Bancolombia S A : Fitch Takes Actions on Colombian and Central American FIs Following Colombia's Sovereign Downgrade

09 JUL 2021

Fitch Takes Actions on Colombian and Central American FIs Following Colombia's Sovereign Downgrade

Fitch Ratings - San Salvador - 09 Jul 2021: Fitch Ratings has conducted a portfolio review of Colombian and Central American Financial Institutions (FI) following Colombia's sovereign downgrade to 'BB+' from 'BBB-'. The review also follows Fitch's adjustment of its operating environment (OE) assessment for Colombian FIs to 'bb'/Stable from 'bb+'/Negative. The stabilization of the operating environment trend indicates that Fitch expects any additional fallout from the pandemic to be manageable for Colombian FIs at their current rating levels. For additional details on the sovereign rating action see "Fitch Downgrades Colombia's Ratings to 'BB+' from 'BBB-'; Outlook Revised to Stable" at www.fitchratings.com.

This portfolio review includes Colombian FIs with Viability Ratings (VR) and Issuer Default Ratings (IDR) rated at the same level, or one notch below the sovereign. Fitch believes these ratings are more sensitive to operating environment deterioration, or further actions on the sovereign rating. Furthermore, the agency will not rate Colombian FIs higher than the sovereign rating, based on their current intrinsic credit profiles.

The banks' national ratings, as well as those of other financial institutions rated in Colombia, are not directly impacted, as these ratings reflect the relative strengths and weaknesses of each institution in a specific jurisdiction. In the short to medium term, Fitch will review the entities in Colombia.

Rating actions have also been taken on the Colombian FI's Central American subsidiaries, specifically in Guatemala and Panama. A full list of the rating actions follows at the end of this release.

Key Rating Drivers

Government Support-Driven Ratings

This group considers state-owned banks or government financial institutions with IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) driven by implicit support from the sovereign: Banco de Comercio Exterior de Colombia (Bancoldex), Financiera de Desarrollo Territorial (Findeter), Financiera de Desarrollo Nacional (FDN) and Banco Agrario de Colombia S.A, (Banagrario).

The Colombian government is the shareholder and the source of any potential support, if required. The ratings were downgraded as the creditworthiness of these entities is linked to the sovereign, given their policy role and/or high strategic importance to the government. Therefore, their ratings have

been traditionally aligned to the sovereign's.

Banagrario's VR has been affirmed at 'bb'. The VR is highly influenced by the OE and its concentrated business model. Banagrario's profitability, weak asset quality, adequate capitalization and diversified funding structure have a moderate influence on its VR.

Senior Unsecured Debt

Findeter's senior unsecured debt rating was also downgraded to 'BB+' from 'BBB-', as the likelihood of default for the debt issuance is the same as the likelihood of a default for the bank.

Large Private Sector Banks

Bancolombia S.A. (Bancolombia), Banco de Bogota (Bogota), Banco Davivienda S.A. (Davivienda) and Banco de Occidente S.A. (Occidente)'s VRs drive their IDRs, and therefore, are relatively sensitive to the OE. The downgrades reflect the recent downgrade of Colombia's ratings, as these banks are constrained by the sovereign's ratings based on their current intrinsic credit profiles. The ratings are highly influenced by the OE and robust company profiles due to their large franchises and diversified business models.

Foreign Owned Commercial Banks (BBVA Colombia)

BBVA Colombia's IDRs are driven by parent support (BBVA Spain rated BBB+/Stable). Fitch believes BBVA Colombia is a strategic subsidiary for its parent, mainly due to the relevance of the Latin American operations and the integration and synergies among the entities. Fitch has downgraded the Long-Term Foreign Currency IDR to 'BBB-' from 'BBB', since this rating is capped by Colombia's country ceiling, which was also downgraded.

The bank's Long-Term Foreign Currency IDR Outlook was revised to Stable from Negative. The Short- Term Foreign Currency IDR has been downgraded to 'F3' from 'F2'. As with the sovereign downgrade and the stabilization of its Rating Outlook, this indicates that there is limited downside rating potential over the rating horizon. Conversely BBVA Colombia's Long- and Short-Term Local Currency IDRs remain at 'BBB' and 'F2', respectively since these ratings are not directly affected by the sovereign downgrade. The bank's Long-Term Local Currency IDR Rating Outlook is Stable, in line with its parent.

