Grupo Aval’s Banco de Bogotá To Buy Panamá’s Multi Financial Group; Moody’s Says Outlook Remains Negative

Banco de Bogotá has reached an agreement with Multi Financial Group (MFG), Panama’s eighth largest banking group by assets, to acquire 100% of its common capital for about $730 million dollars in an all-cash transaction. The proposed acquisition will add $5 billion to Banco de Bogotá’s total assets of $51 billion, further expanding Banco de Bogotá’s footprint in Panama and Central America, where it already participates through its BAC Credomatic (Baa3, baa3) banking group. BAC’s Panamanian operations and MFG will continue to operate separately, but are likely to integrate certain support functions, including IT and operating systems. As of June 2019, the combined banks had $18.9 billion in deposits and $19.4 billion in total assets. The agreement is subject to the approval of the relevant regulatory authorities.

Earlier this month, following the announcement, Moody’s Investors Service affirmed all ratings of Banco de Bogotá S.A., including its Baa2 long-term global local and foreign currency deposit ratings as well as the Baa2 long-term foreign currency senior unsecured debt ratings, following the affirmation of its ba1 baseline credit assessment (BCA). The outlook on Banco de Bogotá’s ratings remains negative. In addition, Moody’s affirmed the ratings assigned to Grupo Aval Acciones y Valores S.A. and Grupo Aval Limited. The outlook on the ratings remains negative. Grupo Aval is the parent company of Banco de Bogotá.

Banco de Bogotá

Moody’s affirmation of Banco de Bogotá’s ratings reflects the bank’s strong earnings and good access to core deposit funding. In addition, the affirmation reflects Moody’s expectation that the bank’s capitalization ratio, measured as tangible common equity (TCE) relative to risk weighted assets (RWA), resulting from the transaction will largely remain within the 8.3-9.3% range. Moody’s assumption incorporates the additional goodwill of $280 million generated from the acquisition, considering MFG’s TCE of $450 million as of June 2019, and Banco de Bogotá’s management’s commitment to reduce dividend payouts as needed to preserve Banco de Bogotá’s capital ratio.

The negative outlook on Banco de Bogotá’s ratings incorporates its large presence in potentially more volatile Central American markets, which continues to expose Banco de Bogotá’s assets and earnings to increased risks that could lead to downward pressures on its baseline credit assessment. Banco de Bogotá’s proposed acquisition of MFG in Panama is credit positive because it adds an attractive asset in a more stable operating environment. Nevertheless, the increased asset exposure to Panama will likely not offset the deteriorating operating conditions in both Costa Rica and Nicaragua, which account for combined 16% of Banco de Bogotá’s loans, and which are incorporated in Banco de Bogotá’s weighted Macro Profile at “Moderate -“.

Grupo Aval

The affirmation of Grupo Aval and Grupo Aval Limited’s ratings with negative outlook incorporates the downward pressure on Banco de Bogotá’s BCA. Banco de Bogotá is the group’s chief operating entity, in which 64% of gross loans of the consolidated group are booked as of June 2019. Grupo Aval’s ratings incorporate the structural subordination of the bank holding company’s liabilities versus the liabilities of the bank and its other subsidiaries and are notched off Banco de Bogotá’s BCA. Moody’s does not incorporate government support in the holding company’s ratings.

The affirmation of Grupo Aval´s ratings follows the affirmation of Banco de Bogotá´s BCA and also incorporates the company´s very stable though somewhat high double leverage ratio, which is measured by investments in subsidiaries divided by shareholders’ equity, at 115%. The double leverage reflects the extent to which a holding company relies upon debt to finance its investments in subsidiaries. Moody’s considers double leverage in excess of 115% to be high. The company has also shown a very stable and high interest coverage underpinned by a strong dividend income from its subsidiaries, with core earnings (dividends paid by its subsidiaries) amounting to 5.4 times interest expenses in June 2019.

Grupo Aval Limited’s debt ratings are based on Grupo Aval’s irrevocable and unconditional guarantee of Grupo Aval Limited’s liabilities under the indentures. The negative outlook on Grupo Aval Limited’s rating is in line with the negative outlook on Grupo Aval.

Dynamic Factors

Moody’s will continue to monitor the developments of the deal until it has received regulatory approvals and the transaction closes, which is anticipated to occur by the end of second quarter 2020. That said, Moody’s may take rating actions in the interim and prior to the close, as it gains further understanding of the transaction and of relevant implications for the creditors of the bank and for the group.

Banco de Bogotá’s supported ratings are positioned at the same level of Colombia’s sovereign bond rating and will likely be downgraded if Colombia’s sovereign rating is lowered. Banco de Bogotá’s ratings could also be downgraded if the operating environment in Central America, specifically Costa Rica and/or Nicaragua, deteriorates further, leading to increased delinquencies and credit costs, or if the bank´s exposures to those countries increase, contrary to current expectations and trends in Nicaragua. The ratings could also face downward pressure if the bank´s capital ratio weakens in conjunction with the transaction, or if the bank experiences higher-than-expected delinquencies and credit costs stemming from its exposures to large troubled Colombian corporates.

Banco de Bogotá’s ratings are unlikely to face upward pressures because they have a negative outlook. However, the outlook could be stabilized provided the operating environment in Costa Rica and Nicaragua and asset quality in those counties stabilize as well, and the bank´s exposures to those countries decline in line with current expectations.

Upward or downward pressures on Grupo Aval and Grupo Aval Limited’s ratings would be associated with similar pressures on Banco do Bogotá’s BCA. The ratings could also face downward pressures if the group’s double leverage appear likely to exceed 115% by a meaningful amount on a sustained basis and/or the interest coverage ratio decrease significantly.

Affected Issuers and Ratings

The following Banco de Bogotá S.A.’s ratings and assessments were affirmed:

• Long term local currency deposit rating of Baa2, Negative
• Long term foreign currency deposit rating of Baa2, Negative
• Long term foreign currency senior unsecured rating of Baa2, Negative
• Short term local currency deposit rating of Prime-2
• Short term foreign currency deposit rating of Prime-2
• Long-term foreign currency global subordinated debt rating of Ba2
• Long term local currency counterparty risk rating of Baa2
• Long term foreign currency counterparty risk rating of Baa2
• Short term local currency counterparty risk rating of Prime-2
• Short term foreign currency counterparty risk rating of Prime-2
• Adjusted Baseline Credit Assessment of ba1
• Baseline Credit Assessment of ba1
• Long-term counterparty risk assessment of Baa2(cr)
• Short-term counterparty risk assessment of Prime-2(cr)
• Outlook, Remains Negative

The following Grupo Aval Acciones y Valores S.A.’s ratings were affirmed:

• Long term local currency issuer rating of Ba2, Negative
• Long term foreign currency issuer rating of Ba2, Negative
• Short term local currency issuer rating of Not Prime
• Short term foreign currency issuer rating of Not Prime
• Outlook, Remains Negative
• The following Grupo Aval Limited’s rating was affirmed:
• -Backed senior unsecured debt rating of Ba2, Negative
• Outlook, Remains Negative