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Rating Action: Moody's rates Baa3 Banistmo's proposed senior unsecured notes; outlook stable
Global Credit Research - 22 Jul 2020
New York, July 22, 2020 -- Moody's Investors Service, ("Moody's") has today assigned a Baa3 long-term foreign currency debt rating to Banistmo, S.A. (Banistmo)'s proposed senior unsecured 144A/Reg S notes for up to $500 million. Banistmo will use the proceeds of the notes for general corporate purposes, including funding the bank's loan growth and the refinancing of maturing debt obligations.
Moody's has also assigned Banistmo a baa3 baseline credit assessment (BCA) and adjusted BCA, Baa3/Prime-3 long- and short-term foreign currency deposit ratings and Baa2/Prime-2 long- and short-term foreign currency counterparty risk ratings. The outlook on Banistmo's ratings is stable.
The following ratings and assessments were assigned to Banistmo, S.A.:
Baseline Credit Assessment, assigned baa3
Adjusted Baseline Credit Assessment, assigned baa3
Long and short-term foreign currency deposit rating, assigned Baa3 stable/P-3
Long and short-term foreign currency Counterparty Risk Rating, assigned Baa2/P-2
Long and short-term Counterparty Risk Assessment, assigned Baa2(cr)/P-2 (cr) Outlook Actions: ..Issuer: Banistmo, S.A. ....Outlook, Assigned Stable
The following ratings were assigned to Banistmo, S.A.'s proposed foreign currency 144A/Reg S senior notes of up to $500 million:
Long term foreign currency senior unsecured debt rating, assigned Baa3 stable
Banistmo's baa3 Baseline Credit Assessment (BCA) reflects the bank's strong capitalization supported by continued earnings retention in recent years, and its favorable funding structure based on a stable and granular deposit base, which reduces liquidity risks considering the bank's moderate liquidity buffers. Banistmo's credit profile is, however, constrained by its weak asset quality evidenced by continued above-peers non-performing loan ratios, and by modest profitability reflecting the challenges brought about by the economic impact of the coronavirus outbreak in Panama.
Banistmo's Baa3 deposit and debt ratings are derived from its baa3 BCA. We assess a high probability of support to the bank's deposit and debt ratings from its ultimate parent Bancolombia S.A. (Baa2 stable, ba1) in case of need. However, Banistmo's ratings do not benefit from uplift from affiliate support, considering that the anchor point for assessing the ability of the parent to provide support, its BCA, is one-notch lower than Banistmo's, at ba1. Banistmo, which was acquired by Bancolombia S.A. in 2013, is a diversified commercial and consumer lender based in Panama and a relevant subsidiary of the parent, representing about 15% of its total consolidated assets. Banistmo also benefits from Bancolombia's management expertise, risk management and compliance practices, new product development , and measures for operational efficiency, among others.
Banistmo is the second largest lender in Panama with an 11% market share in terms of loans and 12% in terms of deposits, serving around 470,000 customers. The bank holds significant market shares in most loan segments, being particularly strong in the construction sector (21% market share). Banistmo's loan asset class diversification is roughly in line with that of the Panamanian banking system -albeit with a higher exposure to the construction sector- with the bank's main segments being residential mortgages (30% of total loans as of March 2020), construction (15%), industrial (10%), commercial (9%), personal loans (8%) and small and medium enterprises (SMEs) (7%).
Banistmo's asset quality had weakened before the outset of the pandemic, as evidenced by its 90 day past due loans increasing to 3.7% of total gross loans in March 2020, from 2.9% as of 2019 year-end. Moreover, problem loans measured as loans classified as stage 3 under IFRS 9 reached 7.6% of gross loans as of March 2020, the result of certain impaired construction loans for which the bank holds high levels of guarantees. Most of the asset quality deterioration has been associated with the real estate sector, while its consumer segment has maintained reasonably sound asset quality.
High asset risks are offset by Banistmo's adequate loan loss reserves, at 110% of past due loans as of March 2020. Under the government´s relief program for borrowers affected by the COVID-19 crisis, which requires payment deferrals until the end of 2020 for some loans, Banistmo has provided tenor extensions to about 53% of its loan book, in line with the system's average. We expect the restructured loan book and the impact on borrowers' repayment capacity of the economic downturn to cause further deterioration on the bank's asset quality for the remaining of 2020 and early 2021, although the expected strong economic recovery in Panama for 2021 will likely help stabilize delinquencies in the medium term.
Banistmo's capital position is a key credit strength, which we expect will sustain its credit profile amid negative pressure from the pandemic. As of March 2020, the bank's capitalization ratio, measured as tangible common equity (TCE) to Moody's adjusted risk-weighted assets (RWA) was 13.5%. Continued earnings retention, reflecting the commitment of shareholders to the bank's financial flexibility and franchise and prudent loan growth have supported overall stable capital position. Capitalization ratios have remained sound following the increase in expected loss provisioning as per the introduction of IFRS 9 in 2018, and the introduction in Panama of increased capital requirements for market and operational risks in 2019.
The bank's profitability is moderate and below peers due to higher provision costs, in line with recent and expected asset risk pressures. However, the bank's inexpensive funding boosts its ample net interest margins, which at an annualized 3.3% as of March 2020, is among the highest in the system. Banistmo has stable sources of fee income, which accounts for about 15% of net revenues, and improving operating efficiency, both of which have supported profitability in recent years. We expect the current adverse economic environment in Panama to hurt Banistmo's profitability in 2020, as for other banks in the system because of higher credit costs associated to asset deterioration. Over the medium-term, Banistmo inexpensive funding and diversified loan book will help sustain its ample margins, supporting its profitability prospects.
Banistmo's relatively inexpensive, granular, and more stable retail deposits are another key credit strength. Market funding, which accounts for 19.7% of tangible assets as of March 2020, is also diversified between global and local issuances, bank borrowings and interbank deposits, reducing refinancing risks. Banistmo's funding profile mitigates potential pressure on its moderate liquidity profile, with liquid assets representing 17.8% of tangible assets as of March 2020, which is below peers.
We do not have any particular concerns with Banistmo's governance. The bank shows an appropriate risk management framework commensurate with its risk appetite and in line with risk management policies and provisioning adopted by its parent bank, Bancolombia.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressures on Banistmo's ratings could be triggered by a sustained improvement in its asset risk profile, which could in turn support increased and sustainable profitability, as credit costs decline, leading to an improved capital replenishment capacity. In addition, a strengthening of the bank's liquidity profile could also exert positive pressure on its BCA and ratings.
Downward pressure on the bank's BCA could arise from continuing weaknesses in its main credit metrics, beyond the expected asset quality deterioration caused by the pandemic. Particularly, a continued and larger than expected asset risk deterioration, especially if it drives a sustained reduction on the bank's capital base, could lead to a downgrade of the bank's BCA and ratings.
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.
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.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Marcelo De Gruttola Asst Vice President - Analyst Financial Institutions Group M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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