BBVA Colombia's VR has also been downgraded to 'bb+' from 'bbb-' as the bank's intrinsic credit profile is not strong enough to be rated above the sovereign. The bank's VR is highly influenced by the deteriorating operating environment, and its company profile reflects its good asset quality metrics, resilient profitability, adequate capitalization and stable funding.

BBVA Colombia's IDRs will likely remain at the level determined by its Viability Rating (VR), or one notch below the parent's IDR, whichever is higher, but subject to sovereign rating and country ceiling considerations.

Mid-Sized Private Sector Banks

Banco GNB Sudameris and Itau Corpbanca Colombia's VRs were downgraded, as their VRs are highly influenced by the OE, and their financial and company profiles were not strong enough to rate these banks at the sovereign's level. GNB's ratings are also highly influenced by its weaker capitalization and leverage metrics compared to peers, while Itau Corpbanca Colombia's ratings are also highly influenced by tight operating profitability and limited internal capital generation. The downgrade of Gilex Holding's (GH) ratings mirrors that of its main operating subsidiary, GNB, and remain one notch lower.

Grupo Aval, Corificolombiana and Banco De Occidente Panama (BOP)

Grupo Aval's downgrade mirrors that of its main subsidiary, Bogota, and remains equalized. Grupo Aval's ratings are driven by the business and financial profile of its main operating subsidiary. Low double leverage, good cash flow metrics and a sound competitive position in multiple markets also support Grupo Aval's ratings.

Grupo Aval Limited's senior unsecured debt ratings are aligned with those of Grupo Aval, as this entity guarantees the senior bonds issued by the former.

Corficolombiana's downgrade reflects the impact of the sovereign rating downgrade and OE deterioration on its ratings. Corficolombiana's IDRs are driven by its Viability Rating (VR), which reflects with high importance the challenging OE and its company profile. The ratings also consider Corficolombiana's strong financial profile. Under Fitch's current assessment, Corficolombiana's IDR will likely remain at the level determined by its own Viability Rating (VR), or at the same level as its main shareholder and its controlling company, whichever is higher.

Banco de Occidente Panama's (BOP) downgrade mirrors that of its holding company, Banco de Occidente. BOP's IDRs reflect the potential support they would receive from Banco de Occidente and its ultimate parent Grupo Aval, if required. In Fitch's view, these entities are an integral part of its parent's business model and core to its strategy.

Sura AM

Fitch has affirmed Sura Asset Management SA's (Sura AM) ratings as the downgrade of Colombia has little impact on the blended OE score, given the relatively limited weight of the business in Colombia on the company´s consolidated EBITDA. Sura AM's ratings are highly influenced by its leading regional franchise and its strong and stable earnings, which Fitch views as commensurate with the company's rating category. Sura AM's ratings also consider its consistent investment performance, ample expertise and sound risk management, and debt service ratios that are consistent with rating category guidelines. Sura AM's ratings are also highly influenced by the operating environment of the countries in which it operates.

BAC International Bank, Inc.. (BIB) and Multibank, Inc.

BAC International Bank, Inc.'s (BIB) and Multibank, Inc.'s IDRs, and the latter's senior unsecured debt ratings were downgraded to mirror the downgrade of its parent Banco de Bogota's rating. BIB and

Multibank's ratings are equalized with those of Banco de Bogota's, reflecting Fitch's assessment of the potential support they would receive from their parent, if required.

BIB and Multibank's national ratings were also downgraded to reflect changes in Banco de Bogota's creditworthiness relative to other rated issuers in Panama. The Stable Outlooks on their Long-Term IDRs and Long-Term National Ratings are aligned with Banco de Bogota's Stable Outlook. Multibank's Stable Outlook also considers the bank's standalone rating and the implied support-driven rating at the same level.

BIB and Multibank's Support Ratings (SR) were revised to '3' from '2', reflecting a moderate probability of support from its shareholder, given its rating, and Fitch's assessment of moderate ability and propensity to provide support to BIB and Multibank, if required

BIB Junior Subordinated Debt Issuance

BIB's perpetual subordinated bonds program's Long-Term National Rating was downgraded to remain four notches below its anchor rating, BIB's Long-Term National Rating. According to Fitch's criteria, this obligation is two notches below its anchor rating to reflect the loss severity arising from the bonds' deep subordination and an additional two notches down to reflect incremental non-performance risk.

Banco de America Central, S.A., BAC Bank, Inc., Credomatic de Guatemala, S.A., Financiera de Capitales, S.A.

