Scope affirms European Investment Bank’s rating at AAA with Stable Outlook
Scope Ratings GmbH has today affirmed the European Investment Bank’s AAA long-term issuer and senior unsecured foreign-currency ratings, along with a short-term issuer rating of S-1+ in foreign currency. All Outlooks are Stable.
For the supranational scorecard, click here.
Summary and Outlook
Scope’s affirmation of the European Investment Bank’s (EIB) AAA rating reflects the supranational’s highly rated key shareholders, strong liquidity profile driven by high and prudently managed liquid assets, and excellent access to capital markets including to the refinancing operations of the European Central Bank (ECB). The EIB’s asset quality is also very high with negligible non-performing loans, its portfolio is well diversified, and the institution has been profitable every year since its inception in 1958. At the same time, the EIB is highly leveraged and, in line with its mandate, also increasing the risk profile of its exposures. Finally, while the EU-27 member states have replaced the UK’s capital in a broadly credit-neutral way, the EIB’s shareholder base is now more concentrated, resulting in a heavier dependence on fewer strong shareholders to provide exceptional support if ever needed.
The Stable Outlook reflects Scope’s assessment of the EIB’s inherent financial buffers to withstand external and balance sheet-driven shocks. The rating could be downgraded if: i) highly rated key shareholders are downgraded; ii) the EIB’s liquidity buffers are significantly reduced; and/or iii) the EIB records sustained losses, reducing its capital base.
The EIB’s AAA rating is supported by the institution’s highly rated shareholders. Specifically, the EIB’s highest decision-making body, the Board of Governors, is composed of ministers designated by each of the EU-27 member states, whose voting rights correspond to the countries’ respective shares of the EIB’s subscribed capital. On this basis, following the UK’s departure as an EIB shareholder and the capital increase by Poland and Romania in March 2020, the six largest European economies – France (AA/Stable), Germany (AAA/Stable), Italy (BBB+/Negative), Spain (A-/Negative), Belgium (AA/Negative) and the Netherlands (AAA/Stable) – together account for around 78% of the EIB’s capital. These sovereigns thus constitute the EIB’s key shareholders with a weighted-average rating of AA-. Scope notes that if both Italy and Spain are downgraded by one notch, as indicated by their Negative Outlooks, the EIB’s key shareholder rating would be lower at A+. This, however, would not impact the EIB’s AAA rating as it currently has substantial rating buffers from its strong financial profile. Scope notes that this heightened sensitivity of the EIB’s key shareholder rating reflects the UK’s departure as a shareholder which has resulted in an increased reliance of the bank’s capital base on fewer large and highly-rated shareholders.
In Scope’s view, the key shareholder rating of AA-, representing at least 75% of the share capital when starting with the largest shareholders, reflects: i) the ability of its shareholders to provide the EIB with a very strong framework, ensuring preferential treatment for and investor acceptance of its debt instruments; and ii) the strong commitment of shareholders with a high willingness and ability to provide the bank with additional financial support if ever needed. The EIB’s importance for its shareholders was once again highlighted by the key role it played in the European Covid-19 crisis response. In addition to the EIB’s own response of accelerated financing via existing products, EU member states set up the Pan-European Guarantee Fund of up to EUR 25bn to guarantee mostly the EIB’s lending to small- and medium-sized enterprises that are viable in the long term but were hit hard by the crisis.
The EIB’s rating is further underpinned by its strong institutional set-up, including its high capitalisation level under the assumption of full leverage in line with its statute and the benefit of having preferred creditor status. Specifically, the EIB’s available and credible resources amount to around EUR 206.0bn. These include paid-in capital (EUR 22.2bn), accumulated reserves and retained earnings (around EUR 47.3bn)a, retained profits as at year-end 2019 (EUR 2.4bn), and the callable capital of the 11 shareholders rated AA- or above (EUR 134.2bn) who benefit from the EIB’s lending operations. Dividing these assets by the maximum potential liabilities as defined in the EIB’s statute1 (EUR 674.2bn as of end-2019) results in a ratio of 30.6%. This implies that if the EIB were to operate at full capacity as allowed under its statute, the EIB’s institutional set-up would allow the bank to ensure that available and credible resources covered around one-third of all potential liabilities; a strength which Scope accounts for with a one-notch positive uplift.
