Fitch Affirms Asian Development Bank at 'AAA'; Outlook Stable

Tue Aug 5, 2014 10:45am EDT

(The following statement was released by the rating agency) PARIS, August 05 (Fitch) Fitch Ratings has affirmed the Asian Development Bank's (AsDB) Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and its Short-term IDR at 'F1+'. A full list of rating actions is available at the end of this comment. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following key rating factors: AsDB's capitalisation is strong but has been declining in the last four years, notably due to rising lending; the equity-to-adjusted assets ratio dropped to 20.7% in 2013 from 24.2% in 2009. As the capital increase in 2009 was mostly made up of callable capital (96%), equity growth has been limited. The bank's strategy is prudent. AsDB's self-imposed lending limit remains at a high level (USD120.6bn at end-2013) due to the recent capital increase. Approvals increased 9.7% in 2013 to USD10.2bn, of which 86% were sovereign loans. Sovereign loans accounted for 92.4% of its outstanding exposure at end-2013. The bank's treasury assets portfolio is large (22% of assets at end-2013) and mostly exposed to highly rated OECD sovereigns. Exposure to Japan (A+/Negative) is structurally high (35.3% of treasury assets at end-2013), which leads to a low share of 'AAA' and 'AA' rated assets (57% at end-2013) compared with other 'AAA' multilateral development banks. Despite its exposure to developing countries, the performance of the loan book remains excellent. AsDB had no loan impairments at end-2013, and its loan loss reserves covered most expected losses. The average rating of loans remained stable at an estimated 'BBB-' at end-2013, at the higher range of 'AAA'-rated MDBs. AsDB's loan portfolio is highly concentrated. The five largest exposures accounted for 244.9% of AsDB's equity and 77.8% of loans at end-2013, which is high compared with peers. However, apart from Pakistan, these large exposures are all investment-grade: China (A+/Stable), India, Indonesia and Philippines (all BBB-/Stable). Interest rate, foreign currency and credit risks on treasury assets and derivatives are prudently managed. Fitch considers that AsDB's risk management framework is of a high standard and will remain compatible with the 'AAA' rating. The 2009 capital increase highlights the support AsDB enjoys from its shareholders. This is mitigated by the large share of callable capital in the capital increase, and by the delay taken by the US (AAA/Stable) to subscribe. The capacity to support is strong, as shown by the full coverage of net debt by 'AAA'-rated callable capital, although this could weaken in the medium term due to debt growth. The average rating of key shareholders ('AA-' as of July 2014) was affected by the downgrade of Japan in 2012 to 'A+'. RATING SENSITIVITIES The Stable Outlook reflects Fitch's expectation that AsDB's financial profile will remain commensurate with the 'AAA' rating. AsDB's 'AAA' Long-term rating would be jeopardised only if both shareholders' support and intrinsic factors come under pressure. Shareholder support would be affected by a downgrade of one of the major shareholders, to the extent that it lowers the level of 'AAA'-rated callable capital. A marked decline in AsDB's capitalisation or deterioration in leverage and liquidity measures would be detrimental to the bank's intrinsic credit quality. Serious decline in asset quality would also affect ratings. KEY ASSUMPTIONS Fitch assumes that shareholders' willingness to support the bank will remain strong, notably that callable capital from highly rated key shareholders would be paid in if called by the bank. The rating actions are as follows: - Long-term IDR: affirmed at 'AAA', Outlook Stable - Short-term IDR: affirmed at 'F1+' - NZD5bn senior unsecured domestic medium term note programme: affirmed at 'AAA'/'F1+' - USD10bn senior unsecured medium term note programme: affirmed at 'AAA'/'F1+' - AUD5bn senior unsecured medium term note programme: affirmed at 'AAA' - MRY3.8bn senior unsecured medium term note programme: affirmed at 'AAA' - Senior unsecured notes: affirmed at 'AAA' Contact: Primary Analyst David Lopes Associate Director +33 1 44 29 91 45 Fitch France SAS 60 rue de Monceau 75008 Paris Secondary Analyst Eric Paget-Blanc Senior Director +33 144 299 133 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. 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