Credit Opinion: Bancolombia S.A.

Transcription

1 Credit Opinion: Bancolombia S.A. Global Credit Research - 24 Dec 2012 Medellin, Colombia Ratings Category Moody's Rating Outlook Stable(m) Bank Deposits -Fgn Curr Baa3/P-3 Bank Deposits -Dom Curr Baa2/P-3 Bank Financial Strength D+ Baseline Credit Assessment (baa3) Adjusted Baseline Credit Assessment (baa3) Senior Unsecured Baa2 Subordinate *Baa3 * Placed under review for possible downgrade on November 27, 2012 Contacts Analyst Phone Felipe Carvallo/Mexico David Olivares Villagomez/Mexico M. Celina Vansetti/New York City Busy Juarez/Mexico Key Indicators BANCOLOMBIA S.A (Consolidated Financials)[1] [2]9-12 [2]12-11 [2]12-10 [2]12-09 [2]12-08 Avg. Total Assets (COP billion) 93, , , , ,783.1 [3]10.8 Total Assets (USD million) 51, , , , ,476.8 [3]17.1 Tangible Common Equity (COP billion) 9, , , , ,296.4 [3]22.3 Tangible Common Equity (USD million) 5, , , , ,910.7 [3]29.3 Net Interest Margin (%) [4]6.0 PPI / Average RWA (%) [5]4.4 Net Income / Average RWA (%) [5]2.4 (Market Funds - Liquid Assets) / Total Assets (%) [4]0.5 Core Deposits / Average Gross Loans (%) [4]96.0 Tier 1 Ratio (%) [5]9.9 Tangible Common Equity / RWA (%) [5]9.6 Cost / Income Ratio (%) [4]54.8 Problem Loans / Gross Loans (%) [4]4.1 Problem Loans / (Equity + Loan Loss Reserves) (%) [4]19.6 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; LOCAL GAAP [3] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [4] LOCAL GAAP reporting periods have been used for average calculation [5] Basel I & LOCAL GAAP reporting periods have been used for average calculation

2 Opinion RECENT CREDIT DEVELOPMENTS On 20 December 2012, Moody's affirmed all of Bancolombia S.A.'s (Bancolombia) ratings with stable outlook, following the announcement on 18 December 2012 of the acquisition of 40% of the shares of the Panamanian holding company of Grupo Financiero Agromercantil de Guatemala (GFAM, unrated), through its subsidiary Bancolombia Panamá S.A. In affirming Bancolombia's ratings Moody's mentioned that the announced acquisition of a minority 40% shareholding in Grupo Financiero Agromercantil de Guatemala, has a limited effect on the bank's capitalization levels, although it enhances its business franchise in Central America. GFAM is the holding company of Banco Agromercantil de Guatemala, S.A., the fourth largest bank in that country, and of Mercom, a Barbados-based offshore bank. Through its agreement with GFAM, Bancolombia will be able to gradually increase its shareholdings to 75% over a seven year period, which will consolidate the bank's franchise in Central America's largest economy. Bancolombia is expected to pay US$216 million in cash for the 40% stake, which is small relative to the bank's consolidated cash and cash equivalent position of US$3.5 billion, as of September GFAM is also small relative to Bancolombia's size, representing a modest 4% of loans and 5% of deposits as of September Moody's noted that Bancolombia already has an important presence in Central America and in the so- called "northern triangle" formed by Guatemala, El Salvador and Honduras as a result of its 2007 acquisition of El Salvador's largest bank, Banco Agrícola de El Salvador, S.A. (BanAgrícola, unrated). It operates in the Guatemalan credit markets through BanAgrícola and a representative office. The bank is nevertheless challenged by strong competition by local powerhouses such as Banco Industrial, S.A. (Baa3, stable) and Banco G&T Continental, S. A. (unrated), which as of 30 September 2012 represented 43% and 45% of loans and deposits in Guatemala, respectively. Moody's will continue to monitor Bancolombia's expansion strategy in the region, and its effects on capitalization, asset quality, and controls, while we acknowledge management's success in integrating BanAgricola. On 27 November 2012, Moody's placed Bancolombia S.A.'s long term foreign currency subordinated debt ratings of Baa3 on review for downgrade as Moody's reassesses systemic support for subordinated debt ratings as discussed in the special comment "Supported Bank Debt Ratings at Risk of Downgrade due to New Approaches to Bank Resolution," published February See press release entitled, "Moody's reviews the subordinated debt ratings of certain Latin American bank issuers for downgrade," published 27 November SUMMARY RATING RATIONALE Bancolombia S.A.'s D+ standalone financial strength rating reflects the bank's continued ability to generate adequate core earnings supported by an ample net interest margin and manageable credit costs, which reflect the bank's well established business franchise in Colombia and El Salvador. Bancolombia also maintains good risk management that ensures