needs. Credit Cards Banorte has an ample credit card offering, ranging from traditional (Banorte Fácil), premium and balance transfer programs (Ya Bájale). Interest rates and annual fees vary according to each product. All of the products benefit from the loyalty rewards program called Recompensa Total Banorte. 36

37 Mortgages Banorte offers mortgage solutions for every customer need: residential acquisition, home equity, debt consolidation, construction and renovation, land acquisition and commercial acquisition. Interest rates and annual fees vary according to each product. Mortgage loan terms range from 15, 20 or 30 years. During July, Banorte launched its new mortgage offering with the objective of being positioned as a specialized mortgage bank that offers various home acquisition options with excellent payment conditions, differentiated product offering and accessible interest rates for all needs. Through this concept, the market needs will be met appropriately through a competitive offering, defining differentiated products for each type of client: HIPOTECA ELITE BANORTE High income clients with low risk. HIPOTECA FIJA BANORTE Clients requiring Fixed Rates and fixed payments. HIPOTECA FLEXIBLE BANORTE Clients seeking Flexibility when payments are timely. HIPOTECA ACCESIBLE BANORTE Clients requiring Accessible monthly installments. ii. Loans to Institutions Small and Medium Sized Enterprises (SME s) One of the segments with lower banking penetration is the SME sector. Loans to SME s are provided to companies with annual sales between US$4 million to US10 million (medium size) and US$0.2 million to US$4 million (small size). All these loans are provided either directly by the bank, or else through the factoring, leasing and warehousing subsidiaries. The main lending product for SME s is Crediactivo, a loan specially designed to address their working capital needs and fixed asset purchases. These loans can have up to 60% guarantees from Nacional Financiera (Nafin), a government development bank. Crediactivo s offer includes special features such as checking account, online banking, payrolls and investing. As a complement to Crediactivo, Banorte offers the Empuje Negocios Visa credit card for companies with monthly receivables of at least Ps 25,000. Through this card, companies receive exclusive services including strategic legal, tax, accounting, business, labor, civil and penal counseling free of charge by phone or online. Solucion Integral PyME a comprehensive product package launched on September 28, 2010, which offers SMEs the ability to have up to 12 products and special services under one contract aimed at supporting their growth by providing technology solutions and savings, investments, finance and insurance products. Also, as part of its SME s products, Banorte also offers the Paquete PYMES, which includes checking accounts with unlimited privileges under a fixed monthly fee, free access to web services, free payroll management services and attractive yields on investments. 37

38 Corporate and Entrepreneurial Corporate loans are offered to companies with annual sales of over US$100 million, while entrepreneurial loans to companies with sales between US$10 and US$100 million. All these loans are provided either directly by the bank, or else through the factoring, leasing and warehousing subsidiaries. Government Loans Loans that are offered to all three levels of government (federal, state and municipal). IXE products Ixe Cuenta Deposit Account for Individuals and small businesses. Provides debit card and checkbook. To open an account there is a Ps minimum. Ixe Cuenta Premium Deposit Account for Individuals and small businesses with an investment option in funds. To open an account there is a Ps minimum. Ixe Casa Mortgage loan Ixe Personal Loans Ixe Tú Crédito Personal Laons to individuals Ixe Tú Nómina Payroll loan Ixe Comercio (SMEs) It allows our clients businesses to be equipped with a holistic sale terminals and online banking services. It also offers other benefits such as training and advisory, competitive prices, and compatibility with any card issued by Visa or MaterCard. Ixe subasta (Auction) Provides our customers with competitive interest rates on our long-term investments through an auction system. CreditNet Through IXE Banco, it provides important services and benefits for the SME segment, such as commercial loans. Mutual funds Which are authorized to distribute as a result of a distribution agreement between Ixe Fondos and BNP Paribas Investment Partners: IXEBNP1 (equity mutual funds in developed markets), IXEBNP2 (equity markets), IXEBNP3 (equity mutual funds in Brazil, Russia, India and China) and IXEBNP4 (fixed income mutual funds in emerging markets). 38

39 Ixe Credit Card Through Ixe Tarjetas, subsidiary in a 50% of Ixe Banco and JP Morgan Chase as a partner, through its subsidiary CMC Holding Delaware Inc., they design, promote and administrate the credit cards of Ixe Banco Other products and services: Ixe Net - One of the first online services web site in Mexico, offering comprehensive banking and online services to individuals and corporate clients. Ixe Directo - Allows customers to do their banking transactions by telephone, 24 hours a day, seven days a week through the automated 24 hour system or with the help of representatives, with a special identification system to protect the safety of customers. Banca Directa - Through which banking services are offered directly to customers at their homes or offices, including cash withdrawals, deposits, checks, traveler checks, foreign currency services and other banking services. Ixe Net Móvil - Allows customers to do banking transactions, such as checking balances and account activity and transfer funds from their mobile phones. V. Infrastructure Banorte s network consists of 1,277 branches in Mexico and 20 in the United States. The bank also has 6,176 Automatic Teller Machines (ATM s) and over 85,000 Point of Sale Terminals (POS s). Banorte has carried out over the last few years an infrastructure expansion program to increase its network and its presence in regions where the bank is underrepresented, especially in Mexico City. 4Q09 3Q10 4Q10 1Q11 2Q11 3Q11 Branches 1,088 1,108 1,134 1,142 1,311 1,277 POSs 54,369 56,336 62,856 78,885 85,229 ATMs 4,478 4,846 5,004 5,014 6,222 6,176 VI. Banorte USA Banorte started its expansion into the United States in 2006, through the purchase of Texas based Inter National Bank (INB). Later, in 2007, it acquired New Jersey based Uniteller and in 2008 California based Motran Services, both remittances companies. 39

40 Inter National Bank On November 2006, Banorte completed the acquisition of 70% of INB s capital for a total amount of US $259 million, and in 2009 acquired the remaining 30%. The bank had assets of approximately US$1 billion when purchased. Most of the loan portfolio consisted of commercial real estate loans in southern Texas, with no exposure to the subprime segment. Even though it is currently only a local player, the bank has a national license to operate throughout the US. The rationale behind this acquisition was to offer cross border financial services to Banorte s clientele in the northern part of Mexico, as well as to penetrate the growing Hispanic market in the US. Since the bank can operate nationwide, it will be able to offer products and services to Americans that require them in Mexico, such as mortgages for retirees to purchase properties in Mexico. Uniteller On January 2007, Banorte closed the transaction to acquire 100% of Uniteller Holding s shares, a US money based transfer business, which has a network of nearly 1,300 agents in the US and has several agreements with financial institutions in Latin America and the Philippines. The transaction amounted to US $20 million, and the rationale behind the acquisition was to fully position Banorte in the value added chain of the remittance business. Previously, Banorte was only a paying agent in Mexico through its branches, and now it will be able to participate since the origination process. Motran As a complement to the acquisition of Uniteller, on December 2007, Banorte completed the acquisition of Motran, a remittance company based in California, the most important market for remittances in the US. The amount of this investment was USD $3 million. VII. Recovery Bank What is Solida? Solida is Banorte s asset recovery unit, which was originally created in order to manage, for a fee, the distressed assets that the government had assumed from the banks as a result of the financial crisis of the mid 90 s. How does the asset recovery unit work? Banorte purchases distressed assets at discount from other financial institutions, like IPAB, banks and SOFOLES (non banks) in order to work them out. Over the past years, Solida has been able to purchase more than Ps $88 billion in assets from auctions, mainly by the IPAB, but also by other institutions. Solida s AUM s currently consist of proprietary assets (46.2%), acquired loans (39.2%), investment projects (7.4%) and managed assets (7.2%). 40

