(The following statement was released by the rating agency)
PARIS/LONDON, March 25 (Fitch) Fitch Ratings has revised the
International Investment Bank (IIB)'s Long-term Issuer Default
Rating (IDR) to
Negative from Stable and affirmed the rating at 'BBB-'. The
Short-term IDR has
been affirmed at 'F3'.
KEY RATING DRIVERS
The change in IIB's Outlook follows the change in the Outlook on
(BBB) to Negative from Stable on 21 March 2014. IIB's ratings
rely primarily on
support from Russia, which is the bank's largest shareholder
with 56% of
capital. In Fitch's opinion, the commitment of the bank's eight
which have an average rating of 'BBB', is strong, as evidenced
commitment to increase the bank's capital by EUR100m in 2014-15.
IIB's ratings also reflect the following key rating drivers:
Although Russia is the dominant shareholder of the bank, IIB is
rated one notch
below that of the Russian sovereign. This reflects the
governance structure of
the bank, whereby each member state has an equal weight in the
irrespective of its capital contribution (including smaller
member states such
as Cuba, Vietnam or Mongolia), therefore potentially making
difficult in times of stress. Additionally, the collective
influence of other
member states on the bank is significant, as evidenced by their
of allocated callable capital.
The revival of the bank in 2012 has implied a complete overhaul
of the business
model, which has been agreed by shareholders. IIB is a small
bank, with total
assets of EUR400m at end-June 2013; it intends to grow
aggressively in the
coming years, focusing on loans to commercial banks and
development banks in its
member countries to on-lend to SMEs and to foster trade
relations among member
countries; it will also extend project financing to corporates
in its member
IIB benefits from a robust capital base, largely unused over the
past 20 years,
and was almost debt-free at end-June 2013. Equity to assets
ratio and capital
adequacy ratio (based on Basel II standards) were respectively
89% and 84.6% at
end-June 2013. This buffer will erode despite the capital
increase as the loan
book grows but Fitch expects capitalisation to remain strong and
moderate in the coming years.
The bank has an extremely poor track record of credit risk in
its loan portfolio
and is in the process of addressing this legacy issue. At
end-June 2013, NPLs
accounted for 57% of gross loans (2012: 83.2%) as most loans
2010 were impaired. However, virtually all NPLs have been
written off as of
end-2013, enabling the bank to clean up its balance sheet.
expects the bank to incur impairments as the loan book grows and
Capital buffers are sufficient to absorb significant losses but
would be negatively affected.
Profitability has been weak historically, even by industry
standards, and Fitch
expects it to remain low despite an expected rise in interest
income as the loan
book grows. This is likely to constrain IIB's ability to
strengthen its equity
base from profit generation to sustain the development of its
The management team of IIB, which has been significantly
reorganised, is in the
process of implementing a new risk management framework, which
looser than usually observed in other sub-regional multilateral
banks. The framework is not yet fully implemented and despite
the resumption of
lending since 2012, it remains largely untested, and is
currently a constraint
on IIB's intrinsic credit quality.
The main factors that, individually or collectively, could
result in a rating
- A change in the rating or Outlook of Russia, which would have
impact on the rating/Outlook of IIB. Over time, a substantial
Russia's ownership could allow higher-rated sovereigns to
increase their share
ownership, which would reduce the reliance of IIB's rating on
- Further evidence of shareholders' support to the bank,
including through a
clearer governance structure enabling each member state to exert
the bank in line with their ownership would be credit positive.
evidence of reluctance by member states to provide support would
to the rating.
- Progressive building of a track record of prudent growth and
risk management in the loan and treasury portfolios associated
with the self-imposed prudential framework would be credit
Fitch assumes that the EUR100m capital increase approved by the
in 2013 will be fully disbursed on a timely basis by all
states in 2014- 2015.
Fitch assumes that, over the short- and medium-term, the
structure of IIB will not change materially.
Fitch assumes that the mandate and investment strategy of IIB
consistent with that outlined in Key Rating Drivers above.
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Additional information is available on www.fitchratings.com
Applicable criteria, 'Rating Multilateral Development Banks'
dated 23 May 2012
are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Rating Multilateral Development Banks
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