low levels of problem loans supported by sizable loan loss reserves. Good macroeconomic conditions in Colombia provide opportunities for healthy loan growth, which is likely to contribute to rising net interest margins and improving profitability. Moody's assesses Bancolombia's core capitalization and its ability to absorb losses both in anticipated and stress scenarios. The bank's Tier 1 capital ratio, after adjusting for goodwill deductions as per international standards, appears resilient to potential stress, also owing to its robust reserves. Management's appetite for further inorganic expansion, however, could add pressure to the bank's capital ratios. Bancolombia's D+ standalone financial strength rating maps to an unsupported credit assessment of baa3. Bancolombia's Baa2 local currency deposit rating benefits from one notch of uplift owing to Moody's assessment of very high probability of systemic support that could be available for the bank in a situation of stress. Rating Drivers - Franchise Value and Risk Positioning: Well established franchise in all areas of traditional banking and market position as the largest bank in Colombia and El Salvador - Profitability and Efficiency: Proven ability to generate recurring core earnings based on an ample net interest margin

3 - Liquidity: Broad access to core funding in the form of checking and savings products in both countries and high holding of liquid assets - Asset Quality and Capitalization: Good risk management ensures manageable asset quality indicators despite strong loan growth, supported by resilient Tier 1 capital levels against potential stresses Rating Outlook The outlook on all ratings is stable, with the exception of Bancolombia's long term foreign currency subordinated debt ratings which were placed on review for downgrade. What Could Change the Rating - Up Bancolombia's standalone financial strength rating is in line with the Colombian government's Baa3 bond rating, and as such upward pressure is less likely at this time. What Could Change the Rating - Down A marked deterioration in asset quality affecting core earnings or capital would generate negative pressure on the standalone financial strength rating and outlook. Non-organic crossborder growth would be reviewed closely, particularly in terms of financing, strategic fit and effect on Tier 1 capital levels, adjusted for goodwill. Recent Results During the first nine months of 2012 net income increased 6% when compared to same period a year ago, mainly as a result of higher net interest income (22%) in line with higher interest rates and loan growth of 13%. As of September 2012, Bancolombia's net interest margin was 5.7%, up slightly from 5.4% as of year-end Credit costs nevertheless increased 1.9x those reported during the same period of 2011, in line with tightening loan loss reserve requirements by the regulators and deterioration in the asset quality of consumer loans, which increased to 2.6%, from 1.6% a year ago. As such, returns on average assets and on average equity decreased to 1.9% and 15.8%, from 2.1% and 19.2%. Overall past due loans increased only slightly to 1.6% of gross loans, up from 1.5% a year ago. As of September 2012, Bancolombia's tier 1 ratio increased to 10.9% as a result of a US$940 million capital injection in February 2012, from 9% as of year-end 2011 and 9.3% a year ago. Moody's adjusts this ratio by deducting goodwill and weighing Colombian government securities at 50% in line with their Baa3 local currency rating by Moody's. Including these adjustments, the tier one ratio is resilient. Core deposits represent 90.1% of gross loans, down from 96.6% as of year-end 2011, reflecting higher growth in lending than in deposits, growth which has been funded through various debt issuances. Moody's also assesses Bancolombia's adjusted tier one capital against upfront losses on its Colombian and Salvadoran loan books separately as well on its securities portfolio, within anticipated and stressed scenarios. Unless noted otherwise, consolidated data used in this report is sourced from company reports, Moody's Financial Metrics and Colombia's Superfinanciera. DETAILED RATING CONSIDERATIONS Detailed rating considerations for Bancolombia's ratings are: Bank Financial Strength Rating Franchise Value and Risk Positioning Bancolombia is well-positioned to maintain its strong franchise value, enhanced by its Banagrícola acquisition, whilst maintaining a conservative risk positioning. Bancolombia holds a fairly diversified lending portfolio based on large corporations (47% of loans), SMEs (26%), consumer lending (19%) and mortgages (9%), as of September Commercial lending (large corporations and SMEs) consists mainly of manufacturing, construction, wholesalers and financial services, largely in the form of working capital loans. The bank holds leading positions in retail banking, with a broad and solid funding base of core deposits (three year-end average of 97.3%).

