(Repeat for additional subscribers)
June 19 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Islamic Development Bank's (IsDB) Long-term Issuer
Default Rating (IDR) at 'AAA' with a Stable Outlook and its Short-term IDR at 'F1+'.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following key rating factors:
IsDB is one of the strongest-capitalised multilateral development banks (MDBs)
rated by Fitch, with an equity-to-assets ratio of 54% and a debt-to-equity ratio
of 79.5% at end-1434H (3 November 2013 in the Gregorian calendar). Although
capitalisation has been steadily declining due to a scale-up in operations since
the global financial crisis, Fitch believes that capital buffers are large
enough to ensure continued strong capitalisation in line with targeted growth of
Credit risk remains moderate but higher than peers, arguing for stronger capital
buffers than peers. The estimated average rating of non-equity operations was
'B+' at end-1434H, at the lower range of peers, but 85.5% of them were extended
to or guaranteed by sovereigns, on which the bank benefits from preferred
creditor status. Private sector operations are higher than in some peers (21.7%
of total operations, including equity stakes), but impairments based on IsDB's
definition have historically remained low, at 1% of non-equity operations at
end-1434H, and are adequately provisioned for. The moderate level of country and
obligor concentration also mitigates credit risk arising from non-equity
IsDB has higher equity participations (accounting for 8.4% of total operations
at end-1434H) than commonly seen among peers, which represents a rating
weakness. However, concentration in this portfolio is moderate and risks are
mitigated by IsDB's long-term outlook on these equity participations and
disposals have usually been made at a profit with favourable timing.
Other risks are manageable. Liquidity is adequate, with treasury assets covering
153.3% of short-term liabilities at end-1434H, in line with peers. Only 24.2% of
treasury assets were invested in instruments (mostly bank deposits) rated 'AA-'
and above at end-1434H, but the risk is mitigated by heavy recourse to
short-term maturities in a diversified range of banks. Interest-rate and
foreign-exchange risks are tightly hedged.
Risk management is conservative and the bank consistently abides by its
self-imposed risk management framework. Even though some limits have recently
been relaxed (the leverage limit was raised to 100% from 50%), the risk
framework remains stringent, and IsDB is progressively aligning it (eg, on the
liquidity policy and new capital adequacy framework) with that of other
As is typical of most MDBs, IsDB is not profit-oriented and does not distribute
dividends. Profits are moderate compared with commercial banks, but are steady
and in line with peers (with a return on equity of 2.5% in 1434H), ensuring
regular equity strengthening.
Shareholder support, a secondary rating driver, remains strong. The credit
quality of member countries is lower than usually observed among peers, with an
estimated average rating of 'BBB-' at end-1434H; however, they have consistently
demonstrated their propensity to support the bank through regular inflows of
fresh capital. The latest general capital increases will increase callable
capital threefold while adding another 3.6bn Islamic dinars (equivalent to the
SDR) in paid-in capital over 20 years, which will support expected growth in
The Stable Outlook reflects Fitch's assessment that downside risks to the 'AAA'
rating are currently not material. Given that IsDB's ratings are not driven by
support, a moderate weakening in the credit quality of the shareholders would
not jeopardise the ratings.
Downward pressure on IsDB's ratings would result from pronounced deterioration
of asset quality or unexpected deterioration in capitalisation and leverage.
Fitch assumes that shareholders' willingness to support the bank will remain