Scope affirms European Bank for Reconstruction and Development’s AAA rating with Stable Outlook
Scope Ratings GmbH has today affirmed the EBRD’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 EBRD’s AAA rating reflects its ‘excellent’ intrinsic strength and ‘very high’ shareholder support. The bank has a proven track record of excellent governance and a very strong mandate for its shareholders, being at the forefront of facilitating the transition to market and greener economies in its countries of operation.
The EBRD is highly capitalised and benefits from strong liquidity policies and conservative risk management practices. The bank’s paid-in capital ratio of 21% is one of the highest among peers, while sustained profits in its core business continue to build its reserves. Prudent capital and liquidity management, along with excellent market access, are important mitigating factors for the EBRD’s comparatively risky business profile. Its mandate to focus its operations on the private sector in transition and emerging market economies, mostly via loans and equity investments, results in higher non-performing loans (NPLs) and more volatile returns compared to peers. However, NPLs do not show a systematic trend, have stabilised since H1 2021 and are well provisioned for at around 50%. The bank’s diversified portfolio across geographies, sectors and counterparties further mitigates asset quality risks.
Finally, the EBRD benefits from a globally diversified, growing, highly rated shareholder base, with the G7 holding more than 50% of its capital. The bank’s highly rated shareholders include the United States (AA/Stable), Japan (A/Stable), the UK (AA/Stable) and all EU-27 member states with a weighted average rating of AA-. This drives Scope’s very high assessment of shareholder support. Further support comes from the EBRD’s high-quality callable capital of about EUR 15.1bn, which currently covers around 43% of its outstanding mandated assets.
The Stable Outlook reflects Scope’s view that risks are balanced over the next 12 to 18 months. The ratings/Outlooks could be downgraded if, individually or collectively: i) the EBRD’s asset quality deteriorated materially, resulting in sustained losses; and/or ii) liquidity buffers were significantly reduced.
The first driver of the EBRD’s AAA rating is its very strong institutional profile.
This reflects the bank’s excellent governance and strong mandate for its shareholders, being at the forefront of facilitating the transition to market and greener economies in its countries of operation. It seeks to promote the emergence of a strong private sector through investments, policy reform and advisory projects in the nearly 40 countries it operates in across Europe, Asia and Africa.
The EBRD has played a critical role for its clients during the ongoing Covid-19 crisis via its ‘Solidarity Package’ centred around the Resilience Framework. Totalling EUR 4bn (up from the original EUR 1bn), the package provides clients with short-term liquidity, working capital and trade finance. Here, the bank also provided support to clients via principal payment deferrals, with 97 operations actively benefitting from a deferral with operating assets of EUR 0.7bn as of Q3 2021. Looking ahead, Scope expects the EBRD to play a critical role in the transition of its countries of operation to a carbon-neutral, climate-resilient economy. Specifically, the bank has committed to a strategy to align all its processes and activities with the Paris Agreement by 2023 and to increase the share of its projects classified as contributing to the Green Economy Transition (GET) initiative to at least 50% by 2025.
To this end, the bank is advancing quickly and comprehensively to integrate climate risk in its risk management and governance frameworks. In June 2021, it introduced systematic physical and transition risk screening for all new direct finance projects. Projects are also assessed for their alignment with the Paris Agreement and whether they contribute to climate mitigation, adaptation and environmental goals. The bank also performs economic assessments on projects with high GHG emissions using shadow carbon prices ranging from USD 40-80 per tonne of CO2e in 2020 to USD 50-100 per tonne of CO2e by 2030. This is important because carbon prices are limited or non-existent in many economies in which the EBRD invests. Going forward, the bank will expand its climate assessment methodologies to include financial institutions, sovereigns, equity and treasury exposures. It is also advancing its climate stress-testing capacities using the Network for Greening the Financial System (NGFS)’s climate scenarios. The bank aims to fully integrate its climate risk assessments in its portfolio monitoring over the coming years 1.
Scope notes that the EBRD’s transition risks are meaningfully higher relative to its peers, while its physical risks are broadly in line with other highly rated supranationals. However, the relatively high transition risks are adequately and comprehensively addressed by the bank’s granular and evolving risk assessments of its exposures, as well as by the effective measures already taken and underway regarding its project and counterparty selection.
Specifically, the EBRD uses three factors to assess its climate-related credit risks: i) time horizon; ii) industry sector; and iii) geography. While 37% of the EBRD’s portfolio is considered long-term, which could increase the bank’s exposure to climate risk, 56% of these exposures are sovereign deals. Moreover, 50% of medium-term exposures are to projects with less than a five-year tenor remaining. In addition, the EBRD identifies 114 clients as having high transition risks, totalling EUR 3.4bn of exposures or 7% of portfolio assets, down from 17% in 2010 (if the bank had applied its current risk assessment criteria back then). Of these, only about EUR 1.2bn are classified as long-term or equity investments. The remaining EUR 2.2bn will amortise within the next two to 10 years, significantly reducing the bank’s transition risks. Notably, the EBRD’s coal-related exposure comprises EUR 1.1bn and 26 different clients as of December 2020. Some 85% of this exposure is indirect, including projects related to energy-efficiency improvements, renewables and CO2 reduction. This portion will mature by 2030, whereas the bank’s EUR 92m of direct exposure to coal will mature by 20251.
Overall, these pioneering monitoring and risk management measures significantly reduce the risk of financing projects with high transition and physical risks. In addition, they further support the EBRD’s role in mobilising private capital to achieve environmental goals in line with its mandate. Consequently, they underpin Scope’s positive assessments of the EBRD’s environmental factors and institutional profile.
The second driver underpinning the EBRD’s AAA rating is its very strong financial profile.
Scope’s assessment reflects the bank’s conservative capital framework and its track record of generating and retaining capital. Its capitalisation level relative to its outstanding assets is one of the highest among supranationals. Scope estimates the EBRD’s equity and reserves at around EUR 19.4bn as of H1-2021. Its statutory leverage is limited to its subscribed capital, accumulated reserves and profit, i.e. roughly EUR 41.8bn. This results in a capitalisation ratio of about 47%, which is significantly above that of peers. In addition, Scope notes that the EBRD operates at an even higher actual capitalisation level of around 55%, based on total disbursed loans of about EUR 28.3bn (excluding provisions), guarantees (EUR 1.3bn) and share investments (EUR 6bn) as of H1-2021. Similarly, the bank’s self-reported gearing ratio based on disbursed assets stood at 79% in 2020. This is up from 71% in 2015 but still well below its policy threshold of 92%. Its risk-based capital requirement ratio stood at 67%, down from 80% in 2015 and thus well below its policy threshold of 90%2.
The bank’s capitalisation is further underpinned by its ability to generate and retain profits. It has been profitable every year since 2010 (except 2014). That includes 2020 – despite extremely challenging economic and financial conditions affecting all regions in which the EBRD