41 VIII. Other Business Units a) Other Finance Companies This business line consists of the following companies: a) Factoring suppliers, clients with delegated collection, clients with direct collection and international. b) Leasing pure / operational and financial / capitalized. c) Warehousing inventories and resources of clients. Since January 2008, the Ministry of Finance (SHCP) approved the merger of Arrendadora and Factor Banorte, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada, Grupo Financiero Banorte with Arrendadora Banorte, S.A. de C.V., Sociedad Financiera de Objeto Multiple Entidad Regulada Grupo Financiero Banorte, with the latter as the merged company and the former as the surviving merging company. The merging company adopted the name of the merged company, Arrendadora y Factor Banorte, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada Grupo Financiero Banorte. This merger will enable Banorte to achieve economies of scale. On November 28 th, 2008, the SHCP modified the authorization given to Almacenadora Banorte to constitute and operate as a General Deposit Warehouse, given the increase in the fixed portion of its stockholders equity, which totaled Ps 31,780,651. This was agreed to in the Extraordinary Stockholders' Meeting held on October 1st, b) Broker Dealer and Mutual Funds GFNorte s Broker Dealer was founded in 1985 and it offers a wide array of services, such as money market, equities, portfolio management, investment banking, private banking, analysis and research and mutual funds. It also manages a broker dealer operation in the United States under the name of Banorte Securities International. In terms of mutual funds, Banorte has a family of fixed income and equity funds. The type of funds varies according to the clients needs (daily liquidity, bonds, private paper, Mexican equities, US equities and global equities). The funds are offered to the clientele either through the broker dealer, or increasingly through the branch network. c) Long Term Savings It consists of the following companies: a) Insurance life, car, casualty and education. b) Retirement Savings Funds (AFORE) manages over Ps $80 billion in AUM through 5 different funds (Siefores) that invest according to the client s retirement horizon and risk tolerance. c) Annuities specialized insurance services in order to operate manage and guarantee the pension payments derived from the Social Security legislation. 41

42 IX. IXE As a result of the merger with IXE Grupo Financiero last April 15, 2011, the subsidiaries that are now part of GFNorte are: Ixe Banco Strategy is focused on clients of the upper and middle-class sectors of the population, as well as on corporate clients, government entities and SMEs. Individuals: mainly savings and investment products (demand and time deposits, investment funds and money market), credit cards, mortgages, car loans, personal loans, payroll loans, insurance and safety deposit boxes. Corporate clients, government entities and SMEs: mainly loans (including factoring and productive chains) and lines of credit, foreign exchange, derivatives, investment products (demand and time deposits, investment funds and money market), fiduciary services, payroll payment services and point of sale terminals. Ixe Casa de Bolsa The Broker Dealer s main areas of business are Patrimonial and Private Banking, Portfolio Management, Capital Markets, Money Markets and Investment Banking. The Patrimonial Banking area services individuals with minimum investments of Ps 1 million, mainly offering them products in the money and capital markets, foreign exchange and derivatives markets and a diversity of mutual funds to satisfy their financial needs. Private Banking offers personalized services to individual clients with significant assets. A minimum investment of Ps 5 million is required. The main products offered to clients are: investments in money and capital markets, foreign exchange and derivatives, mutual funds, portfolio management, structured notes, fiscal advisory and fiduciary services. Portfolio Management is a leading business area in the local market focused on servicing wealthy individuals and institutional clients. The minimum amount required for investment is Ps 10 million. This area is divided into three groups: Portfolio Management, Institutional Investments, Annuities and Long Term Savings Funds. Capital Markets area is responsible for managing Ixe GF s proprietary position in the capital markets and to serve as a platform for the execution of client operations. The Money Market s function is to manage Ixe GF s proprietary position in the money market. Investment banking management provides advisory services in corporate finance and mergers and acquisitions. 42

43 Fincasa Hipotecaria Fincasa s main activity is the origination and management of bridge loans mainly for construction in the middle and lower class sectors of the population. Ixe Automotriz Provides financing for the acquisition of automobiles through pure leasing and loans. Its subsidiary, Ixe Fleet, offers fleet management services. Ixe Fondos Provides services for portfolio management, distribution, promotion and acquisition of shares issued by Ixe GF s mutual funds. Ixe Soluciones e Ixe Servicios X. Alliances and Strategic Initiatives Banorte Generali In 1997 Banorte established an alliance with the Italian insurance company, Assicurazioni Generali, to offer insurance, pensions and retirement services through their subsidiaries Afore Banorte-Generali, Seguros Banorte-Generali and Pensiones Banorte-Generali. Banorte controls 51% of the shares, while Generali the remaining 49%. Telecomm Telegrafos In July 2005 Banorte and the Telecomm, a Mexican telegraph company, announced a strategic alliance which enables Banorte to provide financial services for un-banked communities through Telecomm s 1,559 offices nationwide. Through this alliance, Banorte offers debit cash withdrawal, deposits and payment services as well as entry level accounts (i.e. Banorte Fácil) in Telecomm s offices. Banco Do Brasil On August 6th 2007, Banorte and Banco Do Brazil formalized a commercial agreement in order to offer comprehensive banking and financial services to Mexican businesses and Banorte s customers with operations in Brazil, as well as to Brazilian companies, their executives and citizens of that country that live in Mexico. The business platforms of both institutions will be used to provide each other s customers financial and banking services such as international wire transfers, foreign currency exchange, credit and debit cards, electronic banking, insurance and investment advise. China Development Bank On February 10th, 2009 China Development Bank and Grupo Financiero Banorte signed an important cooperation agreement, establishing the foundation through which both institutions can mutually serve 43

44 their clientele mainly in China, Mexico and the United States by taking advantage of both institutions business platforms. Correspondent Banking Banorte was the first bank to receive authorization to operate under the new correspondent banking scheme and offer financial products and services through third parties. On September 2009, it celebrated a contract with Telecomm-Telegrafos to operate as correspondent and in november started formal operations. Thus, Banorte became the only institution that manages savings accounts inside Telecomm s offices. Also, Banorte and 7-Eleven Mexico received the CNBV s authorization to operate under a third party correspondent agreement in order to provide financial services to more Mexicans in a network of over 1,150 7-Eleven stores throughout the country. Deposits can be made to Banorte accounts in these stores, as well as payments to Banorte credit cards and other services in extended hours, including Saturdays, Sundays and official holidays. The bank also is in the process of negotiating important correspondent agreements with pharmacy chains, retailers and convenience stores, among others. Cardtronics On March 30th, Banorte and Cardtronics reached an agreement in order to integrate 2,000 ATMs into GFNorte s existing network. With this strategic alliance, and the merger of Ixe in GFNorte, it will have one of the largest ATM networks in Mexico, offering clients from Banorte and Ixe access to more than 7,000 ATMs free of service fees, by yearend. The implementation will be carried out in two phases: first, 1,000 ATMs will be installed between April and May 2011, and the remaining 1,000 ATMs will be enabled during the second half of this year. Therefore, this Alliance with Cardtronics will allow Banorte to continue its ongoing technological expansion. The alliance with Cardtronics will start operations once the National Banking and Securities Commission (CNBV) authorizes the agreement. X. Reserve Requirements Why did Banorte s Coverage Ratio decline in the period ? Banorte s Coverage Ratio dropped during 2007 as a result of the new accounting standards that came into effect in January 2007, which required the reversal of any excess reserves built up until 4Q06. The reserve coverage has also declined as a result the new methodology to reserve loans under parametric guidelines for consumer, mortgage and some commercial loans, and also as a consequence of higher charge offs in order to maintain an adequate risk profile of the loan book.. Nonetheless, since August 2009, additional reserves were constituted against equity based on expected losses of the credit card portfolio. This reverted the downward trend in the reserve coverage ratio, which is currently at acceptable levels. 44