4 core deposits (three year-end average of 97.3%). In Colombia, the bank has a defendable market share of 20.7% of the system's loans and 19.7% of deposits, followed by Banco de Bogotá with 12.1% and 15.1%, as of August In El Salvador, Banco Agrícola, S.A. (Banagrícola) is inarguably the largest bank, with total asset size of US$3.7 billion and market shares of 28% of loans and assets and 27% of deposits, followed by far by Citibank's 15% overall market shares, as of March Banagrícola represents 7% of Bancolombia's loans and 10% of net income during the first quarter of Bancolombia's retail component relative to revenues is small (an estimated 35-40% of the bank's revenues), exhibiting less diversification than its larger regional peers in Mexico or Brazil. Management maintains a proactive approach to controlling and monitoring risk, which leads to satisfactory overall risk management practices. Risk control is underpinned by frequent board and senior executive discussions, good monitoring systems and the existence of an independent credit risk officer with veto power and independent of business line management. Bancolombia's overall risk profile is augmented, however, by the bank's concentration of operations in Colombia and El Salvador, whose governments are rated Baa3 and Ba3, respectively. The bank has high borrower concentration levels, as measured by top 20 economic group exposures versus Tier 1 capital and core earnings (PPP), which are nonetheless comparable to those of its regional peers. And though these large concentrations are to the best credits in the country, most are shared across the banking system, which increases the exposure to a single problematic loan. Bancolombia's trading portfolio represents about a third of its investment securities. The investment portfolio consists mostly of Colombian government securities, foreign government and multilaterals and mortgage securitizations (TIPS). The bank has been successful in integrating Banagrícola into its operations, despite it being domiciled in a jurisdiction where the economic cycle was and recuperation has been less benign than in Colombia. Also taken into account in Bancolombia's D+ standalone financial strength rating is that its Salvadoran subsidiary exposes the bank to a fully-dollarized economy, potentially affecting the stability of the subsidiary's contribution to earnings. Dollarization limits the ability of the Banco Central de Reserva de El Salvador to support Banagrícola, as well as that of the Colombian central bank (Banrepública) to support the consolidated Bancolombia (23% of loans are denominated in US dollars as of September 2012), in cases of severe stress. The bank releases complete reports in a quarterly basis containing adequate information about asset quality, earnings and capital adequacy. Moreover, Bancolombia's financial information reporting is enhanced by the bank's ADR program listing in the NYSE Euronext (CIB, since July 1995). Given that investment securities are mainly composed of government issuances and that Bancolombia's main focus is traditional lending, market risk appetite is limited. The unconsolidated VaR as of August 2012 was COP billion, or 6.2% of Tier 1 capital at risk due to market risk events, according to the Superfinanciera. Profitability and Efficiency The bank presents good performance in profitability. Bancolombia's funding base and portfolio are indexed to the benchmark interest rate, providing for ample and stable net interest margins. Bancolombia's three year-end average net interest margin is 5.8%. The bank also maintains a good cost discipline, despite much higher costs related to technology investments than had been expected by management, in the last three years. Pre-provision pre-tax income has been consistently high, averaging for the past three years at 4.22% as a percent of risk weighted assets, with net income averaging 2.40% of risk weighted assets. The bank's operating costs as a percentage of gross operating revenue have increased to a three year-end average of 59%, up from levels closer to 50% prior to 2009, as a result of heavy investment in technology. Liquidity Bancolombia has good ability to fund itself under stress, based on ample deposit-based funding and high holdings of liquid assets. The bank's core deposits represent 97.3% of gross loans while liquid assets represent 19.9% of total assets (three year-end averages).

