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Rating Action:

Moody's affirms EBRD's Aaa rating, maintains stable outlook

07 Dec 2018

London, 07 December 2018 -- Moody's Investors Service ("Moody's") has today affirmed the European Bank for Reconstruction and Development's (EBRD) Aaa long-term issuer and senior unsecured foreign currency as well as the (P)Aaa senior unsecured foreign currency MTN ratings. Concurrently, the EBRD's short-term foreign currency issuer rating of P-1 has been affirmed. The outlook remains stable.

The key factors underpinning today's affirmation are:

1) The EBRD's strong capitalization and steadfast shareholder support which mitigate risks posed by a challenging operating environment; and

2) The Bank's conservative liquidity together with strong indicators of market access.

The stable outlook reflects Moody's view that, despite the potential for further financial stress in Turkey (Ba3 negative), its largest country of operation, the Bank's strong capitalization, ample liquidity and steadfast shareholder support will preserve its credit profile at the highest possible rating irrespective of the EBRD's challenging environment.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION

FIRST FACTOR -- STRONG CAPITALIZATION AND STEADFAST SHAREHOLDER SUPPORT

The first factor supporting the affirmation of EBRD's Aaa ratings is the Bank's very strong capital base, supported by its prudent capital adequacy policies, as well as the steadfast shareholder support.

The Bank's subscribed capital has grown by more than 40% between 2010 and 2017, stronger than its operating assets, such that the institution's gearing ratio remains modest at around 70%, well within its self-imposed ceiling of 92%. Furthermore, in order to minimize recall to callable capital, the Bank's capital adequacy policies ensure a 10% prudential capital buffer against future shocks, although the amount of available capital has historically been in excess of this requirement with the buffer standing at around 30% in H1 2018.

The institution's capital strength is reflected in EBRD scoring better than most other Aaa-rated Multilateral Development Banks (MDBs) on Moody's comparative estimate of asset coverage, evaluating usable equity against gross loans outstanding and equity investment (58% versus the Aaa-median of 38% at end-2017). Furthermore, EBRD benefits from a much higher share of capital which is paid-in compared to many of the Bank's Aaa-rated peers, consistent with its private sector focus which subjects the EBRD to potentially more acute credit risks as well as its sizeable equity share investments which are prone to volatility in mark-to-market valuations. Furthermore, the loss-absorption capacity of its capital structure is supported by the Bank's prudent degree of provisioning, which covers 65% of impaired loans.

In Moody's view, the EBRD's strong capital base and prudent risk policies will also help to mitigate the credit impact from the recent deterioration in financial conditions in Turkey. For example, the EBRD's exposure to Turkey, the Bank's single largest operating exposure with assets amounting to €6.1bn or 21% of total as at Q2 2018, is covered almost 3 times by the EBRD's available capital base such that Moody's assessment of very high capital adequacy would be preserved even under severe stress assumptions. These sizeable buffers provide confidence that an acute stress in a single region of the EBRD's operations, even its largest, will, in Moody's view, remain manageable.

Furthermore, adding to Moody's assessment of the quality of capital resources, EBRD will continue to benefit from one of the highest quality callable capital bases within Moody's MDB universe, with over 60% committed by Aaa and Aa-rated member sovereigns. The Board's approval of a sizeable increase in total authorized capital in the wake of the global financial crisis and shareholder approval for EBRD to help support the private sector recovery in Greece (B3 positive) and Cyprus (Ba2 stable), provides strong indications of commitment from its member base.

SECOND FACTOR -- CONSERVATIVE LIQUIDITY AND STRONG MARKET ACCESS

The second factor supporting the affirmation is the EBRD's very conservative liquidity management and strong indicators of market access, which would help the institution weather macroeconomic and financial shocks.

EBRD's liquidity management is supported by its very prudent policies which help to preserve some distance between its operational targets and the minimum policy requirements, and help to ensure that the EBRD is able to opt out of an expensive funding market if required. For example, at the end of June 2018 the Bank's net liquid assets stood at 151% of projected net cash requirements over the next two years, around twice the policy minimum of 75%. In addition, the Bank's annual stress test informs liquidity policy by requiring sufficient liquidity to meet obligations for the next 12 months under an extreme (1 in 100 year) stress scenario, providing confidence that the EBRD's liquidity can withstand a significant shock to its operations.

Reflecting these policies, EBRD's liquidity scores compare favourably to many other Aaa-rated MDBs, with liquid assets standing at 44.5% of total assets in 2017, higher than the Asian Development Bank (ADB, Aaa stable) or the Inter-American Development Bank (IADB, Aaa stable).

Furthermore, the EBRD's strong market access provides a consistent and stable source of funding for its operations. The Bank's market presence is enhanced by the frequency of its issues, its offer of a secondary market for all its bond issues, and a diverse range of funding sources, including innovative issues such as equity linked structures. Strong market access is also reflected in the diversity of EBRD's investor base with no major reliance on any single investor type and with around half its issuances placed outside the EMEA region.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that, despite an operating environment which will remain challenging, including the potential for further stress in Turkey, the EBRD's strong capitalization, ample liquidity and steadfast shareholder support will preserve its credit profile at the highest possible rating. While the financial stress in Turkey is expected to lead to lower profitability and worsen asset quality, Moody's expects the impact on the EBRD's overall credit profile to be manageable. Moody's also notes that the EBRD's credit fundamentals have withstood previous periods of acute stress in its operating environment, including in Russia (Ba1 positive) in 2014/15, traditionally its largest market.

As a result, the EBRD's non-performing loan (NPL) ratio, which starts from a four-year low of 3.9% at the end of 2017, will remain elevated in the coming years given the headwinds facing the Turkish portfolio and the continued challenging, albeit improving, operations in Russia and Ukraine (Caa2 positive). The Russia portfolio is now significantly smaller, although the remaining exposure is subject to a relatively high share of equity exposure. Ukraine has seen a sizeable decline in impaired loans, although it still comprises a material share of the EBRD's total NPLs such that developments in Ukraine will continue to be relevant for the Bank's asset quality.

The stable outlook also reflects Moody's view that the portfolio will broadly stabilize going forward and the EBRD will remain a strategic presence in its current areas of operation. It will be challenging for the EBRD to find areas for significant further expansion within its traditional geographies and any shift into new, potentially higher risk regions, such as sub-Saharan Africa, would require consensus from shareholders and as such is unlikely to occur over Moody's rating horizon.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure on the EBRD's rating would occur in the event of a significant deterioration in asset quality, which leads to a decline in Moody's assessment of the adequacy of EBRD's capital.

Such a deterioration would most likely be linked to financial stress in the Turkey portfolio but would also extend to other regions of the Bank's operations in order to challenge the EBRD's capital buffers. For example, while losses on the EBRD's equity portfolio in Turkey, mostly stemming from foreign currency valuations, will weigh on near-term profitability, the Turkish portfolio benefits from a relatively low share of equity investments at 16% of operating assets (at end-October 2018).

Furthermore, Moody's expects that the Bank's capital buffers will provide space to work through problem loans and limit the amount of debt write-offs arising from Turkey, and that the strong growth in the Turkey portfolio seen in recent years will not be repeated given the current economic and political challenges.

Moreover, while unlikely over Moody's rating horizon, a rapid and sizeable expansion into new, and potentially much higher risk, regions in which the EBRD lacks expertise would be negative for the Bank's credit profile.

Finally, downward pressure would also occur in the event of a weakening in shareholder support, although Moody's considers this unlikely given the EBRD's proven expertise in regions of political importance to shareholders and sustained underlying profitability.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Evan Wohlmann
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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