45 How are the quarterly provision charges being determined under the new criteria? Since the new accounting standards came into effect, the quarterly provision charges in the P&L are being determined by the loan portfolio risk rating process, which is done according to missed payments for consumer, mortgage and commercial loans under 900,000 UDIS (inflation linked units of accounts or its equivalent), and by the individual rating process based on the Internal Risk Rating methodology certified by the CNBV for commercial loans over 900,000 UDIS or its equivalent. What are the new reserve requirements for the credit card loans that the authorities put in place in ? The CNBV issued in 2008 new rules for the creation of initial reserve requirements for credit card outstanding with zero missed payments, which increased from 0.5% to 2.5%. In accordance with the new rules set by the National Banking and Securities Commission (CNBV) announced in August 22, 2008 regarding credit cards reserve requirements for zero missed payments, as well as article number two which allows for a gradual adjustments of this guideline until October, the initial requirement of 1.72% was made during September and during the month of October it increased to 2.5%. On August 12th, 2009 the National Banking and Securities Commission (CNBV) issued a resolution that modifies the applicable general regulatory dispositions for credit institutions and in accordance with Section I of the second transitory article in September 2009 against results of previous fiscal years, the financial effect resulting from the initial implementation of the new methodology after the end of September is the credit card portfolio according to the new provisions recognizing an initial effect on stockholders' equity of Ps $ 1,136 million. What are the main changes to the rating methodology for the loan portfolio of States and their Municipalities? On October 5th, 2011, the CNBV published a resolution modifying the general applicable dispositions to Credit Institutions, changing the rating methodology for the loan portfolio granted to States and their Municipalities. This resolution modifies the current model for reserves based on public ratings, in order to establish a methodology which rates and reserves the portfolio according to expected losses for the following 12 months taking into consideration the probability of non-fulfillment, severity of the loss and exposure to each client's nonfulfillment, included in Annex 18 of the mentioned Resolution. The resolution went into effect on October 6th, 2011 and is applicable optionally either during the third or fourth quarter of GFNorte opted to apply this methodology with figures for Banorte s loan portfolio to September 30th, As a result, GFNorte released Ps 87 million pre-tax in excess reserves which were calculated under the previous methodology. This cancellation of excess reserves was reflected in the fiscal year s results in accordance with such methodology. The amount of preventive reserves for credit risks in Banorte s loan portfolio calculated using the methodology referred in Annex 18 of the Resolution was Ps 961 million, and the amount of reserves required under the previous methodology was Ps 1,048 million, both using figures to September 30th,

46 XI. Capitalization What is the minimum required level of Capitalization and which level is acceptable for Banorte? The minimum regulatory capital required by the Mexican authorities is 8% (both Tier 1 and Tier 2, of which at least 50% must be Tier 1), although a ratio below 10% triggers preventive measures outlined by the authorities. What is the main source of Capital Consumption? This is because of an increase in risk assets during this period, as well as dividend payments and changes in the methodology for the creation of credit reserves. At closing of 3Q11 the Capitalization Ratio was 15.6% considering credit, market and operational risks and 22.2% when only considering credit risks. The Tier 1 ratio was 11.7% and 3.8% for Tier 2. The Capitalization Ratio increased by 0.07 percentage points (pp) vs. 2Q11, due to the following effects: 1) Reinvestment of profits generated in 3Q11: pp. 2) FX impact on Subordinated Obligations in Dollars: pp 3) Increase in Risk Assets: pp. 4) Valuation of hedging instruments: pp. On an annual basis, the Capitalization Ratio for 3Q11 is (1.0 pp) lower than in 3Q10 due to the following: 1) Effects of profits generated between 3Q10 and 3Q11: pp. 2) FX impact on Subordinated Obligations: pp. 3) Valuation of hedging instruments: pp. 4) Increase in Risk Assets: pp. 5) Payment of Dividends: pp. 6) Valuation of Securitizations: pp. 7) Change in methodology for creating reserves in Consumer loans: pp. What is your strategy to increase the bank s capitalization? Reinvestment of Profits The bank has consistently reinvested most of the profits generated in previous years (around 85% on average). Subordinated Debt Issuance Also, the bank has relied on subordinated debt in order to strengthen its regulatory capital. In 2006, it issued US$600 million in Tier 1 and Tier 2 debt in the international markets. Also, in March 2008, the company began a 5 year program to issue up to Ps 15 billion in Preferred and Non-Preferred, Non- Convertible Subordinated Debentures, which compute as Regulatory Capital. On March 2008, Banorte 46

47 placed Ps $5 billion in Subordinated Debentures in the local markets. The transaction involved the simultaneous public offering of two issues of Subordinated Debentures: Non-Preferred, Non-Convertible Subordinated Debentures (BANORTE 08) and Preferred, Non-Convertible Subordinated Debentures (BANORTE 08U). The Non-Preferred, Non-Convertible Subordinated Debentures amounted to Ps 3.0 billion, while the Preferred, Non-Convertible Subordinated Debentures, which was denominated in UDIS (inflation unit of account), amounted to an equivalent of approximately Ps 2.0 billion. The Non-Preferred, Non-Convertible Subordinated Debentures has a 10-year term and an interest rate of 28 day TIIE plus 60 basis points. The Preferred, Non-Convertible Subordinated Debentures had a 20-year term and a fixed real rate of 4.95% paid every 182 days. Moody's gave both issues an Aaa.mx rating. On June 2008, Banorte issued PS $2,750 million in subordinated debt as part of the previously mentioned program. The transaction consisted of Preferred, Non Convertible Subordinated Debentures (BANORTE 08-2) with a 10 year term and an interest rate of TIIE +77 basis points. Moody s rated this issuance Aaa.mx. On March 2009, Banorte issued Preferred Non Convertible Subordinated Debentures (BANORTE 09) for a total of Ps 2.2 billion with a 10 year maturity and an interest rate of 28 day TIIE plus 200 basis points. The securities were rated Aaa.mx by Moody's and AA (mex) by Fitch. On July 14th, 2010, Banco Mercantil del Norte (BANORTE), a subsidiary of the Group, successfully concluded the issuance of Non-Guaranteed Senior Debt Notes in the international markets for a total amount of US 300 million dollars with maturity of 5 years and a rate of 4.437% (UST bps). The rating assigned to these securities by Standard and Poor's was BBB -, while Moody's rating was A3. The proceeds from this issuance will be used for general corporate purposes. Investment by the IFC The IFC s investment in Banco Mercantil del Norte, a bank subsidiary of Banorte Financial Group, was completed in 4Q09. On November 12th 2009, IFC invested US 150 million dollars, which represents 4.48% of Banco Mercantil del Norte s equity. The transaction was approved by the Board of Directors in the session held in July 2009, while the increase in capital of the bank subsidiary was authorized by the Shareholders Assembly in October of Currently, the IFC and Banorte are working on several initiatives, including a social responsibility plan for the bank, which will help to strengthen this long term relationship. 47

