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Fitch Revises Outlook on International Investment Bank to Negative; Affirms at 'BBB-'
March 25, 2014 / 2:51 PM / 4 years ago

Fitch Revises Outlook on International Investment Bank to Negative; Affirms at 'BBB-'

(The following statement was released by the rating agency) PARIS/LONDON, March 25 (Fitch) Fitch Ratings has revised the Outlook on 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 Russia's IDRs (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 member states, which have an average rating of 'BBB', is strong, as evidenced by their 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 council irrespective of its capital contribution (including smaller member states such as Cuba, Vietnam or Mongolia), therefore potentially making decision-making more difficult in times of stress. Additionally, the collective influence of other member states on the bank is significant, as evidenced by their cumulative 44% 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 countries. 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 leverage 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 extended before 2010 were impaired. However, virtually all NPLs have been written off as of end-2013, enabling the bank to clean up its balance sheet. Nonetheless, Fitch expects the bank to incur impairments as the loan book grows and seasons. Capital buffers are sufficient to absorb significant losses but profitability 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 activities. The management team of IIB, which has been significantly reorganised, is in the process of implementing a new risk management framework, which is slightly looser than usually observed in other sub-regional multilateral development 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. RATING SENSITIVITIES The main factors that, individually or collectively, could result in a rating action include: - A change in the rating or Outlook of Russia, which would have an equivalent impact on the rating/Outlook of IIB. Over time, a substantial dilution of Russia's ownership could allow higher-rated sovereigns to increase their share ownership, which would reduce the reliance of IIB's rating on support from Russia. - Further evidence of shareholders' support to the bank, including through a clearer governance structure enabling each member state to exert influence on the bank in line with their ownership would be credit positive. Conversely, evidence of reluctance by member states to provide support would be detrimental to the rating. - Progressive building of a track record of prudent growth and effective credit risk management in the loan and treasury portfolios associated with compliance with the self-imposed prudential framework would be credit positive. ASSUMPTIONS Fitch assumes that the EUR100m capital increase approved by the bank's council in 2013 will be fully disbursed on a timely basis by all participating member states in 2014- 2015. Fitch assumes that, over the short- and medium-term, the existing shareholding structure of IIB will not change materially. Fitch assumes that the mandate and investment strategy of IIB will remain consistent with that outlined in Key Rating Drivers above. Contact: Primary Analyst Eric Paget-Blanc Senior Director +33 144 299 133 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Amelie Roux Director +33 144 299 282 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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 here Additional Disclosure Solicitation Status 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 WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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