Fitch Maintains Rating Watch Negative for Bancolombia and Banco de Bogotá

Fitch Ratings has affirmed its negative rating watch outlook for Bancolombia, suggesting that a further downgrade could be looming for Colombia’s largest bank. The rating may be re-evaluated “pending further review of the bank’s recapitalization plans,” according to the New York-based rating agency.

The rationale given for the rating watch negative is the large decline in the capital ratios of Colombia’s largest bank over the past year. The depreciation in the nation’s currency throughout 2015, in addition to Bancolombia’s switch to International Financial Reporting Standards (IFRS) accounting last year, pushed the financial institution’s fixed charge coverage (FCC) ratio down to 7.2% by March 2016. This represents a large drop from its 10.1% ratio two years earlier in March 2014.

According to Fitch, the bank’s recapitalization plan relies on growth, currency stability for the peso, and higher margins, among other factors. But while this may bolster Bancolombia’s capital situation, the rating agency is not yet confident that it will prove to be a definitive move.

“Bancolombia’s slower growth and sustained internal capital generation could aid in rebuilding its capital ratios over the next year amid a stable economic environment and less volatile exchange rates, which is Fitch’s baseline scenario,” said Fitch in a statement. “Nevertheless, Fitch does not expect capitalization to return to levels reported in 2014 during this period.”

Fitch first placed Bancolombia on its rating watch negative list in April, noting that a downgrade could be coming in the future after a full review due to the bank’s release of “financial reports that reflected weaker-than-expected capital metrics.”

The following are Fitch’s current ratings for Bancolombia, all of which remain on watch rating negative:

• Long-Term foreign currency IDR: BBB+
• Short-Term foreign currency IDR: F2
• Long-Term local currency IDR: BBB+
• Short-Term local currency IDR: F2
• Viability rating: bbb+
• Senior unsecured debt: BBB+
• Subordinated debt: BBB

The news is no better for the nation’s second largest bank. This week, Fitch has also maintained its rating watch negative for Banco de Bogotá on both its viability rating (VR) and issuer default ratings (IDRs). The 146-year-old bank, which is owned by the Bogotá-based Grupo Aval, has tight capital adequacy, according to Fitch, which will be reviewing this factor as it determines the outlook for Banco de Bogotá.

As with Bancolombia, the bank has been undergoing an optimization plan and Fitch’s recent statement generally sounds more optimistic about its ability to turn things around more quickly. “These actions, along with a deceleration in balance sheet growth, sustained internal capital generation, and a moderate dividend payout policy, will lead to a recovery of Bogota’s capitalization ratios to a level more commensurate with its current rating level and similarly rated international peers in the short term,” said the ratings agency in a statement.

The following are Fitch’s current ratings for Banco de Bogotá, all of which are on watch rating negative:

• Long-Term Foreign Currency IDR: BBB+
• Short-Term Foreign Currency IDR: F2
• Long-Term Local Currency IDR: BBB+
• Short-Term Local Currency IDR: F2
• Viability rating: bbb+
• Senior unsecured debt rating: BBB+
• Subordinated debt rating: BBB