Fitch Upgrades International Investment Bank to 'BBB'; Outlook Stable
07 Dec 2016 6:02 AM
Fitch Ratings-Paris/London-07 December 2016: Fitch Ratings has upgraded the International Investment Bank's (IIB) Long-Term Foreign Currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. The Outlook is Stable. The Short-Term Foreign Currency IDR has been upgraded to 'F2' from 'F3'. The issue ratings on IIB's senior unsecured bonds have been upgraded to 'BBB' from 'BBB-'.
The upgrade reflects the continuing diversification of the bank's operations in central and eastern Europe (CEE), the strengthening of its risk management policies and the reduction in risks related to the bank's business environment, reflected partly in the revision of the Outlook on Russia's sovereign IDR (BBB-) to Stable from Negative in October 2016.
KEY RATING DRIVERS
The upgrade of IIB's ratings also reflects the following key rating drivers:
The rapid growth and geographical diversification of lending operations are in line with objectives set in the bank's business plan in 2013, which reinforces the credibility of management and helps to reduce geographical concentration risk. Notwithstanding these improvements, Fitch assesses IIB's business profile as high-risk, given the bank's focus on the private sector (83% of loans at end-June 2016) and overall weak asset quality. Although it is based in Moscow and has assets in Russia, the bank has been exempted from EU sanctions against Russia, demonstrating evidence of the privileges derived from its supranational status.
Risks to the bank's operating environment have reduced in 2016 as a result of economic stabilisation in Russia (BBB-/Stable), illustrated by the revision of the Outlook on the sovereign rating to Stable from Negative. The bank's business environment also benefits from the rapid development of operations in CEE, which accounted for 40% of the bank's portfolio as of end-September 2016, while exposure to Russia has reduced significantly to 17%, from 39% at end-2014.
Despite the rapid growth in lending, capitalisation will remain strong in the medium-term. The equity-to-adjusted assets ratio, which stood at 45.9% at end-June 2016, is expected to remain well above 25%, which is the threshold set by Fitch for an excellent capitalisation assessment. It is also supported by strong internal capital generation. Profitability is low, as for other multilateral development banks (MDBs), but profits are retained entirely in reserves.
IIB's overall risk profile is assessed as high-risk, reflecting the substantial credit risk exposure of the bank. The overall quality of the loan portfolio is weak, with 83% of loans to borrowers rated in sub-investment grade at end-June 2016. Impaired loans are low (3.5% of total at end-June 2016) and consist of two legacy loans, granted before the bank restructured its portfolio at end-2013. Fitch expects the impaired loan ratio to increase as the bank's asset book matures and in view of the weak average credit quality. However, this risk is mitigated by a high level of diversification and improved risk management policies.
IIB improved its internal policies in 2015 and 2016. The risk management framework has been strengthened, with the implementation of internal policies and limits to monitor the key risks (credit, market, operational). Risk concentration is assessed as low, with the five largest exposures accounting for 38% of the portfolio at end-June 2016. Market risk is well-controlled; foreign exchange exposure is minimal.
IIB enjoys a strong liquidity buffer, comprising bank deposits and securities covering 1.7x short-term debt at end-June 2016, which is in the upper range compared with other MDBs; it is enhanced by unused credit lines from banks. The bank enjoys access to international financial markets, as evidenced by debt issues on CEE debt markets (in Slovakia and Romania). However, the quality of liquid assets is weak overall, with only 0.7% of the treasury portfolio rated 'AA-' and above. The exposure to Mongolian securities is a source of risk, given the recent downgrade of Mongolia's sovereign IDRs to 'B-' from 'B'.
No credit uplift is assigned for shareholders' support. Support rests on a callable capital mechanism; such callable capital was 53%-owned Russia at end-June 2016. The capacity to support, measured by the rating ensuring coverage of net debt, is 'BBB-' and propensity to support is assessed as weak, given the modest size of the bank in relation to the funding requirements of its member states.
The factors that could, individually or collectively, lead to a negative rating action are:
- A more rapid-than-projected decline in capitalisation
-A deterioration in asset quality associated with losses on loans or treasury portfolio
-A loosening of the bank's prudential framework
Conversely, the factors that could, individually or collectively, lead to a positive rating action are:
-The gradual building of an operational track record under the current risk management framework that is consistent with the preservation of high capitalisation metrics
-Marked improvement in asset quality
The ratings and Outlook are sensitive to a number of assumptions:
-IIB will remain compliant with its internal prudential limits.
-The equity-to-asset ratio will remain above 25% by 2019.
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- Sources of information - The source(s) of information used to assess these ratings were IIB's financial statements, and other information provided by IIB.
Supranationals Rating Criteria (pub. 27 Jul 2016)
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