Fitch Places Bancolombia's Individual & Local Currency on Watch Negative.

MONTERREY, Mexico -- Fitch has placed Bancolombia's 'C' Individual rating and its 'BBB-' and 'F3' local currency long and short term Issuer Default Ratings (IDRs) on Rating Watch Negative. This follows the announcement that Bancolombia will acquire, through its wholly-owned Panamanian subsidiary, a controlling stake in Banagricola, the Panamanian holding company of El Salvador's largest bank, Banco Agricola and its subsidiaries Asesuisa (insurance) and AFP Crecer (pension fund management), as well as the small-sized Panamanian bank Banco Agricola Panama. In addition, Banco Agricola's Support rating at '5' has been placed on Watch Positive following this announcement.

After receiving regulatory approvals in Panama and El Salvador, Bancolombia Panama will launch a tender offer to acquire all outstanding shares of Banagricola; the owners of the controlling 52.9% stake in the latter have already agreed to sell their shares. Bancolombia will offer roughly US$900 million for all outstanding Banagricola's shares (2.1 times book value).

The impact of this transaction on Bancolombia's consolidated financial profile will depend on the proportion of shares that will be successfully acquired. The capital structure to finance this purchase and its accounting treatment will be confirmed upon conclusion of the offer. However, Fitch considers that the acquisition will likely affect Bancolombia's overall capital adequacy. While the bank expects to comply with Colombian regulatory capital ratios, in Fitch's view, the proposed transaction will negatively affect the levels and quality of Bancolombia's consolidated capital. As Bancolombia's capital is currently made up largely by Tier I capital, the financing of the acquisition will likely involve the issue of Tier II subordinated debt or hybrid instruments. The eventual amount to be issued will be determined in part by the results of the tender offer, and further terms of the eventual issue are not yet determined, making it impossible at this time to judge the debt- or equity-like makeup of the bank's proposed Tier II securities. In addition, consolidated capital will be encumbered to some degree by the potentially hefty goodwill generated in the transaction (it is important to recall that unlike most regulators, Colombian bank supervisors do not require the deduction of goodwill from regulatory capital ratios).

Fitch believes that Bancolombia's Individual rating would likely be downgraded to 'C/D' should a large portion of the purchase be funded through largely debt-like hybrid securities (see Fitch's criteria piece 'Equity Credit for Hybrids & Other Capital Securities' dated Sept. 27, 2006 for further details on the treatment of hybrids for banks' capital assessment). Since a downgrade in the Individual rating could potentially drive a downgrade in Bancolombia's 'BBB-' and 'F3' local currency IDRs, these were also placed on Watch Negative. In turn, the bank's foreign currency ratings at 'BB+' (long-term) and 'B' (short-term) are not expected to be affected.

Alternatively, upon conclusion of the offer the bank's ratings could be affirmed and removed from the Negative Rating Watch under some circumstances, especially if the acquisition is largely financed with more equity-like funds under Fitch's criteria, Bancolombia's ability to rapidly rebuild capital is enhanced, and the acquisition is not seen as negatively affecting other critical rating factors, namely asset quality, profitability, liquidity and strategy.

Placing Banco Agricola's '5' support rating on Watch Positive reflects Fitch's view that, upon conclusion of the purchase, Agricola will benefit from a moderate possibility to receive institutional support from Bancolombia, should it be required. Agricola's IDRs and Individual rating are unlikely to be affected in the near future by this transaction.

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