Overview -- Colombia-based universal bank, Bancolombia S.A., has a leading market position within the Colombian financial system and has demonstrated adequate asset quality. Nonetheless, its risk-adjusted capital ratio is only moderate. -- We are assigning our long-term 'BBB-' and short-term 'A-3' issuer credit ratings to Bancolombia. The outlook is positive. -- We expect the bank to keep its strong market position in Colombia coupled with moderate capitalization and adequate earnings generation capacity. Rating Action On Nov. 26, 2012, Standard & Poor's Ratings Services assigned its long-term 'BBB-' and short-term 'A-3' issuer credit ratings (ICR) to Bancolombia S.A. y Companias Subordinadas (Bancolombia). The outlook is positive. Rationale The ratings on Bancolombia reflect our "strong" assessment for its business position, our view of its capital and earnings as "moderate", and our view of its risk position as "adequate". The ratings are also supported by the bank's "average" funding and "adequate" liquidity (as our criteria define all these terms). The standalone credit profile (SACP) is 'bbb-'. The 'bbb-' anchor draws on our Banking Industry Country Risk Assessment (BICRA) methodology and our view of the weighted average economic risk in the countries in which Bancolombia, on a consolidated basis, has exposure through its loan book: Colombia (85%), El Salvador (10%), and Panama (5%); as of June 2012. As a result, the weighted economic risk is about '6'.Our bank criteria use the BICRA economic and industry risk scores to determine a bank's anchor, the starting point in assigning an ICR. Our economic risk score of '6' on its largest exposure, Colombia, reflects the country's economic concentration in cyclical commodity sectors, limited fiscal flexibility based on the population's relatively low income levels, high unemployment, and inefficient rule of law, which hinders the claims process for loan collateral. On the positive side, however, we currently don't see any asset bubbles in the Colombian economy. Our industry risk score of '5' is based on Colombia's improvements to underwriting standards, transparency, and good disclosure of accounts and ownership of banks, which have created favorable conditions and strengthened supervision and coverage. The central bank's lending facilities and policies are adequate in terms of capacity, and it has a good track record of providing guarantees, transparency, and liquidity. The country's banks also enjoy a stable and expanding base of core customer deposits. But, in our view, the country's still-shallow capital markets, lack of long-term funding alternatives that harms asset-liability management, and moderate use of securitization continue to constrain the industry. Bancolombia's leading market position, strong brand, and sound franchise within the Colombian financial system supports our assessment of its "strong" business position. We base our view of the bank's business stability as "strong" on its status as the largest financial institution in the Colombian banking system with a predominant, almost unchallenged, market position. As of June 2012, the bank enjoyed a 22.8% market share in terms of total loans and 21.7% of total deposits in the system--it's practically the leading bank in all business lines in which it participates. These market shares have been very stable for the past several years in both revenues and predictability. Business stability is also supported by a nationwide footprint, servicing more than seven million customers. Given its predominant market position and our forecasted growth for both Bancolombia and the Colombian banking system, we anticipate the bank's business stability will remain strong. Bancolombia is a well-diversified full-service financial institution that offers a wide range of banking products. The bank has established a comprehensive branch network with a nationwide presence in Colombia. Both its revenue and business bases comprise strong business lines diversification compared with its industry score: savings and investments, retail segment, private banking, wealth management, corporate finance, brokerage, investment banking, and treasury activities. We expect this strong business diversification to remain as the bank follows its corporate strategy of maintaining growing in all of its business lines. Our forecasted risk-adjusted capital (RAC) ratio of around 5.6% supports our "moderate" assessment for Bancolombia's capital and earnings, and it is its main rating weakness. This forecast takes into consideration: our base-case scenario, which includes an average loan portfolio growth over the next two years of around 10% annually, mainly reflecting the bank's easing growth in the consumer segment; its fairly stable net interest margin resulting from our expected asset and liability composition; and a 50% average dividend payout ratio (although this has been lower for the past three years). We view its quality of capital and earnings as "adequate". Bancolombia's capital is supported by a mix of paid-in capital, retained earnings, capital reserves, and hybrid issuances and preferred shares. Its preferred shares have an intermediate equity content, or 33% of its adjusted common equity. We do not grant its subordinated bonds, given their short terms in the capital structure, any equity content. Counterbalancing its quality of capital is the bank's adequate quality of earnings, which has been fairly stable and compares adequately with other large rated peers in Latin America. The bank has been able to maintain its quality of capital as a consequence of its steady loan portfolio growth, adequate efficiency, and adequate asset quality, which has derived in relatively low provision consumption versus other regional peers. As of September 2012, Bancolombia's core earnings to average adjusted assets stood at 1.9%--the same level it has averaged for the past three fiscal years; we forecast it at around 2% for year-end 2013. Its 55.9% efficiency rate remains adequate compared with peers, and we expect it to remain at about the same level for the next 18 months. Trading income has been of low importance--accounting for less than 4% of total revenues over the past three years. This, in our opinion, provides Bancolombia with healthier, more-predictable revenues. Its earnings capacity is only adequate; our three-year