48 XII. Risk Management i) Credit Risk It is a risk that clients, issuers or counterparts do not fulfill their payment obligations therefore, proper management is essential to maintain the loan quality of the portfolio. The objectives of credit risk management at GFNorte are: Improve the quality, diversification and composition of the loan portfolio in order to optimize the risk-performance (yield) ratio Provide Executive Management with reliable, timely information to assist decision making regarding loans. Provide the Business Areas with clear and sufficient tools to support loan placement and followup. Create economic value for shareholders by efficient loan risk management. Comply with the information requirements that the authorities set forth regarding loan risk management. Perform risk management in accordance with the best practices, implementing models, methodologies, procedures and systems based on the main advances worldwide. Individual Credit Risk The Bank of the Group separates the loan portfolio into two large groups: consumer loans and company loans. The individual loan risk for consumer loans is identified, measured and controlled by a parametric system (scoring) that includes origination and behavior models for each of the consumer products: mortgage, car, payroll loans and credit cards. Individual risk for companies is identified within the portfolio, measured and controlled by means of Objective Markets, the Criteria for Risk Acceptance, Early Alerts and Banorte s Internal Risk Rating (CIR Banorte). The IXE portfolios have established systems for expert analysis which are carried out by personnel specializing in each product type based on the revision of the financial situation of the borrower, credit history, economic viability, and other characteristics that are determined by the Law and internal policies. The individual risk of SMEs is identified, measured and controlled through a scoring system. The Objective Markets, Criteria for Risk Acceptance and the Early Alerts are tools that, together with the Internal Risk Rating are part of GFNorte s Loan Strategy and support the estimated level of credit risk. The Target Markets are activities selected by region and economic activity backed by economic research and loan behavior analysis where Banorte is interested in placing loans. The Risk Acceptance Criteria are parameters that describe the risk identified by the industry, which makes it possible to estimate the risk involved for the bank when granting a loan to customer on the bases of their economic activity. The types of risk contemplated in the Risk Acceptance Criteria are financial risk, operation risk, market risk, company life cycle, legal, regulatory, loan experience and management quality. Early Alerts are a set of criteria based on borrower information and indicators and their conditions that were established as a mechanism for the timely prevention and identification of a probable deterioration in the loan portfolio, thereby enabling the institution to take prompt preventive actions to mitigate the credit risk. Banorte s CIR aligns with AND serves on the individual rating to the portfolios of IXE, they serve the general PROVISIONS applicable to the loan qualification method of loan institution issued by the CNBV 48

49 on December 2, Banorte s CIR was certified by the CNBV and by an international external auditor in Banorte s CIR is applied to commercial loans equal to or greater than an amount in Mexican pesos equivalent to four million investment units on the qualification date. Portfolio Credit Risk GFNorte has designed a portfolio credit risk method that, besides contemplating international standards in identification, measurement, control and follow-up, has been adapted to work within the context of the Mexican Financial System. This credit risk methodology makes it possible to know the current value of the portfolio loans of GFNorte, that is, the loan exposure, allowing surveillance of the risk concentration levels per risk qualification, geographical regions, economic activities, currency and type of product in order to know the portfolio s profile and take action to direct it toward a diversification which will maximize profitability with the lowest risk. Calculating loan exposure implies generating a cash flow of each one of the loans, of both capital and interest to discount it later. This exposure is sensible to changes in the market, thereby facilitating calculations under different economic scenarios. The method, in addition to contemplating loan exposure, takes into consideration the probability of noncompliance, the recovery level associated to each client and the classification of the debtor based on the Merton model. The probability of non-compliance is the probability that the debtor will not meet his/her debt obligation with the bank according to the originally agreed terms and conditions. The probability of non-compliance is based on the transition matrixes that the Banks calculate from the migration of the debtors through different risk qualification levels. The recovery ratio is the percentage of total exposure that is estimated to be recovered if the debtor fails to comply. The Credit Risk+ model is used for IXE portfolios, based on an actuarial focus of the portfolio in which the non-fulfillment probability, the recovery level and the unpaid balance of each client is considered. The classification of the debtor, based on the Merton model, associates the debtor s future behavior to loan and market factors on which his credit health depends, as determined by statistical techniques. The results are risk measures such as the expected and unexpected loss at a one-year horizon. The expected loss is the credit portfolio's loss distribution average, which is used to measure the following year s expected loss due to non-compliance or variations in debtors credit quality. This unexpected loss is an indicator of the loss that could be expected in extreme scenarios and is measured as the difference between the maximum loss given the distribution of losses, at a specific reliability level that in the case of the Banking Sector is 95%, and the expected loss. The results obtained are used as a tool for better decision-making in granting loans and in the diversification of the portfolio, according to the Banks global strategy. The individual risk identification tools and the portfolio credit risk methodology are periodically checked and updated to allow the application of new techniques that may support or strengthen them. By September, 2011, the Banco Mercantil del Norte total portfolio was Ps 281,604 million. The expected loss represents 2.1% and the unexpected loss is 3.6% with respect to the total portfolio. The average expected loss is 2.2% during the period between July and September Banorte s Brokerage House, the credit exposure of investments is Ps 24,078 million and the expected loss represents % of the exposure. The average expected loss is % between July and September The total operating portfolio of Arrendadora and Factor is Ps billion. Prospective losses represent 0.6% and unforeseen losses 2.7% of the total operating portfolio. The prospective loss average represents 0.6% in the period of July and September

