Fitch Maintains Rating Watch Negative on Bancolombia and Related Entities' Ratings

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has maintained Bancolombia S.A. and certain foreign
subsidiaries’ selected international ratings on Rating Watch Negative.
At the same time, Fitch has affirmed other Bancolombia ratings, as well
as some of its subsidiaries’, which are not directly affected by the
watch status. A full list of rating actions is at the end of this
release.

Affected related subsidiaries are:

–Bancolombia Panama S.A. (BP)

–Bancolombia Puerto Rico International Inc. (BPR)

–Banistmo S.A.

The ratings remain on Rating Watch Negative pending further review of
the bank’s recapitalization plans. Fitch will resolve the Rating Watch
Negative after assessing the evolution of Bancolombia’s capital metrics
for consistency with the current rating levels.

KEY RATING DRIVERS – BANCOLOMBIA

IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT RATINGS

Bancolombia’s capital ratios declined in 2015 due to changes in the
accounting standards (IFRS was introduced starting 2015), the
significant depreciation of the local currency, which boosted its USD
denominated risk-weighted assets and USD denominated goodwill deduction
from Fitch Core Capital (FCC), as well as the consolidation of Grupo
Agromercantil Holding as a result of an increase in Bancolombia’s
majority stake. While Fitch expected a slight decline in the bank’s
capital ratios due to continued growth, the FCC ratio fell to 7.16% at
March 2016 (December 2014: 10.1%), a metric that is not consistent with
the current rating levels.

Moderate growth, expected higher margins, increased retained earnings
and Colombian peso stability are the main assumptions for Bancolombia
recapitalization plan. According to Fitch’s projections, 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. Nevertheless, Fitch does not expect capitalization to return
to levels reported in 2014 during this period.

In 2015, profitability ratios were slightly better than in 2014 given
resilient margins, significant loan growth, and the 32% depreciation of
the Colombian peso that resulted in foreign exchange gains and
significant gains on forward contracts in foreign currency. Operational
profits will keep increasing steadily, allowing the bank to boast
competitive profitability ratios.

Asset quality indicators have broadly been stable through the cycles, in
part benefiting from rapid loan growth. However, a few large exposures
in the commercial sector led to a modest deterioration over 2015. Given
Bancolombia’s conservative credit-risk culture, Fitch expects the bank
to maintain asset-quality ratios in line with its current rating level
and similar to regional peer medians. Nevertheless, loan quality
indicators will be slightly weaker than other large Colombian banks.

Bancolombia’s successful franchise, distribution network and its
reputation as a longstanding, conservative institution, support a
well-diversified, stable and relatively low-cost funding base. In
addition, Bancolombia has proven access to local and global capital and
debt markets. Accordingly, the loan-to-deposits ratio reached 124% at
December 2015, as Bancolombia actively uses capital markets to better
match its assets and liabilities tenor profile.

Bancolombia boasts a well-balanced business with loans diversified by
geography, industry, product and obligor. The bank has few undesired
concentrations, robust asset quality, ample reserves and sufficient
liquidity.

SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch has assigned a Support Rating of ‘2’ and Support Rating Floor of
‘BBB-‘, reflecting the agency’s estimation of a high probability of
sovereign support should it be required, given the bank’s systemic
importance. The ability of the sovereign to provide support is based in
its ‘BBB’/’BBB+’/Outlook Stable IDRs.

SUBORDINATED DEBT

Bancolombia’s subordinated debt is rated one notch below its IDR to
reflect higher expected losses in case of liquidation but no additional
notching for non-performance, given its gone concern characteristics.

KEY RATING DRIVERS – BP, BPR AND BANISTMO

IDRS, NATIONAL RATINGS and SENIOR DEBT

BP, BPR and Banistmo’s IDRs and BPR’s national ratings reflect the
potential support they would receive from their main shareholder,
Bancolombia S.A., should it be required. Therefore, these entities’ IDRs
and BP’s senior debt are aligned with those of Bancolombia and mirror
the Rating Watch Negative of their parent’s IDRs.

SUPPORT RATINGS

Fitch believes Bancolombia’s willingness to support BP, BPR and Banistmo
is substantial should it be required, given that are core in the
parent’s business strategy and regional expansion, underpinning a
support rating of ‘2’. Its ability to support these entities is
reflected in Bancolombia’s IDR of ‘BBB+’.