Fitch downgraded the National Long-Term Ratings of the entities that comprise the BAC: Credomatic

group in Guatemala to 'AA + (gtm)' from 'AAA (gtm)'. These include the following: Banco de America Central, S.A. (BAC Guatemala), BAC Bank, Inc. (BBI), Credomatic de Guatemala, S.A. (Credomatic) and Financiera de Capitales, S.A. (FC). The Rating Outlooks are Stable. The downgrade is the result of Fitch's assessment on the support they could receive from Banco de Bogota, which changed the relative strength of these banks' credit profiles with other Guatemalan entities following the downgrade of their parent company's Long-Term Local Currency IDR. In addition, Fitch has affirmed the Short-Term ratings for all the entities at 'F1 + (gtm)'.

Bancolombia Panama (BP) and Bancolombia Puerto Rico (BPR)

BP and BPR's IDRs reflect the potential support they would receive from Bancolombia, if required. In Fitch's view, these entities are an integral part of its parent's business model and core to its strategy. BP and BPR's IDR downgrade to 'BB+'/Stable from 'BBB-'/Negative mirror the downgrade of Bancolombia's IDRs and Outlook revision, as their ratings are fully aligned with those of its parent. The SR downgrade to '3' from '2' reflects a moderate probability of support from Bancolombia.

Banco Agromercantil (BAM), Mercom Bank and Financiera Agromercantil

BAM's IDRs and National Ratings are based on the potential support it would receive from its shareholder Bancolombia, if required. BAM's Local Currency IDR was downgraded to 'BB' from 'BB+', one notch above Guatemala's sovereign rating, following Bancolombia's downgrade, and reflects the

parent's solid commitment to its subsidiary. The Long-Tern Foreign Currency IDR, which is at the same level as Guatemala's country ceiling of 'BB', is driven by support from a higher rated parent. Stable Outlooks reflect its parent and sovereign's Outlooks, respectively. BAM's SR of '3' reflects Bancolombia's moderate ability and propensity to support to BAM, if necessary. This rating is mostly influenced by the current country ceiling.

BAM, Mercom and Financiera Agromercantil's Long-Term National Ratings downgrades to 'AA+(gtm)' from 'AAA(gtm)', reflect the current relative strength of their parent with respect to other rated issuers in the country.

Banistmo

Banistmo S.A.'s ratings are based on Fitch's opinion on the ability and propensity of its parent Bancolombia to provide support if required, which results in Banistmo's IDRs being aligned with those of its parent, mirroring any changes in Bancolombia's IDRs and Outlook. The National Ratings reflect the current relative credit strength of its owner with respect to other issuers in Panama, and have been downgraded with a Stable Outlook to reflect that in the event of further downgrades, these ratings would be driven by the bank's 'bb+' VR. Senior unsecured debt is rated at the same level of Banistmo's ratings, as Fitch considers the likelihood of default of the debt the same as the issuer. Meanwhile, the Banistmo's SR was downgraded to '3' from '2', and reflects a moderate probability of support from Bancolombia, given its rating.

Subordinated Debt

Bogota's and Davivienda's plain vanilla subordinated notes were downgraded in line with the downgrade of these banks' VRs. The anchor rating for these obligations maintained the baseline scenario of one notch for loss severity (-1) and one notch for non-performance risk (-1).

The rating on Bancolombia's and Banco GNB Sudameris' Tier 2 notes were also downgraded in line with the VRs. These notes are rated two notches below Bancolombia's and Banco GNB Sudameris' VRs of 'bb+' and 'bb', respectively, and reflect loss severity exclusively. There is no notching due to incremental non-performance risk. The notes do not incorporate going-concernloss-absorption characteristics, given the relatively low write-off trigger (Regulatory CET1 at or below 4.5%), which in Fitch's view, would only be effective at the point of non-viability. Additionally, coupons are not deferred or cancellable before the principal write-off trigger is activated. As such, no notches are deducted from the VR for incremental non-performance risk.

Davivienda's AT1 notes move in the same direction of the bank's VR, four notches below Davivienda's 'bb+' VR. The baseline scenario reflects that the notching will likely remain at two notches for loss severity and two notches for incremental non-performance risk. According to Fitch's criteria, this is the minimum downward notching for deeply subordinated notes with fully discretionary coupon cancellation issued by banks with a VR anchor of 'bb+'.

The notching reflects the notes' higher loss severity in light of their deep subordination, and additional non-performance risk relative to the VR, given the high write-down trigger of CET1 at 5.125% and full