Fitch Affirms Banco Agrario De Colombia's FC IDR at 'BBB'; Outlook Stable
KEY RATING DRIVERS
IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR
Banagrario's ratings are aligned with those of the sovereign, reflecting Fitch's assessment of the Colombian government's willingness and capacity to provide timely support to Banagrario if needed. Although the Colombian government does not explicitly guarantee Banagrario's liabilities, Fitch views the entity as an integral arm of the state given its key role in the development of the government's agricultural policy, among other policy roles. Banagrario is Colombia's main development tool for the agricultural sector. The bank is the largest individual source of financing for the sector. Banco Agrario is wholly owned by the Colombian government through the Ministry of Finance and Public Credit which held 99.99% of shares as of June 2015, and linked to the Ministry of Agriculture and Rural Development.
The ability of the Colombian government to support Banagrario is reflected in Colombia's sovereign ratings ('BBB/BBB+'/Outlook Stable) and underpins the bank's Support Rating of '2' and Support Rating Floor of 'BBB'. The bank's Support Rating and Support Rating Floor reflect Fitch's opinion that there is a high probability of sovereign support.
The Stable Outlook is aligned with the sovereign rating outlook. Changes in the bank's IDRs would reflect changes in the sovereign rating.
VR
Banagrario's VR reflects its franchise in the agricultural segment, where it stands out as an instrument for the execution of the government agricultural policy, being the largest funding provider for small and medium sized producers. Banagrario has a moderate size and a discernible competitive advantage in the agricultural segment, strengthened by the lower interest rates achieved with government subsidies for interest rates, and low funding costs. The bank has a key policy role to promote the consistent and sustainable development of agricultural sector. Banagrario has a wide geographic coverage of the Colombian territory with its own network of branches, nonbanking correspondents and ATMs and with several strategic alliances.
Banagrario's Statute establishes its primary function and self-regulation. According to the Statute, at least 70% of the bank's loan portfolio must be directed to rural, agricultural, cattle breeding, fish farming, forestry, agro-industrial, among others activities. Its less diversified business model determines higher exposure to specific risks in the agricultural segment, such as adverse weather conditions and changes in the international prices of commodities and producers strikes.
The bank's VR also considers its consistent profitability, adequate capitalization and diversified funding. Banagrario's VR is limited by its concentrated business model, vulnerable to risks inherent to the agricultural segment, and its high delinquency ratios.
Asset quality is weak compared to the Colombian banking system and international peers. Impaired loans ratios are highly sensitive to changes in the agricultural sector. The higher risk of its main segment explains its high rate of non-performing loans and restructured loans. However, Fitch views the large proportion of the loan portfolio covered by tangible collateral as a key risk control tool.
Banagrario's profitability is consistently above the Colombian market average, underpinned by constant asset growth, moderate operating costs and ample income diversification. Earnings as of June 2015 also benefit from reduced provision requirements generated by improvements in asset quality. The bank's net interest margin is below market average, limited by high proportion of assets allocated in in debt instruments issued by the government. These assets are held to maturity and contribute to income diversification and profit stability.
Consistent internal capital generation underpins Banagrario's adequate capital position. Regulatory capital ratios maintain a buffer over regulatory minimums; however, tangible common equity to tangible assets is below market average, and most capital adequacy metrics have trended downward recently, partially explained by changes in accounting standards. In turn, Banagrario's funding is diversified between low-cost and diversified deposits and from financial resources from state agencies or government funds. The funding profile also benefits the bank's term matching of its assets and liabilities and liquidity position.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's IDRs, national and senior debt ratings are sensitive to a change in Fitch's assessment on the Colombian government ability and propensity to support the bank. They could be changed as a result of a similar sovereign rating action.
The SR is potentially sensitive to any change in the propensity or ability of the Colombian sovereign to provide timely support to the bank.
VR
The bank's VRs are sensitive to changes in the capital position or asset quality. A sustained and material deterioration in Banagrario's asset quality metrics that jeopardize the bank's capital position by reducing its Fitch core capital ratio or buffers over minimum regulatory capital requirement may trigger a VR downgrade. Banagrario's VR could be upgraded in response to a material improvement in the bank's asset quality, although upside potential is also somewhat limited by its concentrated and relatively riskier business model.
Fitch affirms the following ratings:
Banco Agrario de Colombia
--Foreign currency long-term Issuer Default Rating (IDR) at 'BBB';
--Foreign currency short-term IDR at 'F2';
--Local currency long-term IDR at 'BBB+';
--Local currency short-term IDR at 'F2';
--Viability Rating (VR) at 'bb';
--Support Rating at '2';
--Support Rating Floor at 'BBB'.
The Rating Outlook is Stable.
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