In addition, while the EIB is not a lender of last resort (it does not have a mandate to lend to sovereigns in distress) and mostly lends to the private sector, Scope acknowledges the institution’s clear track record of being exempt from debt restructurings. This was most recently evidenced during the debt restructuring in Greece (BB/Positive) and Cyprus (BBB-/Stable), for which the EIB’s debt securities portfolios of government bonds were exempt from any haircut to principal or interest. On this basis, Scope assigns the EIB a one-notch uplift for its preferred creditor status. These considerations provide the EIB with a very strong institutional set-up compared to peers.
The EIB’s AAA rating also reflects its conservative liquidity management, which results in a high and stable level of liquid assets. Based on the EIB’s cash and deposits as well as its securities with a maturity of less than or equal to 12 months, Scope estimates the EIB’s liquid assets at around EUR 79.0bn for end-2019b. Conversely, EIB liabilities maturing within a 12-month period amounted to around EUR 92.8bn, while disbursements of loans and advances to credit institutions and customers were EUR 43.6bn2. This brings total liabilities due within one year to around EUR 136.4bn at end-2019. Scope notes that this calculation includes past disbursements to proxy future disbursements to reflect the EIB’s mandate to continue activities precisely when economic and financial circumstances deteriorate.
On this basis, Scope calculates a liquid assets ratio of 58% in 2019, slightly down from 61% in 2018. For the years 2017-19, the weighted average was around 58%, markedly above the 2014 level of 42%. This ratio implies that all outstanding liabilities and all committed disbursements due within a year can be financed with available liquid assets for more than six months without the need to access capital markets.
In addition, the EIB’s AAA rating is further underpinned by its status as a global benchmark issuer, evidenced by high annual funding volumes of around EUR 60bn, the roughly seven-year maturity of its issuances, and a highly diversified funding strategy in terms of currencies (17 in 2019) and instruments (including around EUR 4.1bn of green and sustainable bonds). As of 24 September, the EIB had raised over EUR 63bn and announced the increase of its funding authorisation for 2020 to EUR 70bn.
Reflecting its appeal to global investors, particularly for US-dollar issuances, the EIB benefits from a broad and very diversified investor base, led by investors in Europe (69%), followed by Asia (17%) and the Americas (12%). As of 14 August 2020, bank treasuries (36%), central banks and official institutions (34%) as well as institutional investors (26%) account for most of the EIB’s investors4. Scope also notes that the ECB’s purchase programmes, which allow the ECB to buy debt securities on the secondary market, are estimated to have resulted in Eurosystem holdings of EIB debt of around EUR 100bn. Finally, Scope notes positively that the EIB is the only supranational worldwide with access to the liquidity facilities of a central bank that issues a reserve currency included in the IMF’s SDR basket, namely the ECB. The agency acknowledges this unique funding capacity with a one-notch positive adjustment.
The EIB’s AAA rating is further supported by its excellent asset quality, reflecting its conservative lending policies, high asset protection and credit enhancements provided by the EU and its member states – including for non-EU and European Fund for Strategic Investments (EFSI)-related exposures – as well as strong collateralisation levels. The EIB’s non-performing loans – defined as amounts more than 90 days in arrears that are not secured by EU or member state guarantees – have increased from around EUR 41.6m in 2012 to EUR 146.0m in 2019, slightly below the EUR 176.4m recorded in 2018. This represents 0.03% of total outstanding signed loans (EUR 560.4bn), one of the lowest ratios among supranationals with private sector exposure2. Scope notes that while the Covid-19 shock may adversely impact its asset quality, the EIB already doubled value adjustments for its loan portfolio to EUR 862m (out of which EUR 305mn are collective provisioning) in H1 2020 from EUR 480m in 2019 to account for this risk3. In addition, given its mandate to lend to sovereigns, public institutions, financial institutions and corporates across several sectors and jurisdictions, as well as its lending policies establishing counterparty and sector limits, the EIB’s portfolio is highly diversified, which reduces risks to its asset performance.
