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Rating Action:

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

Global Credit Research - 10 Nov 2017

New York, November 10, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the International Bank for Reconstruction and Development's (IBRD or World Bank) Aaa long-term issuer, (P)Aaa senior unsecured MTN, and Aaa senior unsecured debt ratings. Concurrently, its short-term rating of (P)P-1 has been affirmed. The outlook remains stable.

The key factors underpinning today's affirmation are:

1) Very high capital adequacy, supported by a strong risk management framework that contributes to asset performance

2) Strong liquidity buffers and asset/liability management policies

3) Large cushion of callable capital and very strong willingness and ability of global members to provide extraordinary support

The stable outlook reflects Moody's view that IBRD will maintain its very high capital adequacy and liquidity, very strong shareholder support, and conservative risk management policies, thus keeping its credit profile in line with its Aaa rating.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION

FIRST FACTOR -- STRONG FINANCIAL POLICIES AND VERY HIGH ASSET QUALITY SUPPORT CAPITAL ADEQUACY

The IBRD's prudent financial policies, diversified portfolio composition, relatively low proportion of non-performing loans (NPL) and stable asset quality ensure that the bank has sufficient capital to absorb the shocks inherent to business risk.

In particular, IBRD's very high capital adequacy is supported by sound financial policies that cap the overall amount of risk the bank can take. For instance, the lending limit states that total outstanding loans and callable guarantees cannot exceed the sum of subscribed capital, reserves and surplus.

Moreover, IBRD's assets continue to perform very well, with only 0.3% of total gross loans outstanding classified as non-performing. IBRD does not reschedule its loans and it has never written off a loan. Instead, it continues to seek full recovery of all arrears.

The extremely wide breadth of lending across countries and sectors provides very high diversification that also reduces the risk that a significant proportion of assets become non-performing.

These strengths offset the credit impact of the bank's plateauing capital base and increasing leverage. The IBRD's asset coverage ratio (ACR) and leverage ratios are weaker than the Aaa median.

Moody's ACR measures usable equity against total loans outstanding and risk-weighted liquid assets, where usable equity excludes callable capital. IBRD's ACR has steadily trended downward to 22.2% in the financial year ending on June 30, 2017 (FY2017) from 41.9% in FY2008, and below the Aaa-rated MDB median level of 32.3%.

Meanwhile, leverage has increased substantially. The overall leverage ratio, gross debt-to-usable equity, increased from 378% in FY2013 to 518% in FY2017, compared to the Aaa-rated MDB median of 282%.

Leverage will likely increase further as the bank continues to pursue its Board-mandated development policy objectives. Indeed, the World Bank Executive Directors lowered the IBRD's minimum equity-to-loans ratio from 23% to 20% in order to maximize the bank's overall development impact through increased lending and optimization of its balance sheet. As of FY2017, the ratio stood at 22.8%, indicating scope to raise leverage further. However, Moody's does not expect the ratio to decline below the 20% threshold.

SECOND FACTOR -- AMPLE LIQUIDITY POSITION

IBRD's very high liquidity reflects its large liquidity buffer and conservative asset/liability management policies. The bank uses derivatives to manage its exposure to interest and currency risks; manage the duration of equity; and manage repricing between loans and borrowing. The bank does not enter into derivatives contracts for speculative purposes, and is mandated to match borrowings with assets in the same currency.

IBRD's debt service coverage ratio, which measures the stock of short-term and currently maturing long-term debt against the stock of liquid assets, has continued to improve from over 80% in FY2013 to 63% in FY2017. This reflects a favorable maturity profile and ample liquidity, supported by the bank's official liquidity policy which requires liquid assets to cover a minimum of 12 months of projected debt service and net loan disbursement needs by liquid assets.

Furthermore, IBRD benefits from strong and regular access to funding markets reflected by the frequency of debt issuance, range of funding instruments, including local currency bond issues, and its stable, diversified investor base.

THIRD FACTOR -- VERY STRONG MEMBER SUPPORT

IBRD's very strong member support stems from the presence of a substantial callable capital buffer and the high likelihood of extraordinary support from members. Although the IBRD has never called capital, we believe it is very likely that members would fully meet any call.

If IBRD was unable to service its own debt — an event Moody's considers to be extremely remote, given the bank's intrinsic financial strength — it would have the option of making capital calls on all member countries in proportion to their subscribed shares. Although the bank has never called capital, Moody's believes that it is very likely that members would fully meet any call on capital given the global importance of the bank to both shareholders and borrowers.

Beside contractual support through callable capital, Moody's also assesses the ability and willingness of shareholders to provide extraordinary capital. Moody's believes that in extremely low probability scenarios that support is needed and callable capital is exhausted or otherwise unavailable, IBRD would receive extraordinary support from its members. Willingness to support would be very high, given the strategic role played by the bank around the world, and shareholders' average creditworthiness points to high capacity to provide extraordinary support.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that IBRD's strong capitalization, high liquidity and strong shareholder support, augmented by its preferred creditor status and conservative risk management policies, will continue to support a its Aaa credit rating.

WHAT COULD MOVE THE RATING DOWN

Downward pressure on IBRD's rating could occur in the event of substantial deterioration in capital adequacy, which could result from a rapid expansion in leverage combined with a decline in asset quality resulting from sovereign credit stress among its largest borrowing countries. Despite IBRD's intrinsic financial strength derived from its strong financials and prudent management, a decline in shareholder support would also be credit negative.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in March 2017. 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.

William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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