Moody’s Says Outlook Negative on Colombian Banks Davivienda, Bancolombia, & Grupo Aval’s Banco de Bogota

Moody’s Investors Service has this week affirmed Bancolombia S.A., Banco de Bogotá S.A. & Banco Davivienda S.A.‘s long-term global local and foreign currency deposit ratings as well as the long-term foreign currency senior unsecured debt ratings, following the affirmation of their respective baseline credit assessments (BCAs). At the same time, Moody’s changed to negative, from stable, the outlook on Bancolombia’s ratings, while it maintained the negative rating outlook on Banco de Bogota and Davivienda. These actions follow the change in outlook to negative, from stable, on the Government of Colombia’s Baa2 government bond rating, on 3 December 2020.

In the same action, Moody’s affirmed the ratings assigned to Grupo Aval Acciones y Valores S.A. and Grupo Aval Limited, the outlook remains negative.

Ratings Rationale

The rating actions were prompted by the change in outlook to negative, from stable, on Colombia’s Baa2 sovereign bond rating, reflecting the uncertainty about the effectiveness of fiscal consolidation efforts by the authorities to address deterioration in fiscal metrics following the coronavirus shock as measures would start in earnest in 2022 with results contingent upon tax reform that will be discussed in 2021.

The rating actions also incorporate the ratings agency’s expectation of a gradual recovery to start in the third quarter of the year and an acceleration in 2021 supported primarily by domestic demand, although there are still important downside risks to the economic recovery. The crisis will likely weigh significantly on formal employment and on private consumption should job creation be slower than expected in 2021. Despite the government’s support measures, there is also the possibility that small and medium enterprises, which employ a large share of the labor force, may be forced to cease operations. That said, while the coronavirus outbreak will continue to have a direct negative impact on asset quality, profitability and capital of Colombian banks, Moody’s says it expects that as the economy recovers banks will gradually restore profitability and capital levels.

Bancolombia

The affirmation of Bancolombia’s ba1 BCA reflects the bank’s good earnings generation and its continued access to broad and stable core funding sources, which in turn supports the bank’s financial flexibility and offsets potential risks stemming from its moderate reliance on market funding. The bank’s BCA also incorporates its exposure to riskier operating environments in Central America, which constrains its macroeconomic profile. Bancolombia’s Baa2 deposit and debt ratings, which were also affirmed, benefit from two notches of uplift from its ba1 BCA reflecting Moody’s assessment of a very high probability of support from Colombia’s government in case of need, as a result of the bank’s systemic importance in the country.

The change in the outlook to negative from stable on Bancolombia’s ratings is in line with the change in the outlook of the Colombian sovereign rating, and reflects the fact that if the sovereign ratings were to be downgraded, the bank’s government support uplift would be lowered and therefore its supported ratings would be downgraded. The negative outlook on the bank also captures the deteriorating operating conditions both in Colombia and in Central America, which have and could continue to affect the bank’s asset quality and profitability, in turn leading to lower capital levels.

Although Moody’s says its base case scenario assumes that the bank will be able to sustain its creditworthiness through the negative cycle, risks are still tilted to the downside, particularly if business activity remains modest, limiting earnings generation. They expect that as loan deferrals come to an end in Colombia and Central America in Q4 2020 and the first half of 2021, the bank’s asset quality metrics could deteriorate further. However, the bank has already built significant prudential provisions against expected credit losses, which represented 7.6% of its total gross loans as of September 2020, and could therefore, help mitigate future credit costs.

Banco de Bogotá

Moody’s affirmed Banco de Bogotá’s ratings and assessments to reflect the bank’s relatively strong earnings and good access to core deposit funding. Banco de Bogota’s exposures to riskier markets than its Colombian home footprint, however, continue to challenge the stability of its asset quality and earnings. Banco de Bogota’s Baa2 deposit ratings incorporate the assessment of a very high likelihood of government support, if needed, resulting in a two-notch uplift from its ba1 BCA.

Moody’s negative outlook on Banco de Bogota’s ratings incorporates the weak operating conditions in Colombia and in Central America that could add downward pressure to the bank’s standalone credit strength. The uncertainties around asset quality as loan deferrals and restructurings mature could lead to additional provisioning against problem loans, if loan loss reserves taken to date prove insufficient. That development could hurt profitability and capital. Moody’s noted that the bank’s capitalization ratio, measured as tangible common equity (TCE)/risk-weighted assets (RWA), deteriorated to 7.8% as of September 2020, from 9.4% in YE2019 mainly driven by weaker earnings and the acquisition of Multi Financial Group (MFG), the parent company of the Panama-based Multibank, that increased the value of intangibles due to the goodwill recognized from this operation.

