TEXT-S&P affirms Asian Development Bank 'AAA/A-1+' FC ratings
As of Dec. 31, 2011, 48 members from Asia-Pacific owned 63.4% of the bank and 19 nonregional members owned the remainder. While Japan (unsolicited ratings AA-/Negative/A-1+) and the U.S. (unsolicited ratings AA+/Negative/A-1+) have always been the AsDB's the largest shareholders (currently owning 15.7% each), the bank's shareholder base is diversified with eight governments owning more than 5% of its capital. These include Australia (unsolicited ratings AAA/Stable/A-1+), Canada (AAA/Stable/A-1+), China (AA-/Stable/A-1+; cnAAA/cnA-1+), India (unsolicited ratings BBB-/Negative/A-3), Indonesia (BB+/Positive/B; axBBB+/axA-2) and Korea (foreign currency A+/Stable/A-1+, local currency AA-/Stable/A-1+).
Our business profile assessment is based on our view of the AsDB's role, public policy mandate, membership support, and our expectation that the bank will continue to receive preferred creditor treatment (PCT). There is strong historical evidence of the AsDB's PCT; in 1998-2002, the bank continued to receive timely repayments from both Indonesia and Pakistan even as these countries defaulted on some of their foreign commercial debt. Although there have been a few instances of arrears by Myanmar, Nauru, and Marshall Islands, the amounts were small and were eventually repaid, including interest. As of Sept. 30, 2012, the AsDB has no sovereign loans in nonaccrual status; it has never had to write off a sovereign loan funded from its Ordinary Capital Resource.
The five successful rounds of general capital increases since the AsDB's inception underscore the importance of the bank's policy role and strong shareholder support. The first four capital increases were completed with timely contributions. The latest capital increase was initiated in April 2009 to ensure that lending levels remain in line with the goals of the bank's "Strategy 2020" plan. The paid-in contributions will come up to US$4 billion, payable in equal annual installments over five years, and will more than double the AsDB's paid-in capital from its 2008 level.
The AsDB's financial profile reflects its capital adequacy and its funding and liquidity. Standard & Poor's primary metric to assess capital adequacy, the risk-adjusted capital (RAC) ratio, was 28% before adjustments at year-end 2011. However, after taking into account adjustments specific to MLIs, the RAC ratio falls to 19%. For the AsDB, the chief adjustment is a concentration penalization for sovereign exposures, which our expectation of continuing PCT offsets to an extent. China, India, Indonesia, Philippines, and Pakistan were the top five credit exposures at year-end 2011. These countries have accounted for 84%-89% of total loan and guarantee exposure over the past three years. The AsDB incurred a US$437 million unrealized loss for applying an enhanced swap valuation methodology to its derivative book in the first three quarters of 2012. Nevertheless, we expect the bank to be profitable (on an operating basis) for full-year 2012 and believe that its capacity to generate capital internally is undiminished.
Our funding ratios (excluding loan disbursements) indicate that the AsDB has no funding gaps over the next one to five years. Moreover, the bank is a frequent debt issuer across global markets. Its liquidity ratios are lower than those of some other MLIs. In addition, the AsDB's guarantee book is growing. Our liquidity stress-test scenario indicates that the AsDB has the capacity to forego market funding for nearly 12 months, although it would have to slow scheduled loan disbursements under such stressed market conditions.
Callable capital is important for the AsDB's franchise value, in our opinion. We quantify this support by adding eligible callable capital to the numerator of the RAC ratio. As of year-end 2011, the RAC ratio including callable capital from 13 'AAA'-rated shareholders translates into a "very strong" financial profile for AsDB. This results in one notch of rating support over the bank's SACP.
The stable outlook reflects our expectation that the AsDB's extremely strong business profile will remain anchored by major borrowers treating the bank as a preferred creditor. The outlook also reflects our opinion that the AsDB will continue to execute its policy role effectively, maintaining the sustained financial support of its shareholders. We view the bank's capital levels, funding, liquidity, and its 'AAA' callable capital as sufficiently robust to keep rating pressure at bay.
The rating could come under pressure if, contrary to our expectations, the management adopts more aggressive funding or leverage policies, if the bank's derivative activities generate operating losses, or if one of the bank's larger borrowing members defaults on loans from the bank.
Related Criteria And Research
-- Into The Weeds Of The Revised Multilateral Lending Institutions Criteria, Dec. 19, 2012
-- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012
-- Supranationals Special Edition 2011, Sept.23, 2011
Asian Development Bank
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+