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Banco Bilbao Vizcaya Argentaria Paraguay -- Moody's confirms GNB Sudameris and Gilex Holding's ratings, downgrades BBVA Paraguay's supported ratings; outlook negative

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Rating Action: Moody's confirms GNB Sudameris and Gilex Holding's ratings, downgrades BBVA Paraguay's supported ratings; outlook negative

Global Credit Research - 25 Jan 2021

New York, January 25, 2021 -- Moody's Investors Service ("Moody's") has today confirmed all long-term ratings of Gilex Holding S.A. ("Gilex Holding", senior secured rating B2) as well as the long-term ratings and assessments of its lead bank, Banco GNB Sudameris S.A. ("GNB Sudameris", Ba2 for deposits), including the ba3 standalone Baseline Credit Assessment (BCA). The outlook on the bank's and on the holding's ratings is now negative.

The rating agency also downgraded Banco Bilbao Vizcaya Argentaria Paraguay ("BBVA Paraguay") long-term local and foreign currency counterparty risk ratings to Ba1 from Baa3, the short-term local and foreign currency counterparty risk ratings to Not Prime, from Prime 3, as well as the long-and short-term counterparty risk assessments to Ba1(cr) and Not Prime (cr), from Baa3(cr) and Prime 3(cr). The bank`s adjusted baseline credit assessment (BCA) was also downgraded to ba2 from ba1. The rating agency affirmed BBVA Paraguay's short term local and foreign currency deposit ratings of Not Prime and confirmed all of the bank's other ratings and assessments, including its ba2 BCA. The outlook for the ratings is now negative.

The rating actions follow the completion the completion of Banco GNB Paraguay S.A.'s (GNB Paraguay) acquisition of BBVA Paraguay announced on 22 January 2021. GNB Paraguay is a subsidiary of GNB Sudameris.

The rating actions conclude Moody's review of GNB Sudameris` and BBVA Paraguay's ratings that began on 13 August 2019, when the transaction was first announced.

A complete list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The confirmation of GNB Sudameris and Gilex's ratings follows the recent approval by relevant regulatory authorities of the acquisition of BBVA Paraguay by GNB Paraguay, a subsidiary of GNB Sudameris, which, in turn, is a subsidiary of Gilex Holding. GNB Paraguay closed and paid the all-cash acquisition on January 22nd at a price of $251 million. In connection to the acquisition, GNB Paraguay received a $57 million capitalization from GNB Sudameris. Additionally, GNB Paraguay sold 32% of the combined pro-forma bank to Grupo Vierci, a Paraguayan-based retail-to-media company, for $173 million. The proceeds of the Grupo Vierci transaction were allocated to the acquisition of BBVA Paraguay. The acquisition will create the largest commercial bank in Paraguay, with $2.6 billion in deposits and $3.3 billion in total assets. GNB Sudameris will retain a 68% ownership of GNB Paraguay, with Grupo Vierci holding 32% of the new bank's shares.

GNB SUDAMERIS

The confirmation of GNB Sudameris' ratings and assessments incorporates the bank's historically good asset quality and stable liquidity, which are partially offset by its low capitalization and the challenges to asset risk and profitability deriving from the weak operating conditions in Colombia.

The negative outlook on GNB Sudameris' ratings reflects downward pressures on its baseline credit assessment (BCA) derived from the bank's augmented exposure to weaker operating conditions in Paraguay, which will now account for 36% of GNB Sudameris' loans, doubling its previous 17% exposure to that country. The negative outlook also incorporates Moody's expectation that GNB Sudameris' asset risk, profitability and capital metrics will weaken further as unemployment remains high and economic activity modest into 2021 in its major operating market, Colombia. The bank's problem loans rose to 2.3% of gross loans as of September 2020, from 2.1% as of 2019, but uncertainty about the effects of the pandemic and pace of economic recovery weigh on asset quality metrics and provisioning needs. GNB Sudameris' Moody's capitalization ratio, measured as tangible common equity (TCE)/risk-weighted assets (RWA), increased to 7.9% as of September 2020, from 7.5% as of 2019, as a result of the capital injection early in 2020 in anticipation of the acquisition of BBVA Paraguay. That said, Moody's estimates GNB Sudameris' TCE/RWA ratio will remain low and below that of its rated Colombian peers.

GILEX HOLDING

The confirmation of Gilex Holding's ratings with negative outlook follows the confirmation of GNB Sudameris´ BCA and incorporates the downward pressure on GNB Sudameris' baseline credit assessment. As a holding company, Gilex depends on its primary operating subsidiary Banco GNB Sudameris' dividends to service its debt and repay principal. As such, Gilex's senior secured debt is structurally subordinated to the obligations of GNB.

Gilex Holding´s ratings also incorporate the company´s somewhat high double leverage ratio, which is measured by investments in subsidiaries relative to shareholders' equity, at around 118% and reflects the extent to which a holding company relies upon debt to finance its investments in subsidiaries. Moody's considers double leverage in excess of 115% to be high. This leads to a rating two notches below GNB's baseline credit assessment (BCA) of ba3, one notch wider than Moody's typical notching for financial holding companies.

That said, the company has a high interest coverage ratio underpinned by strong dividend income from its subsidiaries, with core earnings amounting to 2.1 times interest expenses in June 2020. In addition, Gilex Holding has enough liquidity and interest income in dollars, limiting its reliance on dividend inflows to meet upcoming debt obligations.

