Scope affirms European Investment Bank’s AAA rating with Stable Outlook
Continuous retained profits, very high asset quality, excellent access to capital markets and ECB facilities, a very strong mandate and highly rated shareholders support the rating; relatively high leverage is the key challenge.
Scope Ratings GmbH (Scope) 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 detailed rating report, click here.
Summary and Outlook
The European Investment Bank’s (EIB) AAA rating reflects the supranational’s ‘excellent’ intrinsic strength and ‘very high’ shareholder support. The EIB’s institutional profile is characterised by a proven track record of excellent governance and an irreplaceable mandate for its EU shareholders. In addition to being at the forefront of implementing the European Fund for Strategic Investments and successor programme InvestEU, it is catalysing Europe’s transition to carbon neutrality and playing a critical role in the EU’s response to the Covid-19 crisis.
The EIB’s financial profile benefits from its persistent ability to generate and retain capital every year since its inception in 1958, including in 2020 during the Covid-19 crisis. The EIB’s excellent asset quality with negligible non-performing loans is driven by its conservative lending policies, high asset protection, and its widely diversified portfolio across geographies, sectors and counterparties. The EIB’s strong liquidity profile is driven by its high, prudently managed liquid assets, excellent market access given its global benchmark issuer status, diversified funding base, and unique access to the liquidity facilities of the ECB. Challenges, which are marginal at the AAA level, relate to its high leverage and relatively moderate liquidity buffers compared to peers.
Finally, the EIB benefits from highly rated key shareholders. The six largest European economies – Germany (AAA/Stable), France (AA/Stable), Italy (BBB+/Stable), Spain (A-/Stable), the Netherlands (AAA/Stable) and Belgium (AA-/Stable) – together account for around 78% of the EIB’s capital. Their weighted average rating of AA- drives Scope’s very high assessment of shareholder support, which is further supported by the EIB’s high-quality callable capital of about EUR 135.7bn which currently covers around 30% of its outstanding mandated assets.
The Stable Outlook reflects Scope’s assessment of the EIB’s financial buffers to withstand external and balance sheet-driven shocks. The rating could be downgraded if: i) the EIB records sustained losses; ii) its liquidity buffers are significantly reduced; and/or iii) highly rated key shareholders are downgraded.
The first driver of the EIB’s AAA rating is its very strong institutional profile.
This reflects the EIB’s excellent governance and irreplaceable mandate for its EU shareholders. In recent years, it has been at the forefront of implementing the European Fund for Strategic Investments and its successor programme, InvestEU. It also played a critical role in the EU’s response to the Covid-19 crisis in 2020. Looking ahead, Scope expects the EIB to be at the centre of the EU’s climate agenda to support the EU’s transition to a carbon-neutral and climate-resilient economy. Specifically, the EIB aims to: i) align all of its new financing activities with the goals of the Paris Agreement and to start integrating the principles of the EU Taxonomy into its activities from 2021 onwards; ii) stop supporting new unabated fossil fuel energy projects from 2022 onwards; iii) allocate more than 50% of its financing to climate action and environmental sustainability from 2025 onwards; and iv) mobilise EUR 1trn in investment for climate action and environmental sustainability by 20301.
Scope assesses the EIB’s potential environmental risk exposure – including the risk of stranded assets, as well as the reputational risk of pursing activities, either directly or through counterparties, that are contradictory to its mandate and environmental objectives – as low compared to that of its peers. This is due to: i) the comparatively low transition and physical risk scores of the EIB’s main countries of operation based on Scope’s sovereign transition and physical risk scores; and ii) the effective measures already taken and underway regarding its project and counterparty selection. The EIB uses a climate risk screening tool at the counterparty level and a climate risk assessment system to screen, assess and report on climate-related physical and transition risks in its lending operations2. Moreover, the EIB includes a shadow cost of carbon of EUR 80 per tonne of CO2 emissions, which is to be raised to EUR 250 by 2030. These measures meaningfully reduce the risk of financing projects with high transition risks. They also support the EIB’s catalytic role in mobilising private capital to achieve environmental goals, given the EIB’s weight in capital markets. This underpins Scope’s assessment of the EIB’s very strong institutional profile.