RATING SENSITIVITIES – BANCOLOMBIA

IDRS, VR, AND SENIOR DEBT

The bank’s IDR, VR and senior debt ratings are sensitive to a change in
Fitch’s assumptions regarding capitalization. While there is no upside
potential given the recent deterioration in the bank’s capital position,
Bancolombia’s ratings could be affirmed if the bank can successfully
restore its capital buffers. As Bancolombia’s IDRs, VR and senior debt
ratings are above those of the sovereign, any negative rating action on
the sovereign would also lead to a similar action on Bancolombia’s
ratings.

An unexpected deterioration of Bancolombia’s impaired loans ratio above
4% or a significant reduction of its ample loan loss coverage may also
trigger a negative rating action on its VR and IDRs. A dismal
performance (operating ROAA consistently below 1.5%) and/or severely
weaker asset quality that pressures loan loss provisions and further
erodes the bank’s capital (FCC ratio sustained below 10%) could also
lead to a downgrade of its VR and IDRs.

SUPPORT RATING AND SUPPORT RATING FLOOR

Bancolombia’s Support and Support Rating Floor ratings would be affected
by a change in Colombia’s ability or willingness to support the bank.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of Bancolombia’s subordinated debt would move in line with
the bank’s IDR.

NATIONAL RATINGS

Bancolombia’s national scale ratings are not affected due to Rating
Watch Negative on IDRs, because Fitch’s baseline scenario is that a
potential downgrade in the Bancolombia’s ratings, if any, would be
limited to one notch, a scenario that would not alter such national
scale ratings.

RATING SENSITIVITIES – BP, BPR and Banistmo

IDRs

The IDRs of these entities are support-driven and aligned to its
parent’s. Therefore, these ratings would mirror any changes in
Bancolombia’s IDRs.

NATIONAL RATINGS

The national scale ratings of these entities are not affected due to
Bancolombia’s Rating Watch Negative, because Fitch’s baseline scenario
is that a potential downgrade in the Bancolombia’s ratings, if any,
would be limited to one notch, a scenario that would not alter such
national scale ratings.

SENIOR AND SUBORDINATED DEBT

Senior and subordinated debt could be downgraded in the same magnitude
of a potential downgrade in Bancolombia’s IDRs.

Fitch has maintained the following ratings on Rating Watch Negative:

Bancolombia

–Long-Term Foreign Currency IDR ‘BBB+’;

–Short-Term Foreign Currency IDR ‘F2’;

–Long-Term Local Currency IDR ‘BBB+’;

–Short-Term Local Currency IDR at ‘F2’;

–Viability Rating ‘bbb+’;

–Senior unsecured debt ‘BBB+’;

–Subordinated debt ‘BBB’.

Bancolombia Panama

–Long-Term IDR ‘BBB+’;

–Short-Term IDR ‘F2’;

–Long-Term Deposits ‘BBB+’;

–Short-Term Deposits at ‘F2’.

Bancolombia Puerto Rico

–Long-Term IDR ‘BBB+’;

–Short-Term IDR at ‘F2’;

Banistmo

–Long-Term IDR ‘BBB+’;

–Short-Term IDR at ‘F2’.

Fitch has affirmed the following ratings:

Bancolombia

–National long-term rating at ‘AAA(col)’, Outlook Stable;

–National short-term rating at ‘F1+’;

–Support rating at ‘2’;

–Support rating floor at ‘BBB-‘;

–COP1.5 billion program senior unsecured issuances’ national rating
affirmed at ‘AAA(col)’;

–COP1 billion program subordinated issuances’ national rating affirmed
at ‘AA+(col)’;

–COP2 billion program senior unsecured issuances’ national rating
affirmed at ‘AAA(col)’.

–COP3 billion program senior unsecured issuances’ national rating
affirmed at ‘AAA(col)’;

–COP3 billion program subordinated issuances’ national rating affirmed
at ‘AA+(col)’.

Bancolombia Panama

–Support rating at ‘2’;

Bancolombia Puerto Rico

–National long-term rating at ‘AAA(col)’, Outlook Stable;

–National short-term rating at ‘F1+’;

–Support rating at ‘2’.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009088

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009088

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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