50 The total performing portfolio of IXE Banco was Ps billion to September 30th, The estimated loss of the portfolio represents 1.6% and the unexpected loss 0.9%. The estimated loss average for the period of July to September 2011 was 1.5%. As for IXE Casa de Bolsa, (IXE Brokerage House), the Institution's exposure is Ps billion. The estimated loss represents 0.01% of the total exposure. The total performing portfolio of IXE Automotriz including pure lease is Ps 1,392 million. The estimated loss represents 4.0% and the unexpected loss 0.3% both with regard to the total performing portfolio. The estimated loss average represents 4.1% for the period of July to September The total performing portfolio of Fincasa Hipotecaria (Mortgages) is Ps billion. The estimated loss represents 6.5% and the unexpected loss 3.4% both with regard to the total performing portfolio. The estimated loss average represents 6.6% for the period of July to September The total performing portfolio of IXE Soluciones is Ps 285 million. The estimated loss represents 21.4% and the unexpected loss 24.2% both with regard to the total performing portfolio. The estimated loss average represents 39.8% for the period of July to September The total performing portfolio of IXE Cards is Ps billion. The estimated loss represents 8.5% and the unexpected loss 4.6% both with regard to the total performing portfolio. Credit Risks of Financial Instruments To identify, measure, supervise and control loan risks of financial instruments there are defined policies for Origination, Analysis, Authorization and Administration. Origination policies define the types of financial instruments, as well as the method of evaluating the credit risk of the different types of originators / issuers and counterparts. Credit risk is assigned by means of a rating obtained with an internal methodology, through evaluations of external rating agencies or a combination of both. Maximum parameters of operation are also defined depending on the type of originator / issuer or counterpart, rating and type of operation. Analysis policies include the type of information and the variables considered to analyze operations with financial instruments when they are presented for authorization to the corresponding committee, including information on the originator or counterpart, financial instrument, destination of the operation inside the group and market information. The Loan Committee authorizes operation lines with financial instruments in accordance with Authorization policies. The request for authorization is submitted to the business sector and other sectors involved in the operation, with all the relevant information for analysis by the Committee who, if considered appropriate, issues its authorization. Administration policies for transactions with financial instruments consider procedures of Admission, Instrumentation, Compliance with Regulations, Review, Consumption Monitoring, Administration of Lines and Responsibility by the areas and organisms involved in the operation with financial instruments. On an individual level, the concentration of loan risk with financial instruments is managed on a continuous basis, establishing and monitoring maximum parameters of operation for each tally or originator depending on the qualification and type of operation. There are defined risk diversification policies for portfolios, for economic groups and internal groups. Additionally, the concentration of tally type or originator, size of financial institutions and the region in which it operates are monitored so that an appropriate diversification is obtained and undesired concentrations are avoided. Credit risk is measured by means of the rating associated with the issuer, emission or tally, which has assigned a level of risk based on two fundamentals: 50

51 1) The probability of nonfulfillment of the originator, emission or counterpart, which is expressed as a percentage between 0% and 100% where the better the rating or lower rate differential vs. the instrument of a government bond equivalent the lower the probability of nonfulfillment and vice versa. 2) The severity of the loss that could be experienced with regard to the total of the operation in the event of nonfulfillment, is expressed as a percentage between 0% and 100% where the better the guarantees or credit structures, the smaller the severity of the loss and vice versa. To mitigating loan risk and to reduce the severity of losses in the event of non-fulfillment, the counterparts have signed ISDA contracts and agreements to net out, in which lines of credit and the use of collateral to mitigate loss in the event of nonfulfillment are implemented. As of September 30, 2011, exposure to credit risk for Securities Investments of Banco Mercantil del Norte was Ps 184,865 billion, of which 99.1% is rated higher or similar to A-(mex) on a local scale, placing them in investment grade and the 3 main counterparties other than the Federal Government, State Governments and National Financial Institutions represent 18% of the Basic Capital of June, Additionally, the exposure of investments with the same counterparty other than the Federal Government that represents a higher or similar concentration to 5% of the Net Capital of June 2011 has a higher or similar rating to A (mex) and is comprised of (average considered term, amount in millions of pesos and rate): bond certificates from Pemex to 5 years and 6 months for $ to 4.4% senior notes; Santander, Certificates for 1 year and 6 months for Ps 5,899 at 4.9%; Bancomer market certificates for 1 year for Ps 5,133 at 4.8%; and State and Municipal Government loan securitization certificates for 25 years and 8 months for Ps 3,854 at 5.2%; and securitization and deposit certificates from Inbursa of 1 year and 4 months for 3,263 at 4.9%. The exposure of Derivatives is Ps 3,719 billion, of which 99.2% has a rating higher or equal to A-(mex) on local level, placing them in investment grade and the 3 main counterparties other than then Federal or State Governments and National Financial Institutions represent 3% of the Basic Capital of June Credit risk exposure of Banorte s Broker-Dealer for Securities Investments is Ps billion, with 99.8% rated higher or equal to A-(mex) on a local scale, placing them in investment grade, the three major originator other than the Federal or State Governments or Financial National Institutions represents 15% of Equity of March Additionally, the exposure of investments with the same counterparty other than the Federal Government represents 5% or more of the Equity of June 2011 has a rating higher or equal to A+(mex) and stock certificates of Banco del Bajío to 2 months for Ps 1,257 million at 4.7%; certificates of Bancomer at 1 year and 4 months for $1.001 at 4.9%; Stock certificates of Banco Santander term of 1 year and 3 months for Ps 947 million at 4.8%; international investment for Deutsche Bank to one year and 8 months for Ps 306 million at 8.2% and Stock certificates of Banco Compartamos term of five years and 1 month for Ps 150 million at 5.6%.There isn t Derivatives operations. In the case of derivatives, the exposure is -3.2 million pesos, of which 100.0% are rated higher or equal to AAA (mex) at local level, which puts them at investment grade. Arrendadora y Factor Banorte do not have investments in securities or derivatives. Exposure to risk for securities of IXE Banco was Ps billion to September, Of the total, 62.4% is in securities with government and quasi-government tallies; 20.1% with bank tallies and 7.1% with private tallies. The risk exposure of derivatives at closing of 3Q11 was Ps 190 million. The total was distributed with 97.2% in bank tallies and 2.8% in private tallies. Total risk exposure for IXE Casa de Bolsa (Brokerage House) securities was Ps 20,955 billion. Of the total, 69.8% is in securities with government and quasi-government tallies; 30.2% in bank tallies. There were no operations for derivatives. IXE Automotriz does not have investments in securities or derivatives. 51

52 The exposure of Fincasa Hipotecaria to investments is for Ps. 17 million and there are no derivatives. For IXE Soluciones, the risk exposure for securities' investments was Ps 308 million (book value), in privately issued bonds. The Institution does not hold positions in derivative instruments. The exposure of Ixe Tarjetas to investments is for Ps. 5 million and there are no derivatives. ii) General rules for risk diversification in asset and liability operations applicable to loan institutions On December 2005, the CNBV issued General Rules Applied to Credit Institutions in relation to Risk Diversification. These guidelines state that the Banks must carry out an analysis of their borrowers and/or loans to determine the amount of Common Risk ; also, the Banks must have the necessary information and documentation to prove that the person or group of persons represent common risk in accordance with the assumptions established in those rules. In compliance with the risk diversification rules in asset and liability operations, Banco Mercantil del Norte submits the following information: Tier 1 to June 31st, ,855 I. Financings whose individual amounts represent more than 10% of the basic equity: Loan Operations Number of financings 2 Total amount of financings 9,408 % in relation to Basic Capital 22% Money Market Operations Number of financings 0 Total amount of financings 0 % in relation to Basic Capital 0% Overnight Operations Number of financings 0 Total amount of financings 0 % in relation to Basic Capital 0% II. Maximum amount of financing with the 3 largest debtors and common risk groups: 20,845 In compliance with the rules of diversification of risks in active and passive operations, the following information corresponds to Leasing and Factoring (Arrendadora y Factor Banorte) in millions of pesos: Tier 1 to June 31st, ,227 I. Financing with individual amounts that represent more than 10% of Tier 1: Loan Transactions Number of operations 13 Total amount of the financings 6,233 % relative to basic capital 280% II. I. Maximum amount of financing with the 3 largest borrowers and Common Risk groups 3,200 52

