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Correction: Fitch Affirms European Bank for Reconstruction and Development at 'AAA'; Outlook Stable
October 20, 2017 / 1:15 PM / in 2 months

Correction: Fitch Affirms European Bank for Reconstruction and Development at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) This is a correction of a rating action commentary (RAC) published on 8 December 2016 for a data error associated with ratable ID US29874QCW24. This ratable ID was incorrectly omitted from the Rating Information Disclosure Form (RIDF) associated with this RAC and is now included. Fitch Ratings has affirmed the European Bank for Reconstruction and Development's (EBRD) 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 at the end of this rating action commentary. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following key rating factors: EBRD's ratings are underpinned by the bank's intrinsic features, especially its excellent capitalisation, which is key in achieving a solvency assessment of 'aaa'. The bank's ratio of equity to assets net of derivative instruments was 26.5% at 1H16 (2014: 26.8%), in the high range of 'AAA' rated peers. This high level of capitalisation is maintained despite high volatility in internal capital generation, resulting from the fluctuations in the valuation of its equity participations portfolio. As of 1H16, the bank posted a EUR122m net loss after transfers approved by its Board, driven by EUR294m valuation losses on its equity stakes, compared to a net profit of EUR442m at end-2015, with the biggest contribution from a EUR197m gain in equity valuations. In the medium term, Fitch expects profitability to be impacted by higher impairments, due to the bank's increasingly challenging operating environment. As total equity is projected to grow in line with banking exposures and liquid assets, the capitalisation ratio is expected to remain broadly stable in the coming years. Fitch considers EBRD's excellent capitalisation as key to maintain its intrinsic profile assessment and its 'AAA' rating. Fitch assesses EBRD's overall risk exposure as low. Within the risks analysis, we assess credit risk as medium. Based on Fitch's estimates, EBRD's average rating of loans and guarantees was 'B+' at 1H16 (stable since end-2013). Although EBRD's preferred-creditor status does not fully apply to the majority of the bank's loans, Fitch assumes that it would provide a moderate level of protection against the imposition of capital controls on its private-sector exposures. In accordance with Fitch's criteria, EBRD's impaired asset ratio is high, at 5.7% of gross loans in 1H16 (2014: 5.6%), which primarily results from the bank's low exposure to sovereign borrowers, relative to some regional 'AAA' rated peers. We expect this ratio to slightly deteriorate within the forecast horizon, as a result of EBRD's operations in Ukraine and increasing exposure to challenging regions. However, the NPLs ratio is covered comfortably by loan loss provisions (1.8 times impaired loans as of 1H16). The risk associated with equity participations is medium. Equity stakes accounted for 18.4% of total loans and equity exposures at 1H16, a markedly higher proportion than other regional multilateral development banks (MDB). Equity stakes remain heavily concentrated in Russia (32% of equity exposures as of 1H16), and to a lesser extent, Turkey (BBB-/Negative, 9%). Overall, although EBRD's total banking exposure is strongly exposed to Turkey, Russia (BBB-/Stable) and Ukraine (B-/Stable), its portfolio is geographically more diversified than those of other regional MDBs, as evidenced by the rapid growth of operations in the Southern and Eastern Mediterranean region and in Asia. Loans exposure to Russia has noticeably declined compared to 2013, as EBRD is not extending any additional financing to this country until further notice. EBRD's risk management framework is excellent. The bank abides by strict, self-imposed capitalisation, gearing, liquidity and underwriting criteria. Liquidity guidelines were tightened in 2015 and now require the bank to add an extra liquidity buffer to its minimum liquidity requirements. At 69% in June 16, EBRD's self-calculated gearing ratio was well below its prudential limit of 92%. Liquidity is assessed at 'aaa'. EBRD's liquidity buffer is in line with 'AAA' rated MDBs, as evidenced by the excellent coverage of short-term liabilities by liquid assets (1.7x as of 1H16), which Fitch expects to remain at current levels in the medium term. As of 1H16, 54.8% of liquid assets were rated 'AAA'-'AA'. The bank's liquidity profile is also supported by its excellent access to capital markets. We assess EBRD's business environment as medium risk. The bank's operating environment is characterised by the medium credit quality and political risk in countries of operations, such as its increasing exposure to Turkey and to the Southern and Eastern Mediterranean region (Egypt (B/Stable), Morocco (BBB-/Stable), Jordan and Tunisia (BB-/Negative)). Fitch's assessment of the bank's business profile is driven by its high share of exposure to private-sector counterparties (88% of total exposures), which is mitigated by the low political risk in its country of head office (the UK) as well as EBRD's high-quality organisational structure. In accordance with Fitch's criteria, support from shareholders is not taken into consideration in the overall rating since the net debt is not fully covered by highly-rated callable capital. Given the excellent intrinsic strength of the bank, no credit uplift from support is needed to achieve an overall rating of 'AAA'. RATING SENSITIVITIES The following developments could, individually or collectively, affect EBRD's ratings: --Deterioration in EBRD's capitalisation ratio, for example reflecting heavy losses on equity investments or on lending operations, could have negative rating implications. -- Substantial asset quality deterioration from a large country of operation, such as Turkey, Russia or Ukraine, could have negative rating implications. KEY ASSUMPTIONS Fitch assumes that EBRD will continue to abide by a cautious prudential framework on capitalisation, leverage, liquidity and loan selection. The full list of rating actions is as follow: Long-Term IDR: affirmed at 'AAA', Outlook Stable Short-Term IDR: affirmed at 'F1+' Market Linked Securities, Long-Term rating affirmed at 'AAA' Senior unsecured long-term rating affirmed at 'AAA' Senior unsecured, short-term rating affirmed at 'F1+' Contact: Primary Analyst Vincent Martin Director +44 20 3530 1828 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Tony Stringer Managing Director +44 20 3530 1219 Committee Chairperson Eric Paget-Blanc Senior Director +33 1 44 29 91 33 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Sources of information - In addition to the Supranationals Rating Master Criteria, , this action was additionally informed by information from the European Bank for Reconstruction and Development, and by the European Bank for Reconstruction and Development's annual and interim financial report. Additional information is available on www.fitchratings.com Applicable Criteria Supranationals Rating Criteria - Effective from 27 July 2016 to 18 May 2017 (pub. 27 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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