Fitch Takes Action on Colombian and Central American Banks Following Colombia’s Sovereign Ratings Downgrade

Fitch Ratings has conducted a portfolio review of Colombian and Central American banks following Colombia’s sovereign rating outlook revision to negative from stable. Fitch revised the outlook on Colombia’s ratings to negative from stable due to the deterioration in its fiscal position and uncertain prospects for corrective measures.

The central government fiscal deficit for 2024 came in at 6.7% of GDP, sharply underperforming Fitch’s forecast of 5.6% of GDP, mainly due to revenue shortfalls and an inability to implement offsetting spending cuts.

Fitch’s assessment of the Operating Environment (OE) for Colombian banks remains unchanged, despite the negative outlook on the sovereign rating. This outlook is mostly driven by worsening fiscal and public debt dynamics, but not necessarily reflecting weaker economic activity or any other material headwind to the banks’ operating conditions.

The banking system’s sufficient capitalization, improving profitability, and reducing loan impairment charges provide adequate resilience to withstand stress from government and external shocks. GDP growth is projected to increase to approximately 2.7% in 2025, up from 1.7% in 2024.

This portfolio review includes Colombian banks with Issuer Default Ratings (IDR) rated at the same level or above that of the sovereign. Fitch believes these ratings are more sensitive to a potential downgrade of the sovereign rating. Furthermore, the agency will not rate Colombian FIs higher than the sovereign rating, based on their current intrinsic credit profiles, except for those with highly-rated parents. Fitch has affirmed all the ratings for the Colombian banks included in this review.

The Viability Ratings (VR) were not reviewed at this time, given that these ratings do not have explicit outlooks, and also considering the affirmation of the OE score with a stable outlook. However, VRs at the ‘bb+’ level would likely be downgraded in the scenario of a potential sovereign downgrade, as Fitch rarely rates a bank’s VR higher than the respective sovereign rating.

The banks’ national ratings, as well as those of other financial institutions rated in Colombia, are not directly impacted, as these ratings reflect the relative strengths and weaknesses of each institution in a specific jurisdiction.
Rating actions have also been taken on the Colombian FI’s Central American subsidiaries, specifically in Costa Rica, Guatemala, and Panama.

Fitch Ratings building Photo credit: Shashank457.