53 In accordance with risk diversification regulations for asset and liability operations, is the following information corresponding to IXE Banco (millions of pesos): Basic Capital to June 31st, ,082 I. Financings whose individual amounts represent more than 10% of the basic equity (on a group level): Loan Operations Number of financings 17 Total amount of financings 10,048 % in relation to Basic Capital 246% Money Market Operations Number of financings 18 Total amount of financings 14,559 % in relation to Basic Capital 357% Overnight Operations Number of financings 0 Total amount of financings 0 % in relation to Basic Capital 0 II. Maximum amount of financing with the 3 largest debtors and common risk groups: 3,392 In accordance with risk diversification regulations for asset and liability operations, is the following information corresponding to IXE Automotriz (millions of pesos): Equity at June 31 st, I. Financings whose individual amounts represent more than 10% of the basic equity (on a group level): Loan Operations Number of financings 2 Total amount of financings 73 % in relation to Equity 23% Money Market Operations Number of financings 0 Total amount of financings 0 % in relation to Equity 0% Overnight Operations Number of financings 0 Total amount of financings 0 % in relation to Equity 0.0 II. Maximum amount of financing with the 3 largest debtors and common risk groups: 175 In accordance with risk diversification regulations for asset and liability operations, is the following information corresponding to Fincasa Hipotecaria (millions of pesos): Equity at June 31 st I. Financings whose individual amounts represent more than 10% of the basic equity (on a group level): Loan Operations 53

54 Number of financings 23 Total amount of financings to June 30 th, ,698 % in relation to Equity 389% Money Market Operations Number of financings 0 Total amount of financings 0 % in relation to Equity 0% Overnight Operations Number of financings 0 Total amount of financings 0 % in relation to Equity 0.0 II. Maximum amount of financing with the 3 largest debtors and common risk groups: 563 In accordance with risk diversification regulations for asset and liability operations, is the following information corresponding to IXE Soluciones (millions of pesos): Equity at June 31 st I. Financings whose individual amounts represent more than 10% of the basic equity (on a group level): Loan Operations Number of financings 10 Total amount of financings to June 30 th, % in relation to Equity 207% Money Market Operations Number of financings 3 Total amount of financings 252 % in relation to Equity 62% Overnight Operations Number of financings 0 Total amount of financings 0 % in relation to Equity 0.0 II. Maximum amount of financing with the 3 largest debtors and common risk groups: 382 iii) Market Risk Value at Risk The exposure to market risk is determined through the calculation of the Value at Risk ( VaR ). The meaning of the VaR under this method is the potential loss which could be generated in the valuation of the portfolios at a given date. This methodology is used both for the calculation of market risk and for the establishment and control of internal limits. In order to calculate the Value at Risk (VaR), the Institution applies the nonparametric historical simulation method, considering for such purpose a 99% confidence level, using the 500 immediate historical scenarios, multiplying the result by a security factor that fluctuates between 3 and 4 depending on the annual Back Testing results calculated up to the previous quarter, also considering 10 days to break up the risk portfolio in question. These measures make it possible to insure considering unforeseen volatilities in the main risk factors that affect such portfolios. Such methodology is applied to all financial instrument portfolios within and beyond the balance, including money market and treasury transactions, capital, foreign-exchange and derivatives held for trading and 54

55 hedging purposes, which are exposed to variations in their value due to changes in the risk factors affecting their market valuation (domestic and foreign interest rates, exchange rates and indexes, among others). The average VaR for the third quarter for the portfolio is Ps 1,773 million. Million Pesos 3Q10 4Q10 1Q11 2Q11 3Q11 Total Var * 2,272 1,618 1,533 1,572 1,733 Net Capital ** 52,572 54,208 55,514 56,201 58,408 VaR/Net Capital 4.32% 2.98% 2.76% 2.80% 3.04% * Quarter Average of Bank and Brokerage House ** Net capital of the Banking Sector is the arithmetic sum of the net capitals of Bank and Brokerage House. Moreover, the average Value at Risk per risk factor of the portfolio of instruments described for the Bank and Brokerage House, during the second quarter of 2011 is shown below: Risk Factor VaR Domestic interest rate 1,662 Foreign interest rate 293 Exchange rate 117 Capitals 10 Total VaR of Bank and Brokerage House 1,773 Million Pesos The VaR for each of the risk factors shown is determined by simulating 500 historical scenarios of the variables that make up each of such factors, maintaining constant the variables that affect the other risk factors mentioned above. Similarly, the consolidated Value at Risk for the Bank and Brokerage House considers the correlations of all the risk factors that affect portfolio valuation. That is why the arithmetic sum of the Value at Risk per Risk Factor does not match. Backtesting Analysis In order to validate the daily VaR calculation measurement effectiveness, as a measure of market risk, the Backtesting analysis is updated weekly. This analysis makes it possible to compare the results estimated by VaR with the actual results. Sensitivity Analysis and Extreme Conditions Test To enrich the analysis and to obtain the desired impact that movements on risk factors may have on positions, sensitivity analyzes and tests under extreme conditions are periodically implemented. These analyzes prevent the Institution from negative situations that could arise in which extraordinary losses result from the valuation of financial instruments in position. iv) Ixe s Market Risk The Institution's market risk positions include money market instruments mainly floating rate instruments, lineal derivative instruments, underlying options such as interest rates, currencies and stock titles. To estimate market risk of Money, Stock, Foreign Exchange and Derivative portfolios, diverse methodologies are used to evaluate and control risk, which are authorized by the Board of Directors. 55

56 The Value at Risk, VaR, represents the maximum estimated loss with a certain statistical level of trust, for a determined period of time (investment horizon) and under normal market conditions. The Institution uses the integral risk system to the estimate VaR for all its positions and portfolios at risk. To estimate VaR, the Historical Simulation methodology is used with 100 horizon days, as a policy estimations are carried out with a 95% level of trust and a horizon time of 1 day. These estimates are calculated for the Institution's diverse portfolios which include: Capital Market, Money Market, Derivatives, Foreign Exchange and Treasury. To estimate the VaR, it is necessary to have the following: Valuation formula. Data base of relevant risk factors Monthly tests are carried out with extreme scenarios which incorporate historical scenarios during which fundamental suppositions are broken in the risk variables that the Institution is exposed to, additionally there are risk mesurations such as sensitivity to movements in: interest rates by 1 base point (PV01), exchange rates and stock prices. Daily "back-tests" are carried out to compare losses and earnings with the value at risk observed, and to carry out calibrations with the models should the need arise. The Institution can have shares registered as available for sale, which are treated with the accounting regulations in effect; as long as the value at risk is calculated at a trust level of 95% and 99.5% for market risk. The VaR average for the Institution's portfolios for 3Q11 is Ps million, which represents 0.15% of the Bank's Net Capital to September IXE BANCO, S.A. DE C.V. Total VaR by Portfolio & risk factor 3Q11 Million Pesos Average Closing VaR 95% 1 day Money Market Capital Market Exchange Market Derivatives Market Treasury TOTAL Diversifications Effect (12.03) (16.21) Capital Net 7, , VAR / Net Capital 0.15% 0.13% Note VaR does not include securities held for settlement. 56

