TEXT - Fitch affirms International Bank for Reconstruction & Development
(The following statement was released by the rating agency) Feb 12 - Fitch Ratings has affirmed the International Bank for Reconstruction & Development's (IBRD) Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and Short-term IDR at 'F1+'. RATING RATIONALE IBRD's ratings are supported by the bank's intrinsic strengths, including its solid capitalisation, its excellent asset quality, its conservative risk management policies and adequate liquidity. Additionally, Fitch considers shareholders' willingness and ability to support the bank as strong. The bank is strongly capitalised despite the regular decline of capitalisation in recent years. At 18x at June 2012, Fitch's ratio of usable to required capital compared favourably with peers. The debt to equity ratio was moderate, at 406.3%, and the bank benefits from excellent financial flexibility. Despite the expected proceeds from the 45.4% capital increase, which will be spread until 2016, capitalisation should slightly weaken and leverage slightly increase in coming years: activity should remain strong and the IBRD, subject to the adequacy of reserves, intends to maintain significant transfers to the International Development Association (IDA), another branch of the World Bank Group. The excellent credit risk represents a rating strength. Loans extended to investment-grade member states at June 2012 were 67.8% of the total, one of the highest rates among peers and the average rating of loans was 'BBB-'. The marginal non-performing loan (NPL) rate (0.3% of gross loans at June 2012) is underpinned by the bank's preferred creditor status as loans are only made to sovereigns or sovereign-guaranteed borrowers. Even though the IBRD is strongly concentrated, with the five largest loans accounting for 166.5% of its equity, this ratio is in line with peers, and nine of the 10 largest borrowers are rated in the investment-grade category. Liquidity is lower than for peers, with treasury assets accounting for 11.7% of total assets at June 2012. However, Fitch deems liquidity adequate as treasury assets structurally cover short-term liabilities and are particularly liquid. Their excellent credit quality (nearly 80% were rated 'AA-' and above at June 2012) also limits the potential losses of the bank on its investment portfolio. This reflects the bank's conservative risk management framework. Despite IBRD's ability to generate a rather resilient operating income, profitability is volatile because of the accounting asymmetry in valuation of borrowings and loans, which generated a net loss in FY12. The bank also recorded a large negative adjustment to other comprehensive income related to the accounting treatment of liabilities under its pension plan. The bank's equity cushion is therefore subject to volatility. Shareholder support is very strong. Capital is held by 188 member states, with the United States ('AAA'/Negative) holding the largest share (16.5% of subscribed capital). Most of the capital takes the form of callable capital, which the member states commit to provide in case of need. Fitch deems shareholders' ability to support the bank as strong, in line with peers; their willingness to support the bank is excellent given its visibility for member states. Given the diversification of its shareholder base and its intrinsic strengths, the ratings of the IBRD would be resilient to a downgrade of some large 'AAA'-rated shareholders, including the US, into the 'AA' category. RATING SENSITIVITES The Stable Outlook reflects Fitch's anticipation of conservative risk management that is expected to translate into continuing adequate capitalisation, leverage, credit risk and liquidity. The main factors that could lead to a negative action, individually or collectively, are: - A strong and unexpected rise in losses resulting from weaker risk management procedures or an invalidation of the bank's preferred creditor status (particularly on one of the largest exposures) - A prolonged and significant decline in capitalisation related to asset losses, fast growth in operations or increase in P&L volatility - A structural weakening of liquidity. KEY ASSUMPTIONS AND SENSITIVITIES The ratings and Outlook are sensitive to a number of assumptions. - Fitch assumes that borrowing member states, even if experiencing severe difficulties (such as Argentina - 'CC'), will preserve the bank's preferred creditor status should they decide to default selectively to their creditors - Fitch makes the assumption that despite the gradual deterioration in capitalisation and leverage, those metrics will remain consistent with a 'AAA' rating - Finally, shareholder support is expected to remain strong. The invalidation of such scenarios could be detrimental to IBRD's ratings. (Caryn Trokie, New York Ratings Unit)
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