Fitch Affirms Davivienda at 'BBB-'; Upgrades Support Ratings

Fri Jan 24, 2014 3:00pm EST

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(The following statement was released by the rating agency) NEW YORK, January 24 (Fitch) Fitch Ratings has affirmed Banco Davivienda S.A.'s (Davivienda) viability rating (VR) at 'bbb-' and Issuer Default Ratings (IDRs) at 'BBB-'. Fitch has also upgraded the bank’s Support Rating (SR) to ‘2’ and revised its Support Rating Floor to ‘BBB-’. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS: Viability and Issuer Default Ratings Davivienda's VR and IDRs reflect its consistent performance, stable capital, strong asset quality and risk management, and its clear long-term strategy. Fitch's view of Davivienda's creditworthiness is tempered by the bank's moderate efficiency and ongoing execution risk related to its acquisitions. Davivienda’s expansion abroad has so far been uneventful. The newly acquired subsidiaries have shown an improvement in their performance; they have resumed asset growth and re-balanced their funding while they gained in efficiency and stabilized/ improved asset quality. As expected, Davivienda’s consolidated capital and profitability have declined after the acquisition but the trend is in the right direction. These metrics are expected to revert to pre-acquisition levels within the next 12-18 months. Sound loan growth at home and abroad has driven the bank’s performance which in spite of the lower profitability of the new subsidiaries remains healthy. ROAA stood at about 1.57% at September 2013, below the 1.96% of the previous year and poised to improve gradually in line with the performance of the new subsidiaries. As expected, capital ratios declined after the acquisition as risk weighted assets (RWA) increased while goodwill and other adjustments eroded the capital base. Sustained growth and lower yet positive profitability helped stabilize capital along with a conservative dividend payout policy. Davivienda’s capital includes preference shares (previously not counted as Fitch Core Capital) that cannot be redeemed and were subscribed for a low, nominal amount but generated a significant surplus. These shares receive a preferred dividend only when the bank is profitable, subject to regulatory approval. As of September 2013, Davivienda’s Fitch Core Capital ratio was 9.4%; the ratio was 10.9% before the aforementioned acquisition. Given the still sound economic prospects at home and sustained growth and profitability in its core market, Davivienda should gradually replenish its capital. Owing to its sound risk management policies and mature organization, the bank kept asset quality under control while bolstering reserves under increasingly stringent regulation. Davivienda’s asset quality ratios (90-day NPLs: 1.6% at Sept. 2013, unchanged from a year earlier but improving in Central America) compare well to those of its peers even though its loan portfolio has a slightly riskier profile. Davivienda has a proven ability to devise and execute a clear long-term strategy. Building patiently around its core mortgage business, Davivienda became a universal bank, a regional player and diversified its target market, revenue sources, funding base, and loan portfolio. Davivienda’s funding remains stable at home and has somewhat changed its mix abroad - deposit growth in Central America was mainly driven by time deposits - but remains adequate to its growth needs. The bank tapped global markets for senior and subordinated debt and remains an attractive name for investors at home and abroad. Support and Support Rating Floor Given Davivienda’s size, systemic importance and historic support policy, Fitch believes there is a high probability of support from Colombia’s central bank, whose ability to provide support reflects the country’s financial and fiscal standing. The revision of Davivienda’s Support Rating Floor (SRF) to ‘BBB-‘ from ‘BB+’ and the upgrade of its Support Rating (SR) to ‘2’ from ‘3’ are explained by the recent upgrade of the foreign currency sovereign to ‘BBB’ late last year. RATING SENSITIVITIES Davivienda’s VR and IDRs could benefit from the continued strengthening of its capital base (Fitch Core Capital Ratio consolidating above 10.5%) and/or a sustainable increase of its profitability (ROAA above 2%), while maintaining reasonable asset quality and sound reserves. A significant decline in its performance and or weaker asset quality that would erode the core capital/reserve cushion (below 8.5% or 100%, respectively) and/ or a dismal management of the new subsidiaries would negatively affect the bank’s VR. Davivienda’s IDRs would be underpinned by the SRF. Support and Support Rating Floor Changes in the support rating and support rating floor are contingent on changes in Colombia's sovereign ratings or Fitch’s view of Colombia’s willingness to support this bank. Fitch has taken the following rating actions on Davivienda: --Long-term foreign currency IDR affirmed at 'BBB-'; Outlook Stable; --Long-term local currency IDR affirmed at 'BBB-'; Outlook Stable; --Short-term foreign currency IDR affirmed at 'F3'; --Short-term local currency IDR affirmed at 'F3'; --Viability rating affirmed at 'bbb-'; --Support Rating upgraded to ‘2’ from '3'; --Support Rating Floor revised to ‘BBB-’ from 'BB+'; --Senior unsecured debt affirmed at 'BBB-'; --Subordinated debt affirmed at 'BB+'; --National long term rating affirmed at ‘AAA(Col)’; --National Short term rating affirmed at ‘F1+(Col)’. Contact: Primary Analyst Diego Alcazar Director +1-212-908-0396 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Andres Marquez Director + 57 1 326-9999 Committee Chairperson Alejandro Garcia Senior Director +5281-8399-9146 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at ‘www.fitchratings.com’. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --‘National Ratings Criteria’ (Jan. 19, 2011). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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