Feb 26 - Following the announcement of an agreement to acquire HSBC's banking and insurance operations in Panama, Fitch Ratings has today affirmed Bancolombia's Viability Rating (VR) at 'bbb' and its Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. Fitch has also affirmed the national ratings of Bancolombia's subsidiaries. A complete list of rating actions is provided at the end of this release. On Feb. 19, Bancolombia announced that it would acquire 100% of the common shares and 90.1% of the preferred shares of HSBC's banking and insurance operations in Panama for $2.1 billion. The total assets to be acquired (after getting a controlling stake) amount to about $7.6 billion, and the transaction will be carried directly by Bancolombia using cash in hand and other internal resources. The transaction is subject to regulatory and other approvals and is expected to be completed on the third quarter of 2013. KEY RATING DRIVERS: Fitch affirmed Bancolombia's IDRs and VR following the acquisition announcement in consideration of the strategic importance of this acquisition, which will cement the bank's regional franchise. According to Fitch's initial projections, the impact on Bancolombia's financial standing (mainly its Fitch Core Capital -FCC) would be material, but the bank is expected to replenish its FCC within 2-2.5 years. Bancolombia's earnings generation and overall profitability jointly with its adequate asset quality and ample loan loss coverage metrics underpins the capacity of the bank to compensate the initial impact on its capitalization. Also, the acquired entity shows a solid market share on its home market (Panama) and a good financial profile reflected on its current VR of 'bbb' explained by good capital, profitability and asset quality metrics; while its funding base is ample and well diversified. Bancolombia's VR is underpinned by its sound franchise, strong balance sheet, consistent performance, robust asset quality and reserves, ample deposit base and access to funding, and positive economic environment and prospects. Fitch's view of Bancolombia's creditworthiness is tempered by its heightened competitive environment and the execution risk that any merger or acquisition entails. In addition, the bank's expansion within Colombia and abroad would deepen its revenue diversification and underpin its revenues while a positive economic background fosters healthy growth. Bancolombia would maintain a strong balance sheet and performance while solvency metrics would gradually revert to the average of similarly rated peers. Bancolombia's Support Rating and Support Rating floor reflect its systemic importance. Support from Colombia's central bank would, in Fitch's opinion, be forthcoming, if needed. Colombia's ability to provide such support is considered moderate and reflected in its sovereign rating ('BBB-' with a Stable Outlook). According to Fitch's ratings criteria, Bancolombia Panama is a 'core' subsidiary of Bancolombia, and hence its IDRs are equalized with those of its parent. The expected expansion of Bancolombias activities in Panama through the acquisition of HSBC Panama will enhance even more the 'core' characteristics of the Panamanian operations of Bancolombia in Panama and Central America. RATING SENSITIVITIES Bancolombia's VR may be negatively affected if the bank fails to replenish its FCC according to the expected projections provided above in this RAC (expected FCC Ratio of around 10% by year 2015), an unexpected deterioration of its impaired loans ratio above 4% or a reduction of its ample loan loss coverage; also, failure to report overall profitability levels in line of its recent average (ROAA around 1.7%) may hinder its ability to replenish its capital base and hence may trigger a negative rating action. In the medium term, it is not likely that Bancolombia's IDRs and viability ratings would be upgraded unless the bank is able to sustain its performance while maintaining its sound balance sheet and faster than expected recovery of its FCC ratio above the median of similarly rated banks. Even when integration risk of the acquired entities exists, as in any other M&A transaction, a solid history of successful integration of acquired entities in Colombia and abroad and the good financial profile of the acquired entity suggests that these risks are manageable for Bancolombia. Alternatively, a failure to duly integrate the acquired business may trigger a negative rating action on Bancolombia's VR and IDR's. The national ratings of Bancolombia's subsidiaries in Colombia and Puerto Rico reflect the support it would receive from its parent given its importance to Bancolombia's