Frankfurt am Main, May 15, 2020 -- Moody's Investors Service ("Moody's") has today
affirmed International Investment Bank's (IIB) A3 long-term
issuer and senior unsecured rating. The rating outlook remains
stable.
The affirmation of IIB's A3 rating reflects the following factors:
(1) A capital adequacy that remains in line with that of similarly-rated
peers, despite a recently increased leverage;
(2) A robust liquidity situation which benefits from IIB's diversification
of funding sources;
(3) A moderate strength of member support which is reflected in continued
increases in IIB's paid-in capital.
The stable rating outlook is based on improvements in credit metrics over
the past two years amidst new challenges and heightened uncertainty related
to the coronavirus outbreak and the sharp correction in oil prices.
The outbreak will weigh on growth in member states and borrowers'
locations, and could affect member states' fiscal strength and ultimately
their ability to support IIB.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE RATING AT A3
FIRST FACTOR: IIB's CAPITAL ADEQUACY REMAINS IN LINE WITH
PEERS, DESPITE INCREASED LEVERAGE
The first factor underpinning the rating affirmation is based on IIB's
capital adequacy which remains in line with peers, despite a recently
increased leverage. IIB's leverage ratio has trended up since
2014 as asset growth has outpaced growth in useable equity. For
instance, lending growth (17% year-on-year)
exceeded growth in useable equity growth (8.5% year-on-year)
in 2019. However, IIB's leverage ratio is in line with
the A-rated median and at levels comparable to peers like Black
Sea Trade and Development Bank (BSTDB, A2 stable), Africa
Finance Corporation (AFC, A3 negative), and Islamic Corporation
for the Development of the Private Sector (ICD, A2 stable).
Based on IIB's 2020-2022 business plan and assuming timely
paid-in capital contributions from shareholders under the 2020-22
capitalisation programme, Moody's expects IIB's leverage
ratio to gradually trend down over the coming two to three years.
Asset quality and performance has improved as the bank has successfully
diversified its loan portfolio and further reduced concentration risks.
IIB's non-performing loan (NPL) ratio has fallen further in 2019,
to 1.6% of total loans from 1.9% in 2018,
and is now in line with the median for A-rated MDBs. That
said, the improvement in the NPL ratio in 2019 was strongly supported
by strong loan growth, while no new NPLs have been reported since
the beginning of 2019. IIB's risk management policies stipulate
a maximum NPL ratio of 4%, and the bank expects a rise in
the NPL ratio to around 3% over the coming years, factoring
in the potential negative impact on asset quality from the coronavirus
outbreak.
In addition to improved asset performance of development-related
assets, IIB has also seen the credit quality of its treasury assets
improve, which amounted to €385 million in 2019. 70%
of its holdings were rated A3 or higher at the end of 2019, compared
to 57% in the previous year. IIB exceeded its own target
of 60% for 2019 and its 2020 target of 65%. Despite
some negative pressure on the asset quality in 2020 stemming from the
economic crisis related to the coronavirus outbreak, Moody's
expects that IIB will also meet its 2021 target of 75% of treasury
holdings being rated A3 or higher.
SECOND FACTOR: DIVERSIFICATION OF FUNDING SOURCES SUPPORTS THE RATING,
WHILE LIQUIDITY RATIOS ARE WEAKER THAN PEERS'
The second factor of today's rating action relates to IIB's
reasonably robust funding situation, supported by a diversification
of funding sources. IIB has continued to diversify its funding
sources and has seen further reduction in the cost of funding over the
course of last year. In 2019, funding took place in CZK,
HUF, RON local markets and, due to the unexpectedly strong
demand, also included some pre-financing for 2020.
IIB remained active during the first months of 2020, with total
issuance of almost €260 million up until early May. A €1.5
billion MTN programme, registered at the Irish Stock Exchange,
was established in March 2020, with a first issuance of 1-year
RON110 million (€23 million) private placement concluded in mid-April.
The share of funding sourced from more mature and liquid capital markets
in EU member countries has been steadily increasing since the bank's
re-launch in 2012 and reached 70% of total funding in 2019
from just 20% in 2014. However, Russia remains an
important source, with ruble-denominated outstanding debt
accounting for 28% of the total at the end of 2019, and most
of the issuance activity in 2020 to date in the Russian market.
In 2019, IIB's average cost of new funding (after swaps) was
0.49%, falling from 1.07% in 2018.
Despite an improvement compared to last year, liquidity remains
weaker than peers'. Moody's own liquid resources ratio
(liquid assets as a share of expected net cash outflows) currently stands
at 41%, which -- despite an improvement relative to
29% the year before -- is relatively weak and significantly
below the median of A-rated MDBs of 150%. Similarly,
the debt service ratio which compares the stock of liquid assets against
the stock of short-term and currently maturing long-term
debt stood at 110% at the end of 2019 compared to 389% for
AFC and 190% for BSTDB. Moreover, liquid assets over
total debt has fallen to 46% in 2019 from 50% in 2018.
Moody's acknowledges IIB's commitment to maintaining strong liquidity.
The bank's internal liquidity risk management focuses on the liquidity
coverage ratio (LCR) and the net stable funding ratio (NSFR), adjusted
to IIB's circumstances. The LCR covers a 30-day period
and the NSFR a one-year period, and both ratios must remain
at or above 100%.
THIRD FACTOR: CONTINUED INCREASES IN PAID-IN-CAPITAL
REFLECT MODERATE STRENGTH OF MEMBER SUPPORT
The third factor supporting IIB's A3 rating is the continued increase
in paid-in capital. Paid-in capital reached €340
million at the end of 2019 from €326 million in 2018, as Hungary
(Baa3 stable) added €10 million in 2019. In addition,
Romania (Baa3 negative) paid its remaining part of the 2013-2017
capitalisation programme of €3.65 million. Czech Republic
(Aa3 stable) has still not paid the remaining €5.6 million
due for the capitalisation programme for 2013-2017. Capital
injections from member states continued in 2020: Hungary paid-in
€15.5 million, and Russia €20.64 million,
bringing total paid-in capital to €376 million. The
new capitalisation programme for 2020-2022 aims to increase paid-in
capital by €200 million by 2022.
The credit profile of IIB's shareholders improved in 2019, with
the sovereign rating upgrade of Russia (Baa3 stable) back to investment
grade lifting the weighted average shareholder rating to "Baa3"
and raising the callable capital share of investment grade-rated
shareholders to 96.2% from 43.3% before.
However, the callable capital coverage relative to the banks' total
debt has weakened over the past three years, against the background
of the significant rise in IIB's debt and continued increases in paid-in
capital, which in turn reduced callable capital. Thus,
IIB's callable capital as a proportion of the bank's total debt
dropped to 92% in 2019 from 117% in 2018 and over 500%
in 2014. That said, the debt-to-callable capital
ratio is still in line with the A-rated median.
In Moody's view -- given the still relatively short track record
of less than ten years after the bank's relaunch -- in the
unlikely event of substantial financial problems re-emerging at
IIB, there is a risk that shareholders would choose to wind down
the institution rather than inject additional funds. The slower-than-planned
progress under the 2013-2017 capitalisation programme, which
is still not fully completed, supports this view. Moody's
considers the priority of support that IIB's shareholders would
attach to the bank to be constrained by IIB's small, although growing,
size and limited economic presence in their countries. This could
be particularly relevant from the perspective of some of the IIB's
EU shareholders, which Moody's believes could be more likely
to support some other European MDBs, such as the EIB, rather
than the IIB.
RATIONALE FOR THE STABLE OUTLOOK
The stable rating outlook balances the strengthening of some of IIB's
credit metrics over the past two years against the challenges and heightened
uncertainty related to the coronavirus outbreak and the sharp correction
in oil prices. The outbreak will weigh on growth in member states
and borrowers' locations, and could affect member states fiscal
strength and ultimately ability to support in case of sovereign rating
downgrades. Weighted average real GDP growth in IIB's member
states will contract sharply in 2020 by 4-5% compared to
an increase by 2.6% in 2019 and by more than 3% in
prior years, and uncertainty remains high about the shape and pace
of the post-crisis recovery.
Moody's takes comfort from IIB's strong risk management function,
and the fact that concentration risks have been reduced in recent years.
Given the relatively small size of the loan portfolio in terms of number
of borrowers, payment difficulties at even only a few could have
a sizable impact on IIB's asset performance metrics and thus the
capital adequacy score. Moody's also notes that the improvement
in the NPL ratio is flattered by the strong increase in lending.
However, IIB's performance during the first four months of
2020 suggests that the bank will be able to achieve most of its targets
for this year, which will support broad stability in IIB's
credit metrics. Also, the mid-2019 relocation of the
bank's headquarters to Budapest, together with the recently
established MTN programme will continue to support IIB's low funding
costs and access to a more diversified pool of funding sources.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material for IIB's rating.
However, Moody's notes that IIB has significantly increased
its treasury's green bond portfolio, currently amounting to
57% of the total securities portfolio. Also, issuance
of a green bond is part of the bank's business plan for 2020-2022.
Social considerations are not material for IIB's rating. Having
said that, some of its shareholder countries are facing long-term
demographic changes from ageing populations, which could have a
negative impact on sovereign credit profiles through increasing old-age
related government spending, slower economic growth with negative
repercussions for government revenues, and rising government debt
burdens.
Moody's regards the coronavirus outbreak as a social risk under
our ESG framework, given substantial implications for public health
and safety. The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices,
and asset price declines are creating a severe and extensive credit shock
across many sectors, regions and markets. Moody's believes
that the combined negative effect of these developments will lead to a
temporary weakening of economic and fiscal strength in all of IIB's
member states, but does not expect that the pandemic will lead to
a significant weakening of IIB's credit profile.
Governance considerations are material. IIB's governance
is relatively strong, reflected in prudent and robust risk management
and a key factor underpinning the A3 rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
IIB's rating would face upward pressure if Moody's were to
see continuation of stable asset quality despite the strong loan growth
in previous years, an improvement in liquidity ratios, timely
paid-in capital contributions and increases in useable equity,
and execution of the bank's business strategy as planned.
Further diversification of lending and funding, as well as the addition
of new members would also be positive.
Conversely, the rating could face downward pressure if Moody's
were to observe a material and sustained weakening in asset quality,
and particularly if these adverse developments were to occur at a time
of weakening capital buffers and a delay in anticipated payments of promised
capital. A significant deterioration in the bank's strong
risk management and in the strength of member support could also lead
to a rating downgrade.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in June 2019 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147813.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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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
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For any affected securities or rated entities receiving direct credit
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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.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
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for additional regulatory disclosures for each credit rating.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
