Fitch Ratings has affirmed Banco de Bogota S.A. (Bogota) and its holding company, Grupo Aval Acciones y Valores S.A. (Grupo Aval) international ratings.
Fitch has affirmed Bogota's Viability Rating (VR) and Long-Term (LT) Foreign and Local Currency Issuer Default Ratings (IDRs) at 'bb+' and 'BB+', respectively. The Rating Outlook for the LT IDRs is Stable as Fitch does not anticipate a material impact on the bank's financial profile from any pressures on the operating environment or a higher than expected deceleration in economic growth. A complete list of rating actions follows at the end of this release.
Key Rating Drivers
VR AND IDRS
BOGOTA
Viability Rating Drives Rating: 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 its ample and diversified funding base. Capitalization remains the bank's main credit weakness relative to international peers.
Leading Franchise: Bogota is Colombia's third-largest bank by assets and by deposits, with 12.3% and 12.2% market shares, respectively, at June 30, 2022; the second largest by net income with a 25.9% market share; and third-largest by loans at 11.4%. Given its size, the bank is a systemically important financial institution in Colombia. Bogota also consolidates Multibank, a Panamanian subsidiary which was acquired in 2020 with a market share by assets, loans and deposits of 4.1%, 3.8% and 3.4% respectively, at June 2022. In March, 2022 the proposed BAC Holding International Corp (formerly Leasing Bogota S.A. Panama - LBP) spin-off was completed, as expected since 2021.
BAC Spin-off: After BAC's spin-off, loan quality ratios at the consolidated level moved closer to those of the Colombian operations since they have a higher NPL ratio compared with that of Central America. Bogota's asset quality is in line with its local peers' and includes controlled charge-off ratios.
Improving Asset Quality: Bogota's loan portfolio quality remains sound. The 90-day NPLs, after the BAC spin-off, reached 3.4% at Sept. 30, 2022. This was due to better-than-expected performance of consumer loans after finalizing the relief period in Panama and Colombia and especially from improvement in corporate and commercial loans. The loan loss reserve coverage ratio was 1.6x at September 2022. Fitch expects the ratio to remain stable or slightly improve during the short to medium term.
Resilient Profitability: Bogota's performance in 2021 and by 2Q22 improved due to decreasing loan impairment charges from the coronavirus pandemic and from gains related to the Porvenir deconsolidation and BAC spin-off. The bank's operating profit/RWA of 2.9% at 2Q22 remains above the 2.45% average for the pre-spin-off period 2018-2021. Fitch expects this ratio to return to levels close to the 2.0%-2.5% range in the short to mid-term amid a stable operating environment, sustained or slightly decreasing loan growth, stable margins and lower loan impairment charges.
Capital After Spin-off: Bogota's capital has been maintained through sustained profitability and moderate dividend policies. Common equity tier 1 (CET1) was 10.1% at 3Q22, a level slightly below to that prior of the spin-off (Dec. 21: 10.21%). Bogota's consolidated equity at September 2022 decreased 33.4% from September 2021 after the Porvenir deconsolidation and BAC spin-off. These actions had double effect in the ratio numerator because of the respective one-off income in 2021 and 2022 in addition to a lower amount of capital at the consolidated level. The main effect in the denominator comes from lower RWA.
Capital ratios for Bogota are likely to improve during the short to mid-term as profitability is expected to remain sound and due to the current effect the available for sale portfolio has on the capital from ORI, which should revert in 2023. In addition, diversification, and improving income from equity method coming from Corficolombiana and Porvenir as well as from its remaining investment in BAC should sustain the bank's profitability and, consequently, its capitalization during the remainder of 2022 and in 2023.
Wide, Stable Funding: Bogota boasts an ample, well-diversified and low-cost depositor base that funds all of its lending activities. Its loan to customer deposits ratio compares favorably with local and regional peers, although the spin-off resulted in a ratio closer to the one of its Colombian operations. In Fitch's opinion, Bogota's liquidity and liquidity management are appropriate for the risks the bank faces. For the second quarter of 2022, deposits grew 9.5% QOQ, supported especially in time deposits (+23.2% QOQ). This is explained in part by the new NSFR regulation in Colombia.
