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Rating Action:

Moody's reviews Salvadoran banks' ratings for downgrade

18 Nov 2020

New York, November 18, 2020 -- Moody's Investors Service ("Moody's") has today placed on review for downgrade all long-term ratings and assessments of Banco de Desarrollo de El Salvador (Bandesal) and Banco Agrícola, S.A.. At the same time, Moody's affirmed the Not Prime (NP) short term ratings of these entities. A full list of affected ratings can be found at the end of this press release.

The rating actions follow the announcement by Moody's Investors Service, published on 16 November 2020, that it had placed the B3 bond ratings of El Salvador's government on review for downgrade. For additional information, please refer to the related press release: "Moody's places El Salvador's B3 ratings on review for downgrade" (https://www.moodys.com/research/Moodys-places-El-Salvadors-B3-ratings-on-review-for-downgrade--PR_434918).

Moody's has today also revised its Macro Profile for El Salvador's banking system to "Very Weak +", from "Weak", to incorporate the more challenging operating environment for banks stemming from the deterioration of the economic prospects and the government's higher liquidity risks.

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

The actions on Bandesal and Banco Agrícola were prompted by a similar action on El Salvador's B3 bond rating, which was placed on review for downgrade. Both banks' BCAs are currently constrained by the B3 sovereign rating, and therefore a downgrade of the government bond rating would unequivocally drive a downgrade of the banks' BCAs, which would in turn lead to a downgrade of all their long-term ratings. Bandesal's B3 long-term issuer rating is currently placed at the level of the sovereign while Banco Agrícola's B1 deposit rating is placed two notches above, at the level of El Salvador's country ceiling. As one of Bancolombia, S.A.'s (deposits Baa2 stable, BCA ba1) most important Central American franchises, Banco Agrícola's deposit ratings benefit from Moody's assessment of a high probability of support from its parent, which results in two notches of ratings uplift to the bank's b3 BCA, to its deposit rating.

The sovereign action reflects an important increase in El Salvador's government liquidity risks, given a large increase in gross financing needs, limited ability to increase reliance on domestic market financing and very tight financing conditions in external markets. The review period of the sovereign rating will allow Moody's to assess the administration's policy response to address financing constraints and to evaluate if the government's fiscal consolidation plans for 2021 and beyond will prove effective in assuring debt sustainability. The review of the banks' ratings will also focus on the implications of the deterioration in the sovereign's debt sustainability prospects for the local banking system, in particular for Bandesal and Banco Agrícola, in light of the system's increasing exposure to sovereign debt.

Bandesal's ratings capture the bank's relatively good asset quality, which benefits from its preferred creditor status in El Salvador. Asset quality metrics remain sound amid the economic implications of the pandemic, but government-mandated loan restructurings to provide relief to borrowers cloud the view on underlying credit quality. Bandesal's profitability has historically been low as a result of its development bank role and its focus on low-yielding lending to other financial institutions, coupled with its dependence on relatively more expensive funding, although it has improved in the first nine months of 2020 due to a decrease in funding costs. Bandesal's capitalization remains stable and strong, supported by low dividend payments to the government.

Banco Agrícola's ratings capture its strong and stable profitability that benefits from ample net interest margins derived from a broad and inexpensive deposit base. Stable asset quality in 2020 however could deteriorate in the coming quarters as loan deferrals end, but prudential provisions against credit losses, representing 3.0x NPLs as of June 2020, could help mitigate credit risk. Banco Agrícola's capitalization remains adequate, although it has decreased in recent years driven by high dividend payments, which were partly offset by cautious loan growth and strong earnings generation.

EL SALVADOR MACRO PROFILE LOWERED TO VERY WEAK + FROM WEAK

Moody's has lowered its Macro Profile for El Salvador to "Very Weak+" from "Weak" to reflect the impact on banks' operating environment of the increased government liquidity risks, amid the severe economic contraction led by the pandemic outbreak. El Salvador's macro profile continues to reflect its relatively small economy, which is dependent on remittances from El Salvadorans living abroad and low-value added exports to the US. Economic growth has been relatively low even before the pandemic outbreak, hindered by low investment and low productivity rates. The country has a history of political confrontations between the executive and legislative branches that frequently prevent progress on needed reforms to address economic and fiscal challenges.

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

An upgrade is unlikely for Bandesal and Banco Agrícola at this time because the ratings are on review for downgrade. However, the outlooks could be changed to stable following a stabilization of El Salvador's sovereign ratings outlook, provided that operating conditions for the banks stabilized and their asset risk, funding and liquidity metrics would not deteriorate.

Conversely, downward pressure on banks' ratings would develop following a downgrade of the sovereign rating, reflecting the high interlinkages between banks' creditworthiness and that of the government.

ISSUERS AND RATINGS AFFECTED

..Issuer: Banco de Desarrollo de El Salvador

On Review for Downgrade

.Baseline credit assessment and adjusted baseline credit assessment, Placed on Review for Downgrade, currently b3

.Long-term foreign currency issuer rating, Placed on Review for Downgrade, currently B3, Outlook Changed To Ratings Under Review From Positive

.Long-term foreign currency counterparty risk rating, Placed on Review for Downgrade, currently B2

.Long-term counterparty risk assessment, Placed on Review for Downgrade, currently B2(cr)

Affirmations:

.Short-term foreign currency counterparty risk rating at Not Prime

.Short-term counterparty risk assessment at Not Prime(cr)

Outlook action:

. Outlook Changed To Rating Under Review From Positive

..Issuer: Banco Agrícola, S.A.

On Review for Downgrade

.Baseline credit assessment, Placed on Review for Downgrade, currently b3

.Adjusted baseline credit assessment, Placed on Review for Downgrade, currently b1

.Long-term foreign currency deposit rating, Placed on Review for Downgrade, currently B1, Outlook Changed To Ratings Under Review From Positive

.Long-term foreign currency counterparty risk rating, Placed on Review for Downgrade, currently B1

.Long-term counterparty risk assessment, Placed on Review for Downgrade, currently B1(cr)

Affirmations:

.Short-term foreign currency deposit rating at Not Prime

.Short-term foreign currency counterparty risk rating at Not Prime

.Short-term counterparty risk assessment at Not Prime(cr)

Outlook action:

. Outlook Changed To Rating Under Review From Positive

METHODOLOGIES

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.

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.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marcelo De Gruttola
Vice President - Senior Analyst
Financial Institutions Group
Moody's Latin America ACR
Ing. Butty 240
16th Floor
Buenos Aires City C1001AFB
Argentina
JOURNALISTS: 1 800 666 3506
Client Service: 1 212 553 1653

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
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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