Finally, Scope notes positively that the EIB has been profitable every year since its inception in 1958, with stable annual earnings. These are fully retained and thus contribute to the EIB’s accumulated reserves, and in turn to its capitalisation as well as its lending capacity, in line with its statute. The EIB’s net income in 2019 was EUR 2.4bn, which corresponds to a return on equity of 3.3%.
Despite these credit strengths, the EIB also faces the following credit challenges:
First, Scope notes that the EIB’s total borrowings stood at around EUR 449.3bn as of December 2019, resulting in a leverage ratio of around 630%, still one of the highest among supranationals despite declining from around 1,000% in 2011. The decline in the ratio in 2012 reflects the EUR 10bn paid-in capital increase agreed at the time, while the most recent decreases in 2017 and 2018 are due to a rise in reserves amid stable profits and the drop in lending to the UK. As of H1 2020, the latest available figures, this ratio is set to increase again by around 40pp, and is likely stay at that higher level given accelerated disbursements this year and probably higher lending volumes next year.
Second, while the withdrawal of the United Kingdom from the European Union, and thus the EIB’s shareholder base, has had a broadly capital-neutral impact, it has resulted in a reduction of the quality of the EIB’s callable capital, and in addition, a higher dependence on any one shareholder’s ability to honour capital calls. Specifically, the EIB converted EUR 3.5bn (the equivalent of the UK’s paid-in capital) from its reserves into paid-in capital, while each member state increased its callable capital pro rata to compensate for the loss of the UK’s EUR 35.7bn share (the equivalent of the UK’s uncalled capital). In addition, effective 1 March 2020, Poland (A+/Stable) and Romania (BBB-/Negative) increased their subscribed capital by EUR 5.4bn and EUR 0.1bn respectively. Both countries will also contribute an additional amount of around EUR 1.1bn to the EIB’s reserves5. Thus, compared to the pre-Brexit capital structure, the EIB’s subscribed capital has increased by EUR 5.5bn while reserves have decreased slightly (though the reduction of EUR 2.4bn is in line with the retained 2019 profit).
However, Scope notes that the callable capital of shareholders rated AA- or above has dropped from EUR 148.1bn in 2019, when the UK was still a shareholder, to around EUR 134.2bn, which now excludes the UK’s callable capital but includes Estonia’s callable capital of EUR 0.2bn, following Scope’s upgrade of the sovereign to AA-/Stable in February 2020. Critically, going forward, the EIB has to rely on fewer shareholders rated AA- or above for extraordinary capital support, which results in a weaker assessment of shareholder concentration. Still, while no capital call has ever been made, Scope believes shareholders would be willing to honour such a capital call given their ownership and control of the institutionc.
Third, in line with its mandate, the EIB’s riskier exposures have increased since the deployment of the EFSI, which is implemented by the EIB and the European Investment Fund via the respective Infrastructure and Innovation Window and the SME Window. These exposures are, however, guaranteed by the European Commission. The average asset quality of EFSI operations is riskier than the average of other EIB operations and is classified under ‘Special Activities’. These are defined as either: i) debt operations with a risk profile of D- or below based on the EIB’s classification (i.e. expected loss exceeds 2%); or ii) all equity and equity-type operations.
As such, the volume of new EIB Special Activities signatures increased from EUR 4.5bn in 2014 to around EUR 15.0bn in 2019; of this amount, however, only EUR 1.5bn were at the EIB’s own risk. Still, despite this fourfold increase, the stock of Special Activities declined from the peaks seen during the euro area crisis, balancing new signatures in 2019 with offsetting redemptions and improvements in the credit quality of outstanding loans. As of end-2019, the EIB’s total Special Activities exposure stands at around EUR 19.9bn. At the same time, Scope notes positively that the EIB’s reserve covering unexpected losses from Special Activities at the EIB’s own risk has steadily increased, from around EUR 3.2bn in 2015 to EUR 6.6bn in 2019. In addition, these exposures also benefit from a guarantee provided by the European Union (AAA/Stable). Looking ahead, EFSI will be succeeded by the InvestEU programme over the 2021-2027 period, the parameters of which however remain under discussion. Thus, while the EIB will remain the main implementing partner for the extended programme, along with other multilateral development banks, Scope does not expect a material deterioration in its asset quality over the coming years.