5 The bank maintains early warning systems and access to alternative liquidity through access to repurchase agreements with Banco de la República before a hypothetical need for asset sales/securitizations. The bank would be able to repo Colombian treasury bills and obligatory investments in an early stage, followed by its TIPS (mortgage securitizations). Banrepública also offers banks a Transitory Liquidity Support program for repurchasing loans and securities for up to 15% of deposits. Moody's preferred liquidity ratio [(market funds - liquid assets)/total assets] seeks to measure the level of use of market funding, and as such the more negative the outcome, the better. Bancolombia's three year-end average in this sense has weakened to -0.51%, and stands at 3.8% as of September 2012, and is expected to increase to 7% based on the subordinated debt issuance of US$1.2 billion. Market funding in Colombia is readily available as a result of its fairly developed pension fund management companies (AFPs) and insurance companies, and strong demand for well performing developing country issuers. Asset Quality and Capital Adequacy Despite very high loan growth, Bancolombia's proactive risk management and conservative lending policies have maintained past due loans (90+ days past-dues) and problem loans (C, D, or E classified) at manageable levels. Bancolombia indeed has seen deterioration, but mainly among consumer (credit cards and car loans) and SME categories, and within the 30+ days past-dues. Also, Bancolombia maintains resilient capitalization and loan loss reserves against unexpected losses in its portfolio. During the 12 months ended on 30 September 2012, loans grew 17.2% (after slowing from 23% loan growth during 2011), with the strongest growth levels among SMEs (23.7%), mortgage lending (21.0%) and consumer loans (18.8%). The composition of the loan book has remained largely stable, with corporate and SME lending dominating the portfolio (72.7%). The bank's past due loan ratio remains low at 1.6% as of September 2012, versus 1.5% a year ago. The bank's problem loans (C, D or E classified loans) also remain low at 4.0% of gross loans, versus 3.9% a year ago. Bancolombia also maintains high levels of reserves and capital against unexpected deterioration in asset quality. As of September 2012, loan loss reserves represented 4.9% of gross loans, versus 4.6% a year ago. Bancolombia's adjusted tier one capital ratios are resilient and in line with its bank financial strength rating of D+. Bancolombia's three year average unadjusted tier one capital ratio is 9.9%, increasing to 10.9% as of September 2012, based on the February 2012 capital injection. Moody's assesses Bancolombia's tier one capital against upfront losses on both its lending portfolio and its investments securities portfolio, within anticipated and stressed scenarios. Assigned Rating vs Scorecard Outcome As a point of reference, Moody's assigns a D+ standalone BFSR to Bancolombia, which is one notch below the scorecard-implied rating of C- (see table below). Moody's believes the D+ rating reflects Bancolombia's high dependence on the domestic macroeconomic and financial environment. Bancolombia's standalone BFSR is at the same rating level as the Colombian government's local and foreign currency bond rating of Baa3. Global Local Currency Deposit Rating (Joint Default Analysis) Moody's assigns a local currency deposit rating of Baa2 to Bancolombia, which is one notch above its standalone credit assessment of baa3, based on Moody's assessment of very high probability of systemic support in case of stress, as a result of the bank's its important market shares. Colombia's systemic support indicator of Baa1 is two notches above the government's Baa3 local currency bond rating. Given Banagrícola's importance to the Salvadoran banking system, we would expect high systemic support locally. However, systemic support in El Salvador would be limited by the banking system's full dollarization and does not translate into notches of uplift for the bank's ratings. Foreign Currency Deposit Rating Bancolombia's long/short term foreign currency deposit ratings of Baa3/Prime-3 are constrained by Colombia's country ceiling for foreign currency deposits of Baa3. Notching Considerations