business and universal banking strategy. THE TRANSACTION The acquisition is the consolidation of Bancolombia's international growth strategy. After this operation and the acquisition of a 40% stake in Grupo Agromercantil in Guatemala announced recently, Bancolombia will have a strong footprint in the three leading markets of Central America and it is in line with the company's policy of acquiring banks with significant market share, consistent performance, and adequate management. Given the size of the transaction for Bancolombia the financial impact for the bank is considered reasonable. Future integration risk is mitigated by Bancolombia's extensive and successful experience in M&A, including the acquisition of Banco Agricola (El Salvador) in 2007. The bank had been preparing for this acquisition since mid-2011 by raising long term funding (senior and subordinated bonds) as well as equity in local and international markets. In addition, the bank retains about to thirds of its net income every year. According to Fitch's initial calculations, should the transaction be closed during 3Q13, Bancolombia's Fitch core capital ratio would decline by about 400 to 450bp from its peak at 3Q12 but would return to the 9%-10% of RWA range in the 18-24 month period after the acquisition. This would be a tad below the average rating of similarly rated peers, but Bancolombia's capital should be viewed in the light of its sound earnings generation, robust asset quality and ample reserve coverage. Profitability would barely be affected. HSBC Panama is the third largest bank in Panama in terms of assets, with a market share of 8.42% as of September 2012 (excluding the Central American and Colombian operations). The bank serves consumer (PFS), middle market (CMB), and corporate (CIBM) customers through a network of 46 branches and 263 ATMs in Panama. In Fitch's opinion, the acquisition will consolidate Bancolombia's competitive position in the region and has the potential to substantially contribute to its growth and performance in the coming years. Fitch has affirmed the following ratings: Bancolombia S.A. --Long-term foreign currency Issuer Default Rating (IDR) at 'BBB'; Outlook Stable; --Short-term foreign currency IDR at 'F2'; --Long-term local currency IDR at 'BBB'; Outlook Stable; --Short-term local currency IDR at 'F2'; --Viability rating at 'bbb'; --Support rating at '3'; --Support rating floor at 'BB+'; --Senior unsecured debt at 'BBB'. --Subordinated debt at 'BBB-'; --National long-term rating at 'AAA(col)'; Outlook Stable --National short-term rating at 'F1+(col)'; --Multiples y sucesivas emisiones de bonos ordinarios de Bancolombia con cupo global por $1.5 billones National rating at 'AAA(col)'; --Bonos subordinados de Bancolombia con cupo global por $1.0 billones National rating at 'AA+(col)'; --Programa de Emision y Colocacion de Multiples y sucesivas emisiones de bonos ordinarios de Bancolombia con cupo global por $2 billones National rating at 'AAA(col)'; --Programa de Emision y Colocacion de Multiples y sucesivas emisiones de bonos ordinarios de Bancolombia con cupo global por $3 billones National rating at 'AAA(col)'. Banca de Inversion Bancolombia S.A. Corporacion Financiera --National long-term rating at 'AAA(col)'; Outlook Stable; --National short-term rating at 'F1+(col)'. Bancolombia Puerto Rico Internacional Inc. --National long-term rating at 'AAA(col)'; Outlook Stable; --National short-term rating at 'F1+(col)'. Factoring Bancolombia CFC --National long-term rating at 'AAA(col)'; Outlook Stable --National short-term rating at 'F1+(col)'; Leasing Bancolombia S.A. CFC --National long-term rating at 'AAA(col)'; Outlook Stable; --National short-term rating at 'F1+(col)'; --Multiples y Sucesivas Emisiones de Bonos Ordinarios de Leasing Bancolombia hasta por $1.5 billones de pesos National rating at 'AAA(col)'; --Programa de Emision y Colocacion de multiples y sucesivas emisiones con cargo a un cupo global de 2 billones (ampliado hasta 4.5 billones) National rating at 'AAA(col)'. Valores Bancolombia S.A. --National long-term rating at 'AAA(col)'; Outlook Stable; --National short-term rating at 'F1+(col)'; Compania de Financiamiento Tuya S.A. --National long-term rating at 'AAA(col)'; Outlook Stable; --National short-term rating at 'F1+(col)'; Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'National Ratings Criteria' (Jan. 19, 2011); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012). Applicable Criteria and Related Research Global Financial Institutions Rating Criteria National Ratings Criteria Rating FI Subsidiaries and Holding Companies
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