BBVA PARAGUAY

The conclusion of the review and the downgrade of BBVA Paraguay's supported ratings follow the completion of GNB Sudameris' acquisition of BBVA Paraguay through GNB Paraguay. Consequently, BBVA Paraguay's ratings will no longer benefit from affiliate support from its previous parent bank, Banco Bilbao Vizcaya Argentaria S.A. (A2 stable). Moody`s assessment of support for BBVA Paraguay from GNB Sudameris is high, however, its deposit rating will not incorporate uplift from affiliate support because GNB Sudameris` BCA is lower than that of BBVA Paraguay.

BBVA Paraguay will continue to exist as an indirect subsidiary of GNB Sudameris and, under Paraguayan law, it will be merged into GNB Paraguay over a maximum period of six months.

The confirmation of the bank`s ba2 BCA reflects BBVA Paraguay`s strong capitalization, resilient profitability, and conservative risk management, in line with that of its former parent bank. BBVA Paraguay`s BCA also reflects its limited reliance on confidence sensitive market funding and high levels of liquid assets.

Moody`s confirmation of BBVA Paraguay`s long term deposit ratings reflects the rating agency`s assessment of a high probability of government support in the event of stress in light of its relevant deposit market share that results in one notch uplift to its deposit ratings to Ba1, from its ba2 BCA.

The negative ratings outlook reflects the risks of integrating BBVA Paraguay into GNB Paraguay that could lead to client and business attrition, with negative effect on earnings generation, a decline in capitalization, or changes to its risk management policies leading to rising asset risk.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

GNB SUDAMERIS

GNB Sudameris' ratings could be downgraded if asset risk and profitability continue to deteriorate and/or the capitalization ratio declines from current levels. However, the ratings would not be affected by a downgrade of the Government of Colombia's sovereign bond rating of Baa2. While an upgrade of GNB Sudameris' ratings is unlikely given the negative outlook on its ratings, the outlook could be stabilized if the bank manages to maintain asset quality and earnings and improve its capitalization levels.

GILEX HOLDING

Upward/downward pressures on Gilex Holding's ratings would be associated with similar pressures on GNB Sudameris' BCA. The ratings could also face downward pressures if the group's double leverage appear likely to exceed 115% by a meaningful amount on a sustained basis and/or the interest coverage ratio decrease significantly.

BBVA PARAGUAY

At this time, the negative outlook on the bank's ratings precludes any upward pressure. The bank's BCA could be downgraded if its asset quality deteriorates materially as a result of changes in its risk appetite and management policies, leading to rising provisioning expenses and lowering profitability. A decline in the bank's capitalization from historically elevated levels would also be negative for the ratings. The outlook could be stabilized if the bank's asset quality, capitalization and profitability remain in line with historical levels.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Banco GNB Sudameris is headquartered in Bogota, Colombia. The bank had total consolidated assets of COP41,628 billion and shareholders' equity of COP2,221 billion as of 30 September 2020. Gilex Holding S.A. (Gilex) is a private limited liability company incorporated under the laws of Panama, whose only significant assets are its ownership of a 94.7% equity interest in GNB and a 1.5% equity interest in Servitrust GNB Sudameris S.A., (Servitrust), a subsidiary of Banco GNB Sudameris S.A. (GNB).

BBVA Paraguay is headquartered in Asuncion and had total assets of PYG 13.4 trillion ($ 1.9 billion) and equity of PYG 1.3 trillion as of 30 September 2020.

ISSUERS AND RATINGS AFFECTED

The following Banco GNB Sudameris S.A.'s ratings and assessments were confirmed:

- Long-term local currency deposit rating of Ba2, Negative from Ratings Under Review

- Long-term foreign currency deposit rating of Ba2, Negative from Ratings Under Review

- Long-term global foreign currency subordinated debt rating of B1

- Long-term local currency counterparty risk rating of Ba1

- Long-term foreign currency counterparty risk rating of Ba1

- Adjusted Baseline Credit Assessment of ba3

- Baseline Credit Assessment of ba3

- Long-term counterparty risk assessment of Ba1(cr)

The following Banco GNB Sudameris S.A.'s ratings and assessments were affirmed

- Short-term local currency deposit ratings of Not Prime

- Short-term foreign currency deposit rating of Not Prime

- Short-term local currency counterparty risk rating of Not Prime

- Short-term foreign currency counterparty risk rating of Not Prime

- Short-term counterparty risk assessment of NP(cr)

-Outlook, changed to Negative, from Ratings Under Review

The following Gilex Holding S.A.'s ratings were confirmed:

- Long-term global local currency issuer rating of B2, Negative from Ratings Under Review

- Long-term global foreign currency senior secured rating of B2, Negative from Ratings Under Review

-Outlook, changed to Negative, from Ratings Under Review

The following ratings and assessments assigned to BBVA Paraguay S.A. were downgraded:

- Long -term local and foreign currency counterparty risk ratings to Ba1 from Baa3, respectively

- Short-term local and foreign currency counterparty risk ratings to Not-Prime from Prime-3, respectively

- Adjusted baseline credit assessment to ba2 from ba1

- Long-term counterparty risk assessment to Ba1(cr) from Baa3(cr)

- Short-term counterparty risk assessment to Not-Prime(cr) from Prime-3 (cr)

The following ratings and assessments assigned to BBVA Paraguay S.A. were confirmed:

- Long-term local currency deposit rating of Ba1, Negative outlook from Ratings Under Review

- Long-term foreign currency deposit rating of Ba1, Negative outlook from Ratings Under Review

- Baseline credit assessment of ba2

The following ratings assigned to BBVA Paraguay S.A. were affirmed:

- Short-term local currency deposit rating of Not Prime

- Short-term foreign currency deposit rating of Not Prime

-Outlook, changed to Negative from Ratings Under Review

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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