57 The VaR average of the Broker Dealer's portfolios for 3Q11 is Ps 2.59 million, which represents 0.45% of the Institution's Net Capital to September IXE CASA DE BOLSA, S.A. DE C.V. VaR by Portfolio & Risk Factor Million Pesos Average Total 3Q11 Close VaR 95% 1 day Money Market Capital Market Exchange Market Derivatives Market Treasury TOTAL Diversifications Effect (0.42) (0.10) Net Capital VAR / Net Capital 0.45% 0.22% Note VaR does not include securities held for settlement. The VaR average of the Fincasa portfolios for 3Q11 is Ps 3.08million, which represents 0.44% of the Institution s Net Capital to September For their calculation, the Historical Simulation methodology was used with 100 horizon days, and as a policy, calculations were carried out with trust levels of 95% with a horizon time of 1 month. FINCASA HIPOTECARIA. Total VaR Balance. 3Q11 Million Pesos Average Closing VaR Balance Net Capital * VAR / Net Capital 0.44% 0.74% Note Net Capital as of September 2011 is preliminary. The VaR average of the Ixe Automotriz portfolios for 3Q11 is Ps 0.70 million which represents 0.24% of the Institution s Net Capital to September

58 For their calculation, the Historical Simulation methodology was used with 100 horizon days, and as a policy, calculations were carried out with trust levels of 95% with a horizon time of 1 month. IXE AUTOMOTRIZ. VaR Balance. Million Pesos Average Total 3Q11 Closing VaR Balance Net Capital * VAR / Net Capital 0.24% 0.25% Note Net Capital as of September 2011 is preliminary. The VaR average of the Ixe Soluciones portfolios for 3Q11 is Ps 1.71 million which represents 0.49% of the Institution s Net Capital to September For their calculation, the Historical Simulation methodology was used with 100 horizon days, and as a policy, calculations were carried out with trust levels of 95% with a horizon time of 1 month. IXE SOLUCIONES. VaR Balance. Million Pesos Average Total 3Q11 Closing VaR Balance Net Capital * VAR / Net Capital 0.49% 0.47% Note Net Capital as of September 2011 is preliminary. v) Liquidity Risk and Balance In response to the Banking Sector s need to measure global Liquidity Risk and to have consistent followup, the Banks us financial ratios, such as the Liquidity Ratios (Liquid Assets / Liquid Liabilities). Liquid Assets include availabilities, securities to negotiate and securities available for sale. Liquid Liabilities include demand deposits, demand interbanking loans and short-term interbanking loans. The liquidity ratio at closing of 2Q11 is 88.4%, while the average for the quarter is 99.3%. Million Pesos (at closing of the quarter) 3Q10 4Q10 1Q11 2Q11 3Q11 Liquid Assets 127, , , , ,934 Liquid Liabilities 140, , , , ,706 Liquidity Ratio 90.8% 93.4% 89.0% 88.4% 78.4% 58

59 Million Pesos (average) 3Q10 4Q10 1T11 2Q11 3Q11 Liquid Assets 129, , , , ,508 Liquid Liabilities 126, , , , ,421 Liquidity Ratio 102.3% 93.1% 98.0% 99.3% 94.0% Average estimate calculated using weekly estimates of Liquidity Ratio For liquidity risk quantification and follow-up, the Banking Sector uses for the dollar portfolios, the criteria that the Bank of Mexico established for developing the Liquidity Coefficient, which makes it possible to evaluate the differentials between asset and liability flows in different periods of time. This promotes a healthier distribution of terms for these assets. Moreover, to prevent the risk of concentrating terms and re-appreciation date for each of the Banks in the Banking Sector, a Gap Analysis is made to face the resources with sources of funding, detecting any concentration in advance. These analyses are made separately per currency (domestic, foreign, and udis). The structural risk of the Balance is evaluated using the analysis of balance simulation, among others, which allows the evaluation of future static or dynamic behavior in the Balance Sheet. It analyzes sensitivity to movements in domestic, foreign and real rates obtaining the impact that they have on the Economic Value and on the Net Interest Income. Likewise, tests are conducted under extreme conditions wherein the result of extreme changes is evaluated on rates, funding and exchange rates. Projections are periodically compared with real data as a measure of evaluation of the effectiveness of the simulation model. These tests make it possible to evaluate the suppositions and methodology used, and if necessary, adjust them. With the objective of strengthening follow-up of risk, early detection alarms have been determined, which allow the anticipation of problems and if necessary, put contingency plans into action. vi) Ixe Liquidity Risk Considering cash, the deposit with the Bank of Mexico, Government and banking securities of the Balance Sheet, and deposits such as core deposits all as liquid assets, the liquidity quotient (liquid assets vs. deposits) for Banco Ixe to September 30th, 2011 is 17.77%. The liquidity ratio vs. Net Capital is 76.95%. IXE BANCO, S.A. DE C.V. Use Liquidity Risk Million Pesos Sep-11 Accumulated gap in 1 month (MXP + UDIS) (1,207.89) Liquid Assets 5, Net Capital 7, Tier 1 Capital 4, Liquidity vs. Net Capital 76.95% Liquidity vs. Tier 1 Capital % Liquidity Ratio 17.77% Liquidity Ratio= Liquid Assets vs. Deposits 59

60 *Cash, BM's Deposits, Bank and Governmental certificates The liquidity ratio vs. Net Capital for the Casa de Bolsa to September 30th, 2011 is 66.92%. IXE CASA DE BOLSA, S.A. DE C.V. USE Liquidity Risk Million Pesos Sep-11 Accumulated gap in 1 month (MXP + UDIS) 2.51 Liquid Assets Net Capital Liquidity vs. Capital 66.92% The liquidity ratio vs. Net Capital for Fincasa to September 30th, 2011 is 16.94%. FINCASA HIPOTECARIA. USE Liquidity Risk Million Pesos Sep-11 Accumulated gap in 1 month (MXP + UDIS) (1,773.82) Accumulated gap in 3 months (MXP + UDIS) (1,831.83) Liquid Assets* Net Capital Tier 1 Capital Liquidity vs. Net Capital 16.94% Liquidity vs. Tier 1 Capital 17.77% *Only Banks Net Capital as of September 2011 is preliminary The liquidity ratio vs. Net Capital for Ixe Automotriz to September 30th, 2011 is 0.29%. IXE AUTOMOTRIZ. USE Liquidity Risk Million Pesos Sep-11 Accumulated gap in 1 month (MXP + UDIS) (901.16) Accumulated gap in 3 months (MXP + UDIS) (884.40) Liquid Assets* 0.85 Net Capital Tier 1 Capital Liquidity vs. Net Capital 0.29% Liquidity vs. Tier 1 Capital 0.29% 60

