(The following statement was released by the rating agency)
Dec 21 - Fitch Ratings has affirmed the Eurasian Development Bank’s (EDB) Long-term Issuer Default Rating (IDR) at ‘BBB’ and revised the Outlook to Stable from Positive. The Short-term IDR was also affirmed at ‘F2’.
The revision in the Outlook from Positive to Stable reflects the risk that the asset quality of EDB’s loan portfolio may weaken as it seasons from currently strong reported levels such that it would not be commensurate with an upgrade to ‘BBB+’ in the near term. A longer track record will be required to assess the bank’s capacity to maintain strong asset quality as it expands its portfolio. The affirmation of EDB’s ratings reflects the following key factors:
- In Fitch’s opinion support would be provided, in the event of need, from its two founding shareholders, the Russian Federation (Russia; ‘BBB’/Stable) and the Republic of Kazakhstan (Kazakhstan; ‘BBB+’/Stable’), which own 66% and 33% of share capital respectively. The finance ministers of both countries sit on the council of the bank, its establishment was an important diplomatic initiative, it finances key infrastructure and industrial projects in the Eurasian Economic Community and its failure would dent the reputation of its key shareholders.
- The bank’s intrinsic strengths, particularly its high levels of capitalisation and liquidity are also key rating factors. The bank was endowed with a substantial capital base by shareholders at its inception in 2006. Despite rapid expansion of its operations since then, equity to assets stood as high as 53.5% at end-June 2012.
- Liquidity is high and is supported by conservative internal rules. The treasury bond portfolio includes US T-bills (53.5% at end-June 2012) with the remaining allocation comprising exposures to regional governments and banks.
- EDB management have set a prudential leverage ratio ceiling of 200%, although Fitch projects this could be reached by the end of 2013 at the current pace of lending growth and in the absence of additional capital.
- To date, EDB has suffered only minimal credit losses. Reported loan loss provisions remained at only 0.6% at end-June 2012, comparing favourably with most Fitch-rated multilateral development banks (MDBs).
- The ratings are constrained by the bank’s short track record. Low reported non-performing loans (NPL) reflect the fact that the bank only started lending operations in 2007 and many loans are for long-term projects, as well as the bank’s credit assessment standards. Fitch expects impairments to pick up as the loan portfolio grows and seasons, and believes it is still early to judge the bank’s capacity to maintain excellent asset quality while expanding its operations.
- The loan portfolio is quite concentrated, with the five largest exposures accounting for 39% of equity. The agency assesses the average credit rating of borrowers as equivalent to speculative grade.
- Unlike other MDBs, EDB’s shareholders have not subscribed any callable capital. With capitalisation relying entirely on equity, the usable-to-required capital ratio stood high at 2.26x as of end-June 2012.
RATING OUTLOOK - STABLE
The main factors that could lead to positive rating action are:
- An upgrade of Russia’s sovereign rating, the bank’s main shareholder, which would enhance its ability to provide support.
- A longer track record of operations demonstrating EDB’s capacity to maintain excellent asset quality metrics over the medium term as the balance sheet grows and the loan book matures.
- A material improvement in the bank’s operating environment.
The main factors that could lead to a negative action are:
- A downgrade of Russia’s sovereign rating that would weaken its ability to support EDB, as well as likely indicating deterioration in the bank’s operating environment.
- A marked deterioration in loan impairment indicators and NPL formation trends that -combined with rising leverage - could quickly erode capital.
- An adverse shift in the credit profile of the bank’s investment and treasury portfolios either in credit quality or risk concentration terms.
The rating is sensitive to a number of assumptions:
- The two main shareholders - Russia and Kazakhstan - would provide capital to support the bank if needed.
- EDB will continue to build on its track record of prudent capital and liquidity management, while maintaining asset quality indicators under control.
- The Russian and Kazakhstani economies and sovereign creditworthiness are sensitive to global commodity prices. A severe and sustained drop in oil prices could adversely affect the financial position of borrowers from the EDB as well as the capacity of its shareholders to provide support.