BAC acquisition not seen affecting Banco de Bogotá's profitability - Fitch

- Thursday, March 17, 2011

BAC acquisition not seen affecting Banco de Bogotá's profitability - Fitch

Colombia's second largest bank, Banco de Bogotá, is unlikely to see its profitability affected by the debt it took on to finance the purchase of Central American banking group BAC Credomatic, Fitch financial institutions director Santiago Muñoz told BNamericas.

BAC Credomatic is expected to contribute US$150mn-200mn in earnings annually over the next few years to Banco de Bogotá, he said. Banco de Bogotá booked a consolidated net income of US$474mn last year.

Besides, the group's main shareholder, local holding Grupo Aval, recently approved the issuing of 800mn-1.6bn preferred shares, which could be either listed locally or in the US and may help the bank prepay its debt, Muñoz said.

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While the issue's final price will be determined by the board next week, analysts believe the group could raise some 2.4tn pesos (US$1.28bn).

The US$1.92bn acquisition of BAC Credomatic, which was concluded in December 2010, was financed with a US$1.2bn capital injection in the form of BOCEAs - bonds compulsorily convertible into shares - and by US$443mn in cash. As of March 14, 95% of the BOCEAs had been converted to capital.

The remaining US$277mn was sourced from a US$1bn bridge loan from a consortium of international banks, which is expected to be paid off at the end of this year through a debt issuance.

"I would expect Banco de Bogotá to keep BAC's management and operations independent, and supervise them through the bank's new board. It's possible that there could be synergies in the risk area, but BAC's business focus is very different and there is a lot that Banco de Bogotá and Grupo Aval can learn from BAC's broad experience in retail banking and credit cards," Muñoz noted.

However, he warned about the transaction's merger and additional costs as well as the impact of goodwill on the bank's capital structure, which are still uncertain.

MOODY'S CONCERNS

The acquisition is sizable, since BAC Credomatic represents about half of Banco de Bogotá's assets. It is also the Colombian bank's first major cross-border move, and will allow it to enter six Central American markets.

Reflecting its concerns with transition risks and pressure on the bank's profitability, Moody's changed Banco de Bogotá's outlook to negative from stable.

"Together with the highly or fully dollarized nature of the economies in which BAC Credomatic is present, these factors could well expose the bank to integration risks, additional management costs, and the potential increase in credit costs derived from a much larger exposure to consumer credit, as indicated by BAC Credomatic's loan mix," the ratings agency said in a report.

Banco de Bogotá had US$30.8bn in assets and US$2bn in shareholders' equity at end-2010.

To read Moody's full report in English, go to this link

To read the full report in Spanish, go to this link