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30 Apr 2018
New York, April 30, 2018 -- Moody's Investors Service (Moody's) has today upgraded the
issuer and senior unsecured debt ratings of International Investment Bank
(IIB) to A3 from Baa1. The outlook was changed to stable from positive.
The main drivers for the rating upgrade are IIB's improvement in
asset quality, more robust risk management systems, an increasingly
diversified loan book and funding strategy and the strengthened credit
quality of its treasury portfolio. Moody's believes that
IIB's new medium-term strategy will likely maintain these
improved credit features.
RATIONALE FOR THE UPGRADE TO A3 FROM Baa1
IMPROVED ASSET QUALITY ON THE BACK OF ENHANCED RISK MANAGEMENT
Moody's rating upgrade of IIB to A3 from Baa1 reflects the improved
performance of its loan book and the expectation that the bank will be
able to contain the level of its non-performing loans (NPLs) as
it continues to expand its activities under its new five-year plan.
The improved performance stems from a combination of the new management's
explicit focus on credit quality, an associated reduction in loan
concentration (both by borrower and location) and more recently,
a cyclical economic upturn across the bank's diverse membership.
Moody's notes, however, that some of the improvement
in the level of NPLs relative to gross loan (NPL ratio) reflects the gearing
up of the bank's lending activities in the last few years.
Changes in risk management procedures have both contributed to improved
asset quality and are likely to sustain it. The bank's almost entirely
new management significantly changed IIB's business approach since its
re-launch in 2012, now lending via intermediaries and jointly
within syndicates (often including larger MDBs) together with a steady
tightening of its risk management procedures. Moody's sees
these new strategies and closer monitoring of the portfolio as mitigants
against the risks associated with lending to borrowers of generally low
credit quality and the still-concentrated nature of its loan book
and small number of loans.
IIB's average NPL ratio over the last five years was 3.2%,
which represents a structural change in comparison to the situation the
bank faced in the decade to 2012, after two-thirds of the
loans extended before the re-launch of IIB became impaired.
Two additional NPLs developed from the old loan portfolio after the bank's
re-launch; those were written down in 2017 after being fully
provisioned over 2015-16. Beyond that, only two loans
from the 'new' portfolio were in default as of the end of
2017, accounting for 4.5% of gross loans.
IIB's capital and leverage ratios also remain relatively strong,
which together with the improvements in asset quality drives Moody's
decision to raise its assessment of the bank's capital adequacy
to "medium" from "low". That said,
Moody's anticipates that these aspects of the bank's credit
profile will weaken somewhat in the next two-three years as both
lending and funding continue to expand.
GREATER DIVERSIFICATION OF EQUITY, LENDING AND FUNDING MITIGATES
WEAK BORROWER QUALITY AND LOAN BOOK CONCENTRATION
Moody's says that the changes undertaken by the new IIB management
in the past three years have largely addressed the credit weaknesses the
rating agency cited when it downgraded the bank to Baa1 from A3 in March
2015. Those weaknesses related in large part to the bank's
heavy concentration in Russia at a time when Russia was confronting a
major crisis: Russian loans constituted 38% of its lending,
Russia's share of IIB equity was 50% and 80% of IIB's
funding came from the Russian market. Russia's economy is
now growing again, albeit slowly. In the meantime,
however, loans outstanding to Russia were reduced to 27%
of the loan portfolio at the end of 2017 (and 18% as of Q1-2018),
Russia's equity share had dropped to about 48% (IIB's
five EU member countries make up nearly 49%) and Russian market
funding accounts for just 30% of IIB's total funding (whereas
just over half of the bank's total funding comes from EU local markets).
IIB has diversified its lending to the extent that it now lends to at
least one project in each of its nine member countries. At year-end
2017, IIB's top 10 loan exposures accounted for a significantly
smaller share of its loan portfolio than in early 2015. Its loan
concentration at the country level also fell to 12.7% in
2017 from 14% in 2016 (2013: 32%). The concentration
at sectoral levels continued to improve as well, having declined
to 16% in 2017 from just above 17% in 2016 and 39%
in 2015. Finally, the concentration at the regional level
increased slightly to 27.4% in 2017 from 22.3%
in 2016, largely driven by growing operations in the CEE market
which is in line with the 2018-2020 business plan.
