Proceeds from the issue will be used for general purposes and are expected to count as regulatory Tier 2 capital at the bank, although Fitch does not formally assign equity-credit to these notes. Interest will be paid semiannually. The notes may be redeemed at the option of the issuer no earlier than six years before they are due, subject to prior approval from the Colombian Superintendence of Finance (SFC), if the bank maintains its capital ratios in accordance with regulatory requirements.

 Key Rating Drivers

The upcoming issuance is expected to be rated two notches below GNB’s Viability Rating (VR) of ‘bb+’, to reflect loss severity exclusively. There will be no notching due to incremental nonperformance risk. The notes will be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all outstanding obligations due in respect of the bank’s senior liabilities, whether outstanding on the issue date or incurred after that date. Additionally, the notes will be senior in right of payment only to subordinated instruments constituting Tier 2 capital subordinated indebtedness that is designated junior to the notes, subordinated instruments constituting Tier 1 capital and the bank’s capital stock.

The rating on the notes does not incorporate incremental nonperformance risk given the relatively low write-off trigger (regulatory common equity Tier 1 [CET1] at or below 4.5%) – which, in Fitch’s view, would only be effective at the point of nonviability and also considering the fact that coupons are not deferred or cancellable before the principal write-off trigger is activated. If GNB’s capital falls below 4.5%, the outstanding principal amount of these notes may be permanently reduced to the extent required to restore the bank’s capital ratio to 6%. This full write-down feature of the notes heavily influences the two-notch loss severity applied.

The securities, which are expected to comply with local Tier II capital requirements, will rank junior to all senior unsecured creditors, pari passu with all other present or future Tier II capital subordinated indebtedness and senior to the bank’s capital stock, including any other instrument that may qualify at Tier I capital according to local banking regulations.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to an upgrade in the bank’s VR. The rating is also sensitive to a narrower notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to a downgrade in the bank’s VR. The rating is also sensitive to a wider notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

For further information about the drivers and rating sensitivities for GNB’s ratings, please refer to the latest press release entitled, “Fitch Takes Actions on Colombian FIs & Related Entities After Sovereign Downgrade” (https://www.fitchratings.com/site/pr/10117458), published April 8, 2020 at www.fitchratings.com.

 Best & Worst Case Rating Scenarios

International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

  References for substantially material source cited as key driver of rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

 ESG Considerations

Banco GNB Sudameris S.A.: 4; Governance Structure: 4

Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity, due to either their nature or the way in which they are being managed by the entity. The governance structure subfactor has a score of 4 – mainly related to key person risk and business continuity considerations.

Banco Agrario (Banagrario), a state-run development bank that aims to finance projects and offer services tied to agriculture, livestock, fishing, forestry, and other rural activities, also had its long-term foreign currency and long-term local currency issuer default ratings affirmed at BBB. Fitch changed the outlook on its ratings from negative to stable.

“Banagrario’s viability rating is highly influenced by the bank’s business model and its low, although
improving, asset quality,” stated Fitch Ratings in its assessment. The agency added that Banagrario’s rating was moderately influenced by its consistent profitability, high income diversification, strong capital position, and low cost funding structure.

“In Fitch’s views, Banagrario’s business model is consistent with its key role for the development of
the government’s agricultural policy,” stated Fitch. “The bank maintains a clear focus and a strong franchise in the small and medium-sized agricultural producer markets. However, its market share in the Colombian banking system is moderate, at 3.2% of total loans and 2.5% of total deposits. In the agency’s opinion these elements strengthen the bank’s franchise in its specific segment but limit the scope of its business model and challenge the asset quality metrics.”

Fitch also noted that, while Banagrario displayed improving asset quality in 2016, it continues to lags the rest of the nation’s banking industry while its net profits also decreased last year and it remains tied to Colombia’s higher-risk agriculture sector.

But on the positive side of the ledger, according to Fitch Ratings, the Bogotá-based institution has achieved high income diversification — through stable income “generated by valuation of held-to-maturity instruments” — and lowered its non-performing loans ratio to 5.89% on the strength of an improved collections process.

“Banagrario’s profitability is consistent and supports a stable internal capital generation and good
capital levels,” stated Fitch Ratings. “The bank’s profitability is underpinned by high income diversification, as an important proportion of stable income is generated by valuation of held-to-maturity instruments. In Fitch’s opinion, Banagrario’s profitability is sustainable in the medium term but remains sensitive to changes in asset quality.”