Big three credit ratings agency Fitch Ratings has affirmed its international ratings of both Banco de Bogota S.A. and its holding company Grupo Aval Acciones y Valores S.A. (Grupo Aval).
Photo: Banco de Bogotá office in the Colombian capital. (Credit: Jared Wade)
Specifically, the New York-based agency has affirmed Banco de Bogota’s Viability Rating (VR) at bb+ and its Long-Term Foreign Issuer Default Rating (IDR) and Long-Term Local Currency Issuer Default Rating at BB+.
Fitch also set its rating outlook for the long-term IDRs at stable.
“Fitch does not anticipate a further impact on the bank’s financial profile after the challenging operating environment from 2023, as healthier loan growth coupled to improving economic activity are expected for 2024,” stated Fitch in its ratings note.
The agency also listed the following key ratings drivers, reproduced here as published by Fitch.
Viability Rating Drives Rating
Banco de Bogota’s VR is influenced by its business profile, which is underpinned by its leading franchise. The bank’s ratings also consider its consistent financial performance, reasonable credit and risk policies, and ample and diversified funding base. Capitalization remains the bank’s main credit weakness relative to international peers.
Challenging Operating Environment
Fitch expects the OE for Colombian banks to remain stable during 2024 due to higher GDP growth, inflation declining but still above the central bank’s 3+/-1% target, slow decrease in funding cost and gradual improvement on asset quality after a peak reached during 2H23. Furthermore, exposure to global markets and political uncertainty will likely continue to pose challenges and headwinds to economic growth. Fitch believes sustained capitalization, resilient profitability and adequate reserves provide sufficient resilience to face stress for the banks.
Banco de Bogota is Colombia’s third-largest bank by assets and by deposits, with 12% market share at June 30, 2023. It’s the second largest bank by net income; and third-largest by loans (17.4% and 11.9% respectively). Given its size, the bank is a systemically important financial institution in Colombia. Banco de Bogota also consolidates Multibank, a Panamanian subsidiary which was acquired in 2020 with a market share by assets, loans and deposits of 4.0%, 4.5% and 3.5% respectively, at June 2023.
As of 3Q23, corporate lending reached 64.6% of gross loans, similar to the ratio as of YE 2022, with a slight increase in consumer loans from payrolls. 83% of the consolidated loans are booked in Colombia while the remainder is mainly booked through Multibank.
OE Weighs on Asset Quality
Banco de Bogota’s loan portfolio quality deteriorated during 2023 due to the challenging OE and mainly focused on unsecured retail loans. Nevertheless, the deterioration is below that of the peers. The 90-day non-performing loans (NPLs), reached 4.0% at September 2023 with a consolidated loan loss reserve coverage ratio of 1.4x, similar to the pre-pandemic levels. Deterioration should have reached its maximum level at 3Q23 end, and asset quality ratios are expected to improve during 2024 thanks to better macroeconomic conditions and OE, and lower interest rates.
Profitability Impacted by Cost of Risk
Banco de Bogota’s performance in 2023 was affected by higher cost of risk due to the deterioration in retail loans and lower equity method income from Corficolombiana. The bank’s operating profit/risk weighted average (RWA) of 1.9% at 2Q23 is mainly explained by sustained NIM and higher impairment charges. Fitch expects this ratio to stabilize at levels close to the 2.0%-2.5% range in the short to medium term amid a stable OE, increasing loan growth, stable margins and lower loan impairment charges.
Stable Capital Ratios
Banco de Bogota’s capital has been maintained through sustained profitability and moderate dividend policies, coupled with moderate growth. Common equity Tier 1 (CET1) was 10.0% at 3Q23, stable to that from September 2022. Capital ratios for Bogota are likely to improve during the short to mid-term as profitability is expected to improve and due to the current effect the available-for-sale portfolio has on the capital from ORI amid higher RWA from loans, in addition, diversification, and improving income from the equity method coming from Corficolombiana and Porvenir should sustain the bank’s profitability and, consequently, its capitalization during 2024.
The recent announcement of a shareholder’s agreement to change Corficolombiana’s controlling company to Banco Popular from Grupo Aval is expected to result in improving capitalization ratios for Banco de Bogota. Initial calculations result in 200 pb-250 pb improvement in Banco de Bogota’s CET1. Fitch will follow this process to better assess its final impact.
Wide, Stable Funding
Banco de Bogota boasts an ample, well-diversified and low-cost depositor base that funds all its lending activities. Its loan to customer deposits ratio compares favorably with local peers’ even after the spin-off from 2022, which resulted in a ratio closer to that of its Colombian operations. In Fitch’s opinion, Banco de Bogota’s liquidity and liquidity management are appropriate for the risks the bank faces. As of 3Q23, deposits grew 3.65% YTD, supported especially by time deposits. This