Fitch talks issuer default rating pf Eurasian Development Bank

Fitch talks issuer default rating pf Eurasian Development Bank

BAKU, Azerbaijan, Dec. 3

By Nargiz Sadikhova – Trend:

Fitch Ratings has assigned Eurasian Development Bank (EDB) a Long-Term Issuer Default Rating (IDR) of 'BBB+' with a Stable Outlook, Trend reports with reference to the Fitch report.

“EDB's Long-Term IDR of 'BBB+' is solely based on the intrinsic features of the bank. Its intrinsic credit profile is driven by our solvency profile assessment of the bank, at 'a', which is the lower of its liquidity and solvency assessments. The bank's liquidity is assessed at 'aa-'. Fitch's assessment of a high-risk business environment translates into a negative adjustment of two notches below EDB's solvency assessment, to 'bbb+',” the report said.

Fitch considers EDB's 'excellent' capitalization as a key rating strength, primarily driven by our view that EDB's equity / assets ratio will continue to far exceed the 25 percent 'excellent' threshold over a three-year forecast period ending 2021.

As of 2018, the equity/assets ratio was 47 percent and the agency expects significant headroom to remain above the 25 percent threshold.

Fitch expects the bank's internal capital generation (ICG) to continue to average approximately 2.5 – 3 percent over the forecast period.

“Our assessment of EDB's solvency combines the bank's 'excellent' capitalization and 'high' risk profile. The agency estimates EDB's loan portfolio average rating at 'B+',” the report said.

According to Fitch, non-performing loans (NPLs), as reported by the bank, fell markedly to 2.5 percent in 2018 from 6.7 percent in 2017.

Fitch expects Stage 3 loans as a percentage of total loans to decline during the forecast period but the agency continues to expect a 'high-risk' NPL rate (defined as greater than 6 percent) by 2021.

“We assess EDB's concentration risk as 'low', reflecting the bank's ability to lend to private-sector borrowers, which translates into a more diversified loan portfolio than that of peers who are focused only on sovereign lending. Fitch expects the top-five exposures to amount to 25-30 percent of the bank's total banking exposure by 2021, compared with 31.7 percent for end-2018,” the report said.

Fitch assesses EDB's equity participation risks as 'very low', which reflects the expected share of equity stakes relative to the bank's total exposures of around one percent in 2021.

Market risks are assessed as 'low' for EDB owing to both limited interest-rate risk and FX risks, with the bank's primary market risk policy to match its funding and lending activities by currency and maturity to avoid any mismatch.

Risk management policies are assessed as 'moderate'. While the bank adheres well to its internal financial ratios, some limits are less conservative than those of rated peers (including a minimum capitalization ratio of 16 percent).

Liquidity is a rating strength for EDB, with the bank's 'aa-' liquidity profile reflecting its 'excellent' liquidity buffer, 'moderate' asset quality and 'moderate' access to capital markets.

EDB's treasury-asset quality improved considerably in 2019, with the portion of 'AAA-AA' rated assets representing 45 percent of treasury assets as of June 2019, compared with 22 percent as of 2018. While EDB expects to maintain this higher quality of treasury assets over the medium term, Fitch's forecast is more conservative given that the improvements in 2019 were not driven by changes to EDB's policies relating to treasury assets.

EDB's business environment is deemed 'high risk', which translates into a two-notch negative adjustment below our solvency assessment of 'a', leading to an intrinsic rating of 'bbb+'.

“Our assessment of EDB's 'high risk' business profile is driven by the 'small' size of its banking portfolio, its focus on non-sovereign lending and the bank's expected high lending growth. In terms of capacity to support we do not expect the bank's shareholding structure to change materially over the medium term, we expect EDB's net debt to remain covered by 'BBB' rated callable capital over the forecast period,” the report said.

Fitch assesses EDB's shareholders' propensity to support the bank as 'strong'.

“EDB's Short-Term IDR of 'F1' reflects our liquidity assessment of 'aa-' which is higher than 'a', the minimum liquidity assessment at which the higher of two Short-Term rating options (F1 or F2) would apply at the 'BBB+' Long-Term IDR level. EDB's Long-Term IDR is one-notch above the 'BBB' sovereign rating of Kazakhstan, with a Stable Outlook. Therefore, the MDB is rated 'AAA(kaz)' on our Kazakhstan national rating scale,” the report said.

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Follow the author on twitter: @nargiz_sadikh

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