The second driver underpinning the EIB’s AAA rating is its very strong financial profile.
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, its capitalisation and lending capacity, in line with its Statute. The EIB’s net result in 2020 was EUR 1.7bn, down from EUR 2.4bn in 2019, on account of the Covid-19 shock resulting in a slightly lower return on equity of about 2.4% for 2020.
The EIB’s excellent asset quality reflects its conservative lending policies, high asset protection, and credit enhancements provided by the EU and its member states – including for non-EU exposures and exposures related to the European Fund for Strategic Investments. Its widely diversified portfolio across geographies, sectors and counterparties and its strong collateralisation levels also play an important role. Equity participations, while growing, remain moderate. Looking at loan exposure at the consolidated EIB Group level, Scope notes that of the EIB’s EUR 423.2bn in total disbursements, about EUR 234.7bn was ultimately lent to or backed by sovereigns or public institutions. Of the remaining EUR 188.6bn, about EUR 113.1bn or 26.7% of the total portfolio is unsecured private sector exposures. Scope thus estimates that 60%-80% of the EIB’s portfolio is well protected. This assessment is corroborated by the EIB’s internal grading system, according to which 84.1% of its exposures – based on the better of the borrower’s or guarantor’s internal ratings – are assessed as investment grade, while less than 3% are assessed as ‘high risk’ (‘b’) or worse3.
The EIB’s portfolio is highly diversified given its mandate to lend to sovereigns, public institutions, financial institutions and corporates across several sectors and jurisdictions. Its lending policies establish counterparty and sector limits to ensure sufficient diversification of the loan portfolio. As a result, at the EIB Group level, the top 10 nominal exposures constitute only 10.9% of the EIB’s portfolio, excluding exposures to sovereigns and those covered by sovereign guarantees, supporting its asset quality.
In addition, Scope notes that the EIB’s non-performing loans – defined as amounts more than 90 days in arrears – amounted to EUR 121.1m in 2020, down from a peak of EUR 182.2m in 2017. This represents just 0.03% of the EIB’s portfolio, which is one of the lowest NPL ratios among peers. Looking at the wider definition of impaired exposures – defined as amounts that are probable that will not be collected in full – the EIB’s track record is also outstanding, with around EUR 1.9bn of impaired exposures as of YE 2020, or about 0.4% of the loan book.
The EIB’s AAA rating is further underpinned by its status as a global benchmark issuer. EIB bonds are designated as high-quality liquid assets under the Basel framework and are included in the ECB’s asset purchase programmes, supporting the bank’s market access. The EIB estimates that the ECB may have purchased EUR 139bn in EIB debt since March 2015, about 32.7% of its outstanding debt securities in 2020. The EIB’s annual funding volume of around EUR 50bn-70bn over the past decade is by far the largest among peers. This, along with its highly diversified funding strategy in terms of currencies (19 in 2020) and instruments (including around EUR 10.5bn of green and sustainable bonds in 2020 and EUR 8.9bn during H1 2021), underlines its status as a global benchmark issuer. This status was on display again in 2020 when the EIB entered the market as the first supranational in a de facto closed market environment after the Covid-19 crisis began.
As of June 2021, the EIB had already funded EUR 43.8bn or 73% of its targeted EUR 60bn programme for the year. In the coming years, Scope expects the EIB to issue EUR 50bn-60bn annually, in line with its operational strategy. Reflecting its appeal to global investors, the EIB benefits from a broad and very diversified investor base led by those in Europe (69%), followed by Asia (17%) and the Americas (12%). Bank treasuries (37%), fund managers, insurance and pension funds (28%), and central banks and official institutions (31%) account for most of the EIB’s investors. Reflecting its agency and ability to develop capital markets, the EIB is the second largest supranational green and sustainable bond issuer after the European Union, having raised a cumulative EUR 45.4bn in green and sustainable bonds across 19 currencies since 20074. Of the EUR 200bn in outstanding supranational green and sustainable bonds worldwide, about 20% have been issued by the EIB. Finally, Scope notes positively that the EIB is the only supranational in the world with access to the liquidity facilities of a central bank that issues a reserve currency, namely, the ECB. Scope has acknowledged this unique funding capacity with a one-notch positive adjustment5.