Bogota's loan to customer deposits ratio remains relatively stable, even after the BAC spin-off and is better than that of local peers, due to having about 76% of customer deposit in its funding mix. In Fitch's opinion, Bogota's liquidity position and liquidity management are appropriate for the risks the bank faces and are better than its peers'.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Bogota's VRs and IDRs are sensitive to a material deterioration in the local operating environment or a negative sovereign rating action;
The ratings could be downgraded from an extended deterioration of the operating environment that leads to a significant deterioration of the asset quality and/or profitability (operating profit to RWA consistently below 1.5%), resulting in an erosion of capital cushions if the CET1 ratio falls consistently below 10%;
After the announcement to spin-off BAC Holding International Corp. (former Leasing Bogota S.A. Panama - LBP), Fitch expects Bogota's financial ratios to remain commensurate with its current rating even taking into consideration potential changes, especially in the bank's capitalization and asset quality levels after BAC's spin-off. Potential financial ratios variations will be monitored by Fitch and could take several months to become clear. However, if there is eventually a material change in Fitch's assessment of the capital adequacy and/or double leverage of Bogota or Grupo Aval during or after the completion of the corporate reorganization, this could potentially trigger a negative rating action, although this is not the baseline scenario.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given the limitations of the operating environment, a ratings upgrade is unlikely in the medium term;
Over the longer term, an improvement in the operating environment along with improvement of capital metrics and profitability after BAC spin-off could be positive for creditworthiness.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SENIOR AND SUBORDINATED DEBT
BOGOTA
Bogota's senior unsecured obligations are rated at the same level than the bank's IDR. Its subordinated debt is rated two notches below the bank's VR.
GOVERNMENT SUPPORT RATING
BOGOTA
Bogota's GSR of 'bb', reflects the agency's estimation of a moderate probability of sovereign support, if required, given the bank's systemic importance. The ability of the sovereign to provide support is based on its 'BB+'/Stable rating.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings of Bogota's debt would move in line with the bank's IDRs and VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The ratings of Bogota's debt would move in line with the bank's IDRs and VR.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Bogota's GSRs would be affected if Fitch changes its assessment of the government's ability and/or willingness to support the bank
Factors that could, individually or collectively, lead to positive rating action/upgrade
Bogota's GSRs would be affected if Fitch changes its assessment of the government's ability and/or willingness to support the bank
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
GRUPO AVAL ACCIONES Y VALORES S.A. (GRUPO AVAL)
Strong, Competitive Position: Grupo Aval's ratings are driven by the business and financial profile of its main operating subsidiary, Bogota. Low double leverage, good cash flow metrics and a sound competitive position in multiple markets also support Grupo Aval's ratings. The holding strategy and operations continue to remain under Fitch's expectations after the BAC spin-off in March 2022.
Improving Consolidated Performance: On a consolidated basis, asset quality has improved, with consolidated 90-days NPL of 3.2% at September 2022. 6.8% of the total gross loans remained under the relief program at June 2022, improving from pre-spin-off 10.3% at September 2021. The holding company's operating profit to estimated risk weighted assets (RWA) ratio has returned to pre-pandemic levels (4.65% at June 2022) thanks to improving cost of risk and gains from the BAC-spin-off.
Evolving Double Leverage: On an unconsolidated basis, Grupo Aval's double leverage is moderate (1.12x at June 2022 or 1.25x when including subordinated loans to subsidiaries). This ratio is has remained close to Fitch's expectations after the BAC spin-off and is expected to return to levels below 1.20x in the short term.
GOVERNMENT SUPPORT RATING
GRUPO AVAL
As the focus of regulators is on protecting banks' depositors, not their shareholders, it is not likely that they would support a bank holding company. Hence, Grupo Aval's GSR was assigned an 'ns' (no support) rating.
SENIOR AND SUBORDINATED DEBT
GRUPO AVAL LIMITED
The ratings for Grupo Aval Limited's senior unsecured debt are aligned with those of Grupo Aval, as this entity guarantees the senior bonds issued by the former.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
GRUPO AVAL and GRUPO AVAL LIMITED
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Grupo Aval's IDR would remain at the same level as Bogota's and would move in tandem with any rating actions on its main operating subsidiary. However, the relativity between these two entities' ratings could also be affected in the event of a material and sustained increase in Grupo Aval's double-leverage metrics (consistently above 1.2x), but also considering the holding company's liquidity position and its management. Additionally, a change in the dividend flows from the operating companies or debt levels at the holding company that affects its debt coverage ratios could also be detrimental to its ratings.
The ratings for Grupo Aval Limited's senior unsecured debt would move in line with Grupo Aval's IDRs.
GOVERNMENT SUPPORT RATING
Grupo Aval's GSRs would be affected if Fitch changes its assessment of the government's ability and/or willingness to support the bank or the holding company.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Grupo Aval's IDR would remain at the same level as Bogota's and would move in tandem with any rating actions on its main operating subsidiary.
The ratings for Grupo Aval Limited's senior unsecured debt would move in line with Grupo Aval's IDRs
GOVERNMENT SUPPORT RATING
Grupo Aval's GSRs would be affected if Fitch changes its assessment of the government's ability and/or willingness to support the bank or the holding company.
VR ADJUSTMENTS
VR ADJUSTMENTS
BOGOTA
The Capitalization and Leverage score has been assigned above the implied score due to the following adjustment reason: Reserve Coverage and Asset valuation.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond 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.
Public Ratings with Credit Linkage to other ratings
The ratings of Grupo Aval Acciones y Valores are support-driven from its main subsidiary Banco de Bogota S.A.; The rating of Grupo Aval Limited issuance is linked to the rating of Grupo Aval Acciones y Valores S.A.
ESG Considerations
ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
BANCO DE BOGOTÁ S.A. 