6 Bancolombia's senior unsecured debt issuances are rated at the same level as the bank's local currency deposit rating of Baa2. As a consequence of the increased probability that losses may be imposed on subordinated debt, Moody's is considering removing the systemic support which currently accounts for one notch of uplift. Upon the conclusion of the review and in line with "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", Moody's may position the ratings of subordinated debt issuances of Bancolombia one notch below the standalone BCA of baa3. Foreign Currency Debt Rating Moody's assigns Baa2 foreign currency debt ratings to Bancolombia's two senior debt issuances: five-year senior debt issuance of US$520 million due 5 January 2016 (coupon of 4.25%) and ten-year senior debt issuance of US$1 billion issued due 3 June 2021 (coupon of 5.95%). Moody's also assigns foreign currency debt ratings of Baa3 to Bancolombia's three ten-year subordinated issuances: - US$400 million due 25 May 2017 (coupon of 6.875%), - US$620 million due 26 July 2020 (coupon of 6.125%) and - US$1.2 billion due 11 September 2022 (coupon of 5.125%), all of which were placed on review for downgrade in line with Moody's reassessment of systemic support for subordinated debt ratings as discussed in the special comment "Supported Bank Debt Ratings at Risk of Downgrade due to New Approaches to Bank Resolution," published February Portions of the subordinated debt issuances are eligible for tier two capital treatment under Colombian law. The issuances are plain vanilla non-preferred, non-convertible subordinated debt with no ability to skip coupons. Rating Factors BANCOLOMBIA S.A Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (70%) C- Factor: Franchise Value C Improving Market share and sustainability x Geographical diversification x Earnings stability x Earnings Diversification [2] Factor: Risk Positioning C- Neutral Corporate Governance [2] - Ownership and Organizational Complexity - Key Man Risk - Insider and Related-Party Risks Controls and Risk Management x - Risk Management x - Controls x Financial Reporting Transparency x - Global Comparability x - Frequency and Timeliness x - Quality of Financial Information x Credit Risk Concentration x - Borrower Concentration x - Industry Concentration x Liquidity Management x

7 Market Risk Appetite x Factor: Operating Environment D Improving Economic Stability x Integrity and Corruption x Legal System x Financial Factors (30%) B- Factor: Profitability A Improving PPI % Average RWA (Basel I) 4.22% Net Income % Average RWA (Basel I) 2.40% Factor: Liquidity C+ Weakening (Market Funds - Liquid Assets) % Total Assets -0.51% Liquidity Management x Factor: Capital Adequacy B+ Neutral Tier 1 Ratio (%) (Basel I) 9.90% Tangible Common Equity % RWA (Basel I) 9.59% Factor: Efficiency C Improving Cost / Income Ratio 55.83% Factor: Asset Quality C+ Improving Problem Loans % Gross Loans 4.20% Problem Loans %(Equity + LLR) 19.85% Lowest Combined Financial Factor Score (9%) C+ Economic Insolvency Override Neutral Aggregate BFSR Score C Aggregate BCA Score a3 Assigned BFSR D+ Assigned BCA baa3 [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. [2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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