earnings buffer calculation is 1.1% of total risk weighted assets. Bancolombia's asset quality and credit losses, along with its risk concentration and changes in exposures, compares adequately with other peers in Colombia and supports our view of an overall "adequate" risk position. We assess growth and changes in exposure as moderate, however, reflecting the bank's aggressive acquisitive trend and our belief it will remain open to future acquisitions as it expands operations in the region. Risk concentration and diversification are adequate, in our opinion. The bank shows satisfactory risk dispersion among some asset classes. As of September 2012, its loan portfolio mainly comprised: commercial/corporate loans (57.6%), consumer loans (18.6%), leases (14.6%), residential real estate mortgages (8.1%); and other (1.1%). Its top 20 largest exposures represent a low 11% of its total loan portfolio and 77% of total reported equity. The commercial portfolio does not show concentrations by economic sector and the exposure to the construction segment--which we view as riskier--represented 11.7% of the total loan portfolio as of September 2012. In our view, the bank shows certain complexity in its balance sheet because its subsidiary, Banca de Inversion Bancolombia S.A., manages long-term equity investments, which we consider more complex than those of the bank's regional peers. But these investments represent a low proportion of the bank's total assets, and its RAC ratio would be pressured only if these were to increase (along with further acquisitions). Nonetheless, we are not expecting Bancolombia to significantly boost its equity investments. Nonperforming assets (NPA) and credit losses have been historically in line with the system's average; we deem those as "adequate". NPA as of September 2012 stood at 2.9%, while credit losses--measured as net charge offs (NCO)--were 0.9%. The past three-year NPA and NCO averages of 3.8% and 1.2%, respectively, compare adequately with the system's respective 2.7% and 1.9. We note some deterioration in NPA as a result of the growth in consumer loans, but recent loan vintages have shown some steady decline in NPA, and we believe this trend will continue mainly due to lower growth rates in the consumer segment and our expectation that growth will slow in the next two years. We are currently expect NPA and credit losses of around 3% and 1%, respectively--levels we consider manageable. Our opinion of Bancolombia's funding is "average" compared with the industry norm. This opinion stems from the bank's funding composition--the majority of sources are core customer deposits (72.3% of the total as of September 2012). The remaining funding sources are interbank lines, other credit facilities, and market bonds issuances. We expect this funding structure to remain based on our expectation that customer deposits will continue to grow. The bank's net loan-to-deposit ratio is only barely adequate, though, at around 114.7% as of September 2012. Despite its net loan-to-deposit-ratio being higher than other Latin American peers, it compares adequately with the system's 104.4%. Total market debt represented 15.8% of total interest bearing liabilities as of Sept. 30, 2012. We expect the bank to maintain its current funding structure since we don't anticipate significant shifts in its funding strategy. Our view of Bancolombia's "adequate" liquidity is supported by is manageable refinancing risk and its cash on hand plus liquid securities (deducting restricted cash due to central bank's monetary restrictions and considering only trading and available for sale government securities as liquid) representing around 15% of its total deposit base; considering the total amount of trading and available for sale securities, this ratio increases to 19%. Refinancing risk is manageable with a satisfactory maturity profile: its market debt is 15.8% of the total funding base and slightly more than 75% of debt issuances mature starting in 2015. Liquidity provides excess coverage of the bank's overnight interbank borrowings and 78% of its market debt issuances. We expect adequate liquidity management going forward. In our opinion, Bancolombia is a highly systemic financial institution within the Colombian banking system. This view stems from its leading market share in terms of deposits (21.7% as of June 2012) and its importance to the country's payment system. Its 12% market penetration in the consumer segment also makes it a very important player in the local market. We view the Colombian government as being "supportive" towards its financial system. In this regard, we believe there is a "moderately high" likelihood of extraordinary government support to Bancolombia. However, currently, its SACP of 'bbb-' does not incorporate any notches of support given the limitation to Colombia's foreign currency rating (FC: BBB-/Positive/A-3; LC: BBB+/Positive/A-2). Outlook The positive outlook on Bancolombia currently reflects that of the sovereign; if we upgrade Colombia, we will then raise our ratings on the bank if its 'bbb-' SACP) remains unchanged. We expect the bank will maintain moderate capitalization and fairly adequate earnings capacity at about 130 basis points. As a result, we do not expect the bank to undertake any debt-financed acquisitions in the next 12-18 months. Our base-case scenario forecasts a 10% average loan portfolio growth during the next two years, and we expect the RAC ratio to average about 5.6% over the next 12-18 months. If the bank undertakes debt-funded acquisitions, which would result in our forecasted RAC ratio to drop to less than 5%, we would revise the bank's SACP to 'bb+' and the outlook back to stable. However, the ratings would remain unchanged, reflecting one notch of support due to the moderately high likelihood of extraordinary government support. Ratings Score Snapshot Issuer Credit Rating BBB-/Positive/A-3 SACP bbb- Anchor bbb- Business Position Strong (+1) Capital and Earnings Moderate (-1) Risk Position Adequate (0) Funding and liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Government 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 And Assumptions, Nov. 9, 2011 Ratings List New Rating; Outlook Assigned Bancolombia, S. A. y Companias Subordinadas Counterparty Credit Rating BBB-/Positive/A-3 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.