Bancolombia’s Proposed Tier 2 Subordinated Notes Rated Ba3(hyb) By Moody’s

Moody’s Investors Service has assigned a Ba3(hyb) rating to the proposed US Dollar-denominated contractual non-viability Tier 2 subordinated notes to be issued by Bancolombia S.A. (NYSE:CIB) of Medellín, Colombia. The notes will be due in 2029.

The capital securities are Basel III-compliant, and their terms and conditions have been defined so as to qualify the notes for treatment as Tier 2 capital pursuant to Colombian regulations.

Ratings Rationale

The Ba3(hyb) rating assigned to the new Tier 2 subordinated notes is positioned two notches below the ba1 adjusted baseline credit assessment (adjusted BCA) of Bancolombia in line with Moody’s standard notching guidance for contractual non-viability subordinated debt with a full or partial principal write-down triggered at or close to the point of non-viability.

The rating reflects the risk of a full or partial write-down of principal in the event that (1) the bank’s regulatory Basic Solvency ratio (equivalent to the CET1 ratio) falls below 4.5% (which Moody’s considers to be below the point of non-viability) on either an individual (i.e. treating the bank’s Central American subsidiaries as investments) or fully consolidated basis; or (2) the regulators determines that the Basic Solvency ratio needs to be restored to 6.0%. The notes will only be written down in an amount sufficient to restore the Basic Solvency ratio to 6% under either circumstance. In practice however, they will automatically be fully written down if the basic solvency ratio falls below 4.5% as the par amount of the notes equals just about 1% of current risk-weighted assets.

The notes will rank:

1. junior to all present and future senior indebtedness of the issuer
2. junior to all other present or future “preferred” subordinated indebtedness
3. pari passu with all other present or future unsecured Tier II subordinated indebtedness and
4. senior to securities junior to the notes as well as to all classes of capital stock of the issuers.

While Moody’s assesses the probability that Bancolombia will receive support from the Colombian government (Baa2 stable) in a stress situation as very high given the bank’s large market share of domestic deposits, this support only applies to the bank’s deposit and senior debt ratings. Moody’s does not expect that Tier II securities – which are designed to absorb losses – will benefit from government support.

Bancolombia’s ba1 baseline credit assessment (BCA) reflects the bank’s good earnings generation capacity, its improving consumer asset quality despite still high corporate loan delinquencies, and Bancolombia’s broad and stable core funding access, which partially offsets the bank’s moderate reliance on market funding. Bancolombia’s profitability has benefited from lower credit costs and a shift in loan portfolio mix towards consumer lending, as the Colombian economy recovers.

Moody’s believes Bancolombia’s exposure to environmental risks is low, consistent with its general assessment for the global banking sector. Bancolombia’s exposure to social risks is moderate, consistent with Moody’s general assessment for the global banking sector. As well, governance risks are largely internal rather than externally driven. Moody’s does not have any particular concerns with Bancolombia’s governance.

Factors that can positively or negatively affect the rating

The ratings of the Tier 2 notes are notched from Bancolombia’s adjusted BCA. As such, the ratings of the securities will move in tandem with Bancolombia’s adjusted BCA. Bancolombia’s supported ratings are positioned at the same level of sovereign bond rating and could face upward pressure if Colombia’s government bond rating is upgraded in conjunction with continued improvement in the issuers’ credit fundamentals and/or Colombia’s macroeconomic environment. However, if Colombia’s government bond rating faces downward pressures, Bancolombia’s ratings could be negatively pressured as well. The ratings could also face downward pressure if the issuers’ intrinsic credit fundamentals deteriorate unexpectedly.