Grupo Aval Acciones Y Valores S.A and Grupo Aval Limited

The affirmation of Grupo Aval and Grupo Aval Limited’s ratings with negative outlook follows the affirmation of Banco de Bogota´s BCA and incorporates the downward pressure on Banco de Bogota’s baseline credit assessment. Banco de Bogota is the group’s chief operating entity, in which about 64% of gross loans of the consolidated group are booked as of September 2020. 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 Bogota’s BCA. Moody’s does not incorporate governmental support in the holding company’s ratings.

Grupo Aval´s ratings also incorporate the company´s very stable though somewhat high double leverage ratio, which is measured by investments in subsidiaries divided by shareholders’ equity, at 115% and 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 amounting to 3.9 times interest expenses in June 2020. In addition, Grupo Aval has enough liquidity and interest income in dollars, limiting its reliance on dividend inflows to meet upcoming debt obligations.

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’s ratings.

Davivienda

The affirmation of Davivienda’s ratings and assessments incorporates the bank’s good access to core funding and stable liquidity, which is partially offset by the challenges to asset risk and profitability deriving from the weak operating conditions in Colombia.

The negative outlook on Davivienda’s ratings reflects Moody’s views that its asset risk, profitability and capital metrics will deteriorate further as unemployment remains high and economic activity modest into 2021. Problem loans rose to 4.5% of gross loans as of September 2020, from 3.7% as of 2019, and the bank’s capitalization ratio, measured as tangible common equity (TCE)/risk-weighted assets (RWA), declined to 7.3% as of September 2020 from 8.4% as of 2019. Moody’s noted that Davivienda is more exposed than its peers to consumer and mortgage financing to low income households and hence its loan book is more sensitive to economic downturns.

Davivienda’s Baa3 deposit and senior unsecured debt ratings also incorporate Moody’s assessment of a high probability that Davivienda would benefit from government support in an event of financial stress given its meaningful market share of local deposits. This results in one notch of ratings uplift from the bank’s BCA of ba1.

Factors That Might Lead To A Ratings Upgrade Or Downgrade

Bancolombia

Bancolombia’s supported ratings are positioned at the same level of the sovereign bond rating and will likely be downgraded if Colombia’s government bond rating is downgraded. The bank’s BCA and ratings could also be downgraded if operating conditions worsened in its main operating countries, leading to larger-than-expected deterioration in asset quality, profitability and particularly on capital levels.

Although positive pressures on Bancolombia’s ratings are limited at this time given the negative outlook, the outlook could be stabilized in the case of a stabilization of Colombia’s sovereign rating outlook, provided that the bank’s core capitalization metrics stabilized, and its asset quality and profitability metrics gradually recovered to previous levels.

Banco de Bogotá

Banco de Bogotá’s supported ratings are positioned at the same level of sovereign bond rating and will likely be downgraded if Colombia’s sovereign rating is lowered. Banco de Bogota’s ratings could also be downgraded if the operating environment in Colombia and Central America, specifically Costa Rica, Panama and/or Nicaragua, deteriorates further, leading to increased delinquencies and credit costs, or if the bank´s exposures to riskier operating environments increase. The ratings could also face downward pressure if the bank´s capital ratio weakens, 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.

Grupo Aval

Upward/downward pressures on Grupo Aval and Grupo Aval Limited’s ratings would be associated with similar pressures on Banco do Bogota’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.

Davivienda

Davivenda’s ratings could be downgraded if asset risk and profitability continue to deteriorate and/or the bank is unable to sustain its capitalization ratio at current levels. However, the ratings would not be affected by a downgrade of the Government of Colombia’s sovereign bond rating of Baa2. While an upgrade of Davivienda’s ratings is unlikely given the bank’s negative outlook, the outlook could be stabilized if the bank manages to halt the deterioration of its asset quality and earnings and restore its capitalization levels.

Affected Issuers & Ratings

The following Bancolombia S.A.’s ratings and assessments were affirmed:

• Long term local currency deposit rating of Baa2, Negative from Stable
• Long term foreign currency deposit rating of Baa2, Negative from Stable
• Long term foreign currency senior unsecured rating of Baa2, Negative from Stable
• 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/Ba3 (hyb)
• 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, changed to Negative from Stable

The following Banco de Bogota 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

The following Banco Davivienda S.A.’s ratings were affirmed:

• Long-term local currency deposit rating of Baa3, Negative
• Long-term foreign currency deposit rating of Baa3, Negative
• Short-term local currency deposit rating of P-3
• Short-term foreign currency deposit rating of P-3
• Long-term foreign currency senior unsecured debt of Baa3, Negative
• Long-term foreign currency global subordinated debt 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 principal methodology used in these ratings was Banks Methodology published in November 2019 and available here.