Wed Nov 9, 2011 5:50am EST
(The following statement was released by the rating agency)
– We are reviewing our Banking Industry Country RiskAssessments after having published our updated methodology.
– We are revising our BICRA on Colombia to group ’5′ fromgroup ’6′.
– We are revising our economic risk score to ’6′ from ’5′,and the industry risk score to ’5′ from ’6′.
On Nov. 9, 2011, Standard & Poor’s Ratings Services saidthat it is revising its Banking Industry Country Risk Assessment(BICRA) on Colombia to group ’5′ from group ’6′. It is alsorevising the economic risk score to ’6′ from ’5′, and theindustry risk score to ’5′ from ’6′.
We have reviewed the banking sector of the Republic ofColombia (BBB-/Stable/A-3) under our updated BICRA methodology.The BICRA groups summarize our view of the risks that a bankoperating within a particular country and banking industry facesrelative to those in other banking industries. They range fromgroup ’1′ (the lowest risk) to group ’10′ (the highest risk).Other countries in BICRA group ’5′ are Panama, Trinidad yTobago, China, India, and Turkey.
Our economic risk score of ’6′ reflects our opinion thatColombia has “high risk” in “economic resilience” and “creditrisk in the economy,” and “intermediate risk” in terms of”economic imbalances,” as our criteria defines those terms.
The Colombian economy’s concentration in certain commoditiesmakes it vulnerable to external shocks. Additionally, GDP percapita is low at about $6,400 and unemployment is still highcompared with other countries. However, the Colombian economyhas shown increased resilience that, combined with favorablemedium-term growth prospects, should restrain public sector debtburden. Deepening domestic capital markets and improvingexternal liquidity should continue to reduce vulnerability ofthe sovereign debt burden. Exchange-rate flexibility and amonetary policy targeting inflation should help the economywithstand external shocks.
In our view, Colombian economy is in an expansionary phase.Private-sector credit has been increasing at more than 18% inthe past few years. Residential real estate prices havemoderately increased, but we expect high growth in commercialreal estate prices, which could erode the banking system’s assetquality. The exposure to equity prices is limited. The currentaccount deficit is likely to be 2.8% of GDP in 2011 and will bemostly funded by foreign direct investment.
Low incomes are the main reason behind the private-sectorcredit to GDP ratio of 34%, since debt capacity and leverage arelow. The country has strengthened its underwriting standards.Loan-to-value ratios are conservative, at about 53%, and thebanking sector’s exposure to foreign currencies is low, at lessthan 10%; however, its exposure to commercial real estate isincreasing. Payment culture is solid, but a still inefficientrule of law slows the claims process over loan collaterals.
Our industry risk score of ’5′ for Colombia is based on ouropinion that the country faces “high risk” in its “institutionalframework,” and “intermediate risk” in its “competitivedynamics” and “system-wide funding.”
Our institutional framework assessment is based on thecountry’s accounting standards, which are still not aligned withinternational standards. Regulators monitor market, credit, andliquidity risks, but not operational risk, which is supervisedin most investment-grade sovereigns. Supervision of existinglarge and complex financial conglomerates is challenging forauthorities, particularly now that these conglomerates areexpanding abroad. However, regulators have well documentedprocedures and adequate track record of early action andprevention towards distressed financial institutions.Improvements in transparency and good disclosure of accounts andownership of banks have created favorable conditions,strengthening supervision and coverage.
The banking sector has shown prolonged profitability levelsthat are higher than those of other sectors in the economy.However, banks offer traditional service products and a limitednumber of high-risk products, and commercial practices havestrengthened. Colombian banking system is moderatelyconcentrated: three local banks– Bancolombia S.A. ,Banco de Bogota S.A. , and Davivienda S.A. DVIp.CN-accounted for 48% of the loans as of June 2011. Additionally,the two largest financial groups, Grupo Aval (notrated) and Grupo de Inversiones Suramericana S.A. (BBB-/Watch Neg/–), account for more than half of the marketshare. Market distortions, in our view, are limited, given thelow presence of government-owned financial institutions.
Banks enjoys a stable and growing core customer depositbase, which has been the main source of funding for the sector.The country’s still shallow capital markets, lack of long-termfunding alternatives that harm asset liability management, and amoderate use of securitization continue to constrain theindustry. The central bank’s lending facilities and policies areadequate in terms of its capacity and good track record ofproviding guarantees, transparency, and liquidity.
We classify the Colombian government as ‘supportive’ towarddomestic banking. We recognize the government’s long trackrecord of providing support to the banking system in times ofexceptional duress.
RELATED CRITERIA AND RESEARCH
– Banking Industry Country Risk Assessment Methodology AndAssumptions, Nov. 9, 2011
– Standard & Poor’s BICRAs Highlight The Shifting BalanceIn Global Banking, Nov. 9, 2011
– S&P’s BICRAs Measure Banking Risks for 86 Countries, Nov.9, 2011