61 *Only Banks Net Capital as of September 2011 is preliminary The liquidity ratio vs. Net Capital for Ixe Soluciones to September 30th, 2011 is 0.9%. IXE SOLUCIONES. USE Liquidity Risk Million Pesos Sep-11 Accumulated gap in 1 month (MXP + UDIS) (2.75) Accumulated gap in 3 months (MXP + UDIS) (1,027.74) vii) Operational Risk Liquid Assets* 0.34 Net Capital Tier 1 Capital Liquidity vs. Net Capital 0.09% Liquidity vs. Tier 1 Capital 0.09% *Only Banks Net Capital as of September 2011 is preliminary GFNorte has a formal Operational Risk department pertaining to the Deputy Managing Director Operational Risk Administration", which reports to General Management of Risk Administration. Our institution defines Operational Risk as the potential loss due to failures or deficiencies in the internal controls, errors in operation processing and storing or in data transmitting, as well as to adverse administrative and judicial rulings, fraud or theft (this definition includes Technological and Legal risk). The objectives of the Operational Risk Management are: a) To allow and support the organization to reach its institutional objectives through the prevention and management of operational risks; b) To insure that the existing operational risks and the required controls are duly identified, assessed and in line with the risk strategy established by the organization; and c) To insure that the operational risks are duly quantified in order to make the proper capital allocation per operational risk. Pillars of Operational Risk Management I. Policies, Objectives and Guidelines As part of the institutional regulations, there are documented policies, objectives, guidelines, methodologies and responsible areas in Operating Risk management. The Operating Risk Directorship maintains close communication and coordination with the Regulatory Comptrollership in order to facilitate effective Internal Control in which the proper procedures and controls are established that will mitigate Operating Risk in the processes, and provide follow up through the Internal Audit Department. The Regulatory Comptrollership, as part of the Internal Control System, carries out the following activities to mitigate risk: a) Internal control validations; b) Institutional regulations management and control; c) Monitoring of operating processes internal control by means of control indicators reports, that are reported by the process comptrollers in the various areas; d) Money Laundering Prevention process 61

62 management; e) Control and follow up of the regulatory provisions; and f) Analysis and assessment of the operating processes and projects with the participation of the responsible directors of each process in order to insure adequate internal control. II. Quantitative and Qualitative Measuring Tools Operating Losses Database To record operating loss events, has a system that enables the central information supplier areas to directly record such events online, which are classified by Type of Event in accordance with the following categories: Types of Events Internal Fraud External Fraud Labor Relations and Safety in the Workplace Customers, Products & Business Practices Natural Disasters and Other Events Incidences in the Business and Systems Failures Process Execution, Delivery and Management Description Losses derived from a type of action intended to defraud, unlawfully take goods or sidestep regulations, laws or company policies (excluding diversity/discrimination events) in which at least one company party is involved. Losses derived from a type of action intended to defraud, unlawfully take goods or sidestep the laws, caused by a third party. Losses caused by acts that are incompatible with the legislation or labor agreements regarding hygiene or safety, the payment of personal damage claims, or cases associated with diversity/discrimination. Losses caused by involuntary noncompliance or negligence of a professional obligation to specific customers (including fiduciary and adjustment requirements), or due to the nature or design of a product. Losses caused by damage or harm to material assets as a consequence of natural disasters or other events. Losses caused by incidences in the business and systems failures Losses caused by errors in operations processing or management, as well as the relations with commercial counterparties and providers. This historical Database provides the statistics of the operating events in which the institution has incurred so as to be able to determine their trends, frequencies, impact and distribution. Moreover, the Database will make it possible in the future to have enough information to calculate the capital requirements per Advances Models. Legal and Fiscal Contingencies Database For the recording and follow-up of legal, administrative and tax issues that may arise from adverse unappealable ruling, an internal system called Legal Risk Issues Monitoring System (SMARL) was developed. This system enables the central data supplying areas to record such events directly and online, which are then classified by company, sector and legal issue, among others. As part of GFNorte s legal risk management, legal and fiscal contingencies are estimated by the attorneys that process the issues based on an internal methodology. This makes it possible to create the necessary book reserve to face such estimated contingencies. Risk Management Model 62

63 GFNorte has defined objectives, which are achieved through different plans, programs and projects. Compliance with such objectives may be adversely affected due to operating risks, for which reason a methodology must be in place to manage them within the organization. Consequently, operating risk management is now an institutional policy defined and supported by senior management. To perform Operating Risk Management, each of the operating risks involved in the processes must be identified in order to analyze them. In this regard, the risks identified by the Regulatory Comptrollership are recorded in a risk matrix and processed in order to eliminate or mitigate them (seeking to reduce their severity or frequency) by defining tolerance levels, as the case may be. At present, work is being done on developing a new Institution Operating Risk Management Model and the technological tools needed to implement it. III. Required Capital Calculation In accordance with the Capitalization for Operational Risk Regulations in effect, the institution has adopted the Basic Model, which is calculated and reported periodically to the authorities. IV. Information and Reporting The information generated by the Database and the Management Model is processes periodically to report to the Risk Policies Committee and the Board of Directors regarding the main operating events that were detected, the trends, identified risks (risk matrix) and their mitigating strategies. Reporting is also done on the status of the main Operating Risk mitigation initiatives implemented by the various areas of the organization. viii) Technology risk Technological Risk is defined in our institution as all potential losses from damage, interruption, alteration or failures derived from the use of or dependence on hardware, software, systems, applications, networks and any other information distribution channel in the rendering of banking services to the customers. This risk forms an inherent part of Operating Risk, which is why its management is handled collectively throughout the entire organization. To address the Operating Risk associated with information integrity, and Integrity Committee has been created. Its objectives are to align security and information control efforts under a prevention focus, to define new strategies, policies, processes or procedures and to provide solutions to information security issues that affect or may affect the Institutional patrimony. The functions established by the CNBV or Technology Risk Management are performed by the Institution under institution regulatory and Integrity Committee guidelines. To address the Operating Risk caused by high impact external events, GFNorte has a Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP) based on a same-time data replication system at an alternate computer site. All the above cover the backup and recovery of the Institution s critical applications in the event or any relevant operating contingency. ix) Legal risk Legal Risk is defined as the potential loss from failure to comply with the applicable legal and administrative provisions, the issuance of indisputable unfavorable court rulings and the application of penalties regarding the operations that the institution performs. The Legal Risk must be measured as an inherent part of Operating Risk in order to understand and estimate its impact. Therefore, those legal issues which result in actual operating losses of the SMARL system are later recorded in the SCERO in accordance with a predetermined classification. 63

64 Based on the statistics of the current legal issues and real loss events, the Institution can identify specific legal or operating risks, which are analyzed in order to eliminate or mitigate them in an attempt to reduce or limit their future occurrence or impact. x) Ixe Operational Risk IXE has a Manual for Operational Risk Management and an Internal Control System that integrates policies, procedures, responsibilities and roles of government entities for operational risk management including Operational, Technological and Legal Risk, as well as the section of internal control. In addition, there are manuals for processes, policies and procedures of the operating processes for entire areas of the institution. Objectives, policies and procedures for Operational, Technological and Legal Risk Management, as well as those for Internal Control, are ratified at least once a year by the Board of Directors. Operational Risk Management has a model to follow called "Process for Operational Risk Management in the Business" in order to identify, evaluate, mitigate, administer and monitor the operational, legal and technological risk in the environment of the entire company, with the support of the process owners and operational risk delegates. To register those events with operational losses, a database is made that allows the central areas supplying information to report the events directly, classifying each by type of event and line of business, in order to have statistics of those operational events incurred by the institution to be able to determine the tendencies, frequency, impact and distribution that they present. The functions established by the CNBV in Technology Risk Management, are performed by the Institution under the guidelines established by institutional regulations. Also, IXE has a Business Continuity Plan and a Disaster Recovery Plan with what you have covered the backup and recovery of critical applications of the institution, in the event of any significant operational event. To register and follow-up on judicial, administrative and fiscal matters that could result from unfavorable unappealable resolutions, there is a database that allows the central areas supplying information to report directly on these matters, which are classified under defaulted taxonomy. In accordance with Capitalization Rules for Operational Risk in effect, IXE has adopted the Basic Model that is calculated and reported periodically to authorities. 64