The third driver of the EIB’s AAA rating is its very high shareholder support.
In line with its governance, the six largest European economies – Germany (AAA/Stable), France (AA/Stable), Italy (BBB+/Stable), Spain (A-/Stable), the Netherlands (AAA/Stable) and Belgium (AA-/Stable) – together account for around 78% of the EIB’s capital. Their weighted average rating of AA- drives Scope’s assessment of shareholder support. This is further supported by the EIB’s high-quality callable capital of EUR 135.7bn which currently covers about 30% of its outstanding mandated assets.
Despite these credit strengths, the EIB also faces the following credit challenges:
First, the EIB’s capitalisation level relative to its outstanding assets is one of the lowest among supranationals. Scope estimates the EIB’s equity and reserves at around EUR 73.5bn. The EIB’s statutory leverage is up to 2.5 times its subscribed capital, accumulated reserves and profit, i.e. roughly EUR 750.3bn. This results in a capitalisation ratio of about 10%, which is significantly below that of peers. However, Scope notes that following the UK’s exit as a shareholder, the EIB’s subscribed capital increased given the higher subscription levels of Poland (EUR 5.4bn) and Romania (EUR 0.1bn). Scope also notes that the EIB’s actual capitalisation ratio, based on disbursed operations, is slightly higher at around 16%.
Second, while the EIB’s conservative liquidity management results in a stable level of liquid assets, its liquidity coverage ratio is estimated at only around 57%. Scope estimates the EIB’s liquid assets at around EUR 83.1bn for YE 2020, slightly above the EUR 79bn figure for 2019. Conversely, Scope estimates the elevated liabilities coming due within 12 months, including disbursements, at about EUR 146.4bn at YE 2020. While the 57% liquidity coverage 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 needing to access capital markets, this ratio is lower than that of peers.
Finally, Scope notes that the EIB’s equity type financing at the EIB Group level has grown steadily since 2010 from around EUR 2.0bn to around EUR 12.8bn, or about 18% of its equity and reserves (up from around 5% in 2010). Similarly, the EIB’s guarantees (at the EIB Group level) have grown to around EUR 22bn in 2020 (or about 26% of estimated liquid assets) from EUR 3bn in 2010 (7.4% of estimated liquid assets). Still, potential risks from these exposures are curtailed by the overall strong credit quality of the positions, with 70% at investment grade based on the EIB’s internal ratings, their high diversification and the lack of substantial guarantee calls to date.
Factoring of environment, social and governance (ESG)
Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. ESG factors are explicitly captured in Scope’s assessment of the institutional profile, which Scope assesses as ‘very strong’ for the EIB.
Scope’s supranational scorecard
Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative AAA rating for the EIB. 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: i) 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 II of the rating report.
The main points discussed were: i) institutional profile; ii) financial profile, including capitalisation, asset quality, liquidity and funding; iii) shareholder support; iv) additional considerations; and viii) consideration of peers.
Rating driver references
1. The EIB Group Climate Bank Roadmap 2021-2025
2. EIB Risk Management Disclosure Report 2020
3. EIB Financial Report 2020
4. EIB CAB & SAB Newsletter, May 2021
5. EIB Investor Relations Presentation, 19 August 2021
The methodology applicable for these Credit Ratings and/or Outlooks, (Supranational Rating Methodology, 7 September 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation YES
With Access to Internal Documents NO
With Access to Management NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Alvise Lennkh, Executive Director
Person responsible for approval of the Credit Ratings: Dr Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 15 November 2019. The Credit Ratings/Outlooks were last updated on 16 October 2020.
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
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