Finally, Scope notes that the EIB’s statute limits the amount of own funds that it can invest into equity participations. While equity type financing has grown steadily since 2010, from around EUR 2.2bn to around EUR 8.5bn, it still constitutes only around 12% of the institution’s equity and reserves (up from 6% in 2010).
Factoring of Environment, Social and Governance (ESG)
Scope considers ESG sustainability issues during the rating process as per its supranational methodology. Scope’s ‘fundamental rating’ of ‘AA’ for the European Investment Bank implicitly captures governance-related factors. Environmental factors are considered during the rating process, including the risk of ‘stranded assets’ and the benefits from issuing green and/or social bonds. However, environmental factors had no impact on this particular rating action. At the same time, Scope notes positively that the EIB has revised its energy lending policy, ending financing for fossil fuel energy from the end of 2021 and pledged to increase the share of financing dedicated to climate action and environmental sustainability to 50% of its new operations in 2025. The EIB is also the largest green bond issuer among supranationals, having raised a cumulative EUR 31.2bn in green bonds across 16 currencies since 2007. Finally, the EIB will gradually align its Green Bond Framework (CAB) with the EU Green Bond Standard in line with the European Commission Action Plan on Financing Sustainable Growth, specifically the EU Sustainability Taxonomy, thus ensuring continued high standards on green bond issuance. This alignment is also likely to result in an extension of its green bond allocations beyond projects in renewable energy and energy efficiency going forward.
Scope’s supranational scorecard
Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘AAA’ rating for the European Investment Bank. Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect the creditworthiness of the issuer.
For the EIB, the following additional consideration has been identified: it is the only supranational worldwide with access to the liquidity facilities of a central bank that issues a reserve currency, namely the ECB. Scope acknowledges this factor with a one-notch positive adjustment.
A rating committee has discussed and confirmed these results.
For further details, please see Appendix I of the rating report.
a) The figure of EUR 49.6bn reported in the 2019 financial results is adjusted: i) downward for the conversion of EUR 3.5bn of the bank’s reserves into paid-in capital; and ii) upward for the additional contributions from Poland and Romania to reserves of around EUR 1.1bn, or 2.3% of the EIB’s reserves at end-2019.
b) This is a conservative estimate since the EIB has additional securities worth EUR 22.5bn. While these securities have a maturity of over 12 months, they could still be included in Scope’s assessment if their minimum rating is AA-. However, to err on the conservative side, these assets were not included since their exact rating is not publicly disclosed. Based on the fact that 47% of the EIB’s securities portfolio has a ‘Moody’s or equivalent rating’ of AA- or above, Scope estimates that approx. EUR 10.6bn of these assets could serve as additional liquid assets. If these assets were included in Scope’s calculations, the agency’s assessment of the liquid assets ratio would not change.
c) Article 5.3 of the EIB’s statute stipulates EIB shareholders have the obligation to honour capital calls ‘to such extent as may be required for the Bank to meet its obligations’.
The main points discussed were: i) key shareholders and institutional set-up; ii) preferred creditor status and mandated activities; iii) liquidity management and buffers; iv) funding activity; v) asset quality, including EIB Special Activities and equity exposures as well as credit enhancements; vi) portfolio diversification; vii) profitability; and viii) peers.
The methodology applicable for this rating and/or rating outlook, ‘Supranational Entities’ 4 November 2019, is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rating process was conducted:
With Rated Entity or Related Third Party Participation NO
With Access to Internal Documents NO
With Access to Management NO
The following substantially material sources of information were used to prepare the credit rating: public domain. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Rating prepared by Alvise Lennkh, Executive Director
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director
The ratings/outlook were first released by Scope on 15 November 2019.
Please see http://www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.
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