IIB's ability to raise stable financing improved significantly over
the last few years, especially with respect to the diversity of
its investor base. IIB has expanded its funding to 11 countries
from two in March 2015, with 52% of funding stemming from
EU countries as of end-2017. Diversification by products
increased to seventeen (up from four as of end 2014). The bank
plans to continue to increase the size of its investor base and the range
of financing products every year, after initially having raised
most of its funding in Russia. IIB is also targeting to issue in
more member states over time, as a sign of its commitment to the
development of those countries' capital markets.
HIGHER CREDIT QUALITY OF TREASURY PORTFOLIO ENHANCES LIQUIDITY
The credit quality of IIB's treasury portfolio was poor three years
ago, with only 23% of its holdings in Aaa-A rated
assets at the end of 2014 and an even lower 14% by the end of 2015.
That share has since risen to 44% by the end of 2017 (and to 49%
in the first quarter of 2018 according to unaudited statistics).
The medium-term plan calls for high-quality Aaa-A
assets to rise to a 65% share of treasury assets by 2020.
A key emphasis has been to shift more holdings to assets in non-member
states to de-correlate the two sides of its balance sheet,
such that assets of non-member countries rose to 58% in
2017 from 15% in 2014. Meanwhile, Russian assets are
down to just 5% of total treasury assets, compared to 53%
at the end of 2014.
Last year, IIB also decided to double its liquidity buffer --
made up of cash and cash equivalents, liquid deposits and securities
-- to cover 12 months of estimated cash flow needs on a forward-looking
basis. The buffer is meant to allow the bank to operate normally
even in a stressed market environment when its access to market borrowing
would presumably be difficult. At the end of 2017, the liquidity
buffer amounted to €71 million compared to the estimated cash flow
needs of around €25 million, which suggests that IIB would
still be able to extend a relatively large share of planned loan disbursements
on top of its operating expenses.
Other measures of liquidity, such as the debt-service coverage
ratio or liquidity ratio, are relatively strong. The former
measures the three-year average of the stock of short-term
and currently maturing long-term debt against the stock of liquid
assets. The liquidity ratio is currently strong as well,
but it is likely to weaken with the further expansion of the balance sheet
in the next several years. That said, IIB's liquidity
ratio improved last year to 28% from 41% in 2016,
due to a lengthening of the maturity of IIB's debt that more than
offset the expansion of the loan portfolio and the reduction in treasury
assets. This is a similar position to the bank's more established
MDB peers in the A rating range.
RATIONALE FOR A STABLE OUTLOOK ON THE A3 RATING
Moody's says that the change to a stable from a positive outlook
on IIB's rating balances the positive developments noted above against
a number of remaining challenges, which relate both to the relative
newness of the institution as well as its small size and still relatively
concentrated loan mix. IIB is still building its reputation among
investors, a process that has gone well at a time of low global
interest rates but that could prove more challenging as interest rates
normalize. A higher cost of funds could also negatively affect
the bank's ability to be a competitive lender, which could
be problematic in view of its already low return on assets. The
relatively young vintage of its loan book also presents elements of risk
as the bank has yet to establish a long track-record of limited
asset quality pressure under its new strategy. Finally, Moody's
believes that IIB will still need time to solidify its new business model
and its market position as a go-to source of infrastructure funding
or trade finance among its member countries.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating would likely be upgraded if the bank's expansion were
to be supported through additions to paid-in capital, further
progress in containing asset quality pressure and diversifying its loan
portfolio were made, in addition to achieving its medium term objective
of continuing to strengthen the quality of its treasury assets.
Conversely, IIB's rating would come under negative pressure
if asset quality pressures were to rise materially and expected to remain
elevated, particularly if these adverse developments were to occur
at a time of weakening capital buffers and/or an erosion in its favorable
liquidity position. Although not anticipated, a significant
deterioration in the strength of member support would also lead the rating
agency to consider a rating downgrade.
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.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
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
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information please see the ratings tab on the issuer/entity page for the
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For any affected securities or rated entities receiving direct credit
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for additional regulatory disclosures for each credit rating.
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
No Related Data.
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