November 10, 2017 / 3:31 PM / a year ago

Development bank EBRD wants 50 pct hike in cost ratio-sources

* Sources say EBRD wants to raise to cost-to-income ratio limit

* Plan to raise ratio maximum to 50 pct from 33 pct

* Moscow riled after Russia portfolio deterioration cited

By Marc Jones

LONDON, Nov 10 (Reuters) - Triple-A rated development bank, the EBRD, is tapping shareholder countries to sanction a 50 percent hike in its cost-to-income ratio limit for what will be the second increase in less than three years, sources at the bank have told Reuters.

The reason for the proposed change - which aims to raise the proportion of income that can spent on costs such as staff, travel and offices - is its sprawling expansion in recent years and ultra-low global interest rates hurting profit margins, the sources said.

They added that if the plan gets the go-ahead as expected, it would lift the cost-to-income ratio limit to 50 percent from its current maximum of 33 percent.

“There are discussions going on on this subject,” said one of the sources who is involved in the discussions but speaking on condition of anonymity.

“The plan is to raise the ceiling (on the cost-to-income ratio) so we have room to manoeuvre.”

The sources also say the proposal by European Bank for Reconstruction and Development has angered Moscow, because the EBRD cites poor performance of its Russian equity portfolio as a key cause, despite not investing there since 2014.

An EBRD spokesman confirmed on Friday that the bank’s directors had agreed to propose the change to its board of governors but declined to give further details as to the reason or size of the planned increase.

Although the EBRD does not expect to hit the 50 percent ceiling any time soon, it is not alone in seeing its cost-to-income ratio deteriorate in recent years.

A number of large development banks such as the Asian Development Bank, African Development Bank and the IFC have seen their ratios rise. Many commercial banks have cost-to-income ratios well above 50 percent too, though unlike development lenders, they must also bear the cost of running thousands of local branches.

But in the case of the EBRD, critics point out the move comes less than three years after the bank’s shareholders - more than 60 governments alongside the EU and European Investment Bank - agreed to increase the limit from 25 percent.

“At that time it was a different world,” the source said, pointing to further expansion since then into parts of North Africa and Greece, and the tough lending environment generally. Lebanon, currently mired in financial and political crisis, also this year finalised its EBRD membership.

This time, the bank’s management also want to change the way the ratio is calculated. They plan to average it out over five-years to smooth out the peaks and troughs that lending in more risky places tends to create.

Set up in 1991 to invest in the ex-communist economies of eastern Europe, the EBRD has expanded its mandate rapidly in the last decade and now stretches from Morocco to Mongolia.

The cost-to-income changes are expected to be approved by the end of the year but there is likely to be resistance, notably from Russia which remains unhappy about EBRD’s lending halt in wake of the Ukraine crisis.

A second source told Reuters that Moscow was irked by the cost-to-income ratio plan. Circulated to member governments, the documents cited a deterioration in the EBRD’s Russian equity portfolio as a reason for needing the ratio hike.

The EBRD’s Russian equity portfolio is still its largest by far, at around 1.5 billion euros of a total equity portfolio of 5 billion euros. But some of its most lucrative Russian projects have matured and no fresh ones have taken their place.

Russia has complained repeatedly about the lending freeze, saying it was against the EBRD’s own interest.

“By (flagging the Russian portfolio performance) (EBRD) just shot themselves in the foot,” one of the sources said. (Reporting by Marc Jones; Editing by Toby Chopra)

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