Overview -- El Salvador-based Banco Agricola's strong business position, above-average diversification by business activities, and strong risk-adjusted capitalization support the ratings. -- We are affirming our 'BB-/B' issuer credit ratings on the bank. -- The stable outlook reflects our expectation that its leading position in El Salvador and strong capitalization levels will keep supporting Banco Agricola's stand-alone credit profile. Rating Action On Dec. 5, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' long-term and 'B' short-term issuer credit ratings (ICR) on Banco Agricola. The bank's stand-alone credit profile (SACP) remains at 'bbb-'. Rationale The ratings on Banco Agricola reflect our view of its "strong" (as our criteria define the term) business position, "strong" capital and earnings, "adequate" risk position, and its "average" funding and "adequate" liquidity. Our bank criteria use the Bank Industry Country Risk Assessment (BICRA) economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in El Salvador is 'bb'. Our economic risk score of '8' reflects an "extremely high risk" for "economic resilience" based on low GDP per capita and moderate potential economic growth in the medium term. We consider the country's limited fiscal and monetary flexibility and political uncertainty as also limiting its economic risk assessment. In our opinion, credit risk in the Salvadorian economy represents a "very high risk" because of relaxed lending and underwriting practices in the real estate segment and citizens' low debt capacity. Our industry risk score of '6' is based on El Salvador's regulatory framework, which still lags in the implementation of international supervisory practices. "Systemwide funding" also limits the banking system's industry risk assessment, based on underdeveloped domestic capital market and its very limited access to external debt capital markets. However, in our opinion, the restrained risk appetite of Salvadorian banks relieves pressure on industry risk. We consider Banco Agricola enjoys a "strong" business position based on its leading position in the Salvadorian banking industry, a well-diversified base of revenues by lines of business, and the stability due to its long-standing customer relationships. After the global financial crisis of 2008, Banco Agricola's loan portfolio contracted during 2009 and 2010. However, the bank maintained its strong market position. In 2011, the bank's loan growth was low and for 2012 and 2013 we expect it to remain marginal, around 4%. As of September 2012, Banco Agricola remains as the largest bank in El Salvador (BB-/Stable/B) with a market share of 28% by total loans and deposits, while its most immediate competitor has a 14% share. In our view, the bank's business stability will keep benefiting in the future from its "sticky" customer base and its strong position in the market, making the bank less reliant than other competitors on pricing for future growth. As of September 2012, the Banco Agricola's loan portfolio is distributed among consumer loans (41%), mortgages (15%), and corporate and commercial loans (44%). In our opinion, Banco Agricola's diversification of business activities is reflected in a relative stability of revenues, which result in good profitability levels. We assess Banco Agricola's capital and earnings as "strong." At year-end 2011, Banco Agricola's risk-adjusted capital (RAC) ratio remained strong, at 10.6%, and we believe this ratio will be 10%-11% during the next 12-18 months. Our base-case scenario considers a loan growth of around 4% during 2012 and 2013, with a relatively lower net interest margin due to competition. Despite higher credit loss provisions projected for 2012 and 2013 than in 2011, they will represent 30%-35% of Banco Agricola's preprovision operating income, which we consider as adequate. Our financial forecasts for 2012 and 2013 consider dividend payments in line with the 2011 level--payout ratio of 71%. This aggressive payout ratio reflects its parent's, Bancolombia, S. A. y Companias Subordinadas's, investment of Banco Agricola's excess of capital in its Panamanian operations while growth rates in El Salvador remain modest. Our capital sustainability analysis supports our expectation of a stable RAC. We assess Banco Agricola's risk position as "adequate." In our view, aggressive growth rates and changes in exposure is not a concern for Banco Agricola, considering its modest projected growth and the stability of its loan portfolio's composition, which we expect to remain unchanged during the next 12 months. We consider Banco Agricola's loan portfolio to remain well diversified, which is in line with the bank's traditional core business. The top 20 exposures represent less than 20% of Banco Agricola's total loans and 98% of its total capital base. We do not perceive concentration by sector. In addition, Banco Agricola's exposure to related parties is very low, less than 1% of total loans as of September 2012. In our view, Banco Agricola's credit losses are adequate. Even amid difficult global economic conditions in 2009 and 2010, Banco Agricola's credit losses to total loans were below 2%. During those years, the bank's loan portfolio contracted around 4% each year. For 2012 and 2013 we expect that Banco Agricola's credit losses will remain below 2%. We consider the bank's provisioning policy to be conservative; it fully reserves its nonperforming loans (NPLs) after 30 days. Its nonperforming assets (NPAs; NPLs and repossessed assets) are fully covered by reserves and we do not expect changes in the future. As of September 2012, the bank's NPAs were 3.2%, below the Salvadorian banking system's average of 5%. In our opinion, Banco Agricola's funding is "adequate." As of September 2012, deposits make up 87% of the bank's funding base. The additional funding sources are interbank loans (5%), multilateral bank loans (1%), and medium-term notes (7%). Banco Agricola's well-diversified deposit base is a positive factor. As of September 2012, retail deposits represent around 70% of total deposits, as seen in a pulverized deposit base. In addition, the bank's loan-to-deposit ratio remains below 100%, and considering the modest projected loan growth for 2013, we do not expect this ratio to change significantly. Banco Agricola's liquidity remains "adequate." As of September 2012, the bank's liquid assets (cash and interbank deposits plus government securities) represented around 30% of total deposits. In addition, these liquid assets cover by 2x the bank's interbank loans, multilateral bank facilities, and medium-term notes. We consider Banco Agricola a "highly strategic" subsidiary of its Colombia-based ultimate parent Bancolombia. This because although the Salvadorian subsidiary does not share Bancolombia's name and brand, it operates in lines of business integral to the overall group strategy, and it continues to benefit from its parent for management expertise, infrastructure, product development, etc. As of September 2012, Banco Agricola represents 7.1% of Bancolombia's total assets, 8.5% of total equity, and 6.7% of total operating revenues. However, Banco Agricola's ICR doesn't incorporate notches of support and is limited by the sovereign ratings on El Salvador (BB-/Stable/B). This reflects our opinion that the economic factors, which could trigger a sovereign stress scenario, would erode the bank's fundamentals. Outlook The stable outlook on Banco Agricola reflects our base-case scenario that the bank's business position and risk-adjusted capitalization will remain strong. The bank will keep taking advantage of its parent's expertise and benefit from its strong presence in El Salvador. We believe that the bank's RAC ratio will remain strong, based on our expectation of a 4% loan growth in 2012 and 2013 and its adequate internal capital generation capacity. We expect the bank's core earnings to average adjusted assets to stand above 2% during 2012 and 2013. We also believe that Banco Agricola will maintain its status as a "highly strategic" subsidiary of Bancolombia. Because the sovereign rating is constraining our ratings on Banco Agricola, our ratings on it will move in tandem with the sovereign rating. We believe that a downgrade is unlikely because of the bank's current SACP. Even if the SACP deteriorates due to lower-than-expected capital or the bank's weaker risk position, we would not change the ratings but rather add notches of support due to the bank's highly strategic importance to Bancolombia. Ratings Score Snapshot Issuer Credit Rating BB-/Stable/B SACP bbb- Anchor bb Business Position Strong (+1) Capital and Earnings Strong (+1) Risk Position Adequate (0) Funding and Liquidity Average/Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology For Banks, Nov. 9, 2011 Ratings List Ratings Affirmed Banco Agricola S.A Counterparty Credit Rating BB-/Stable/B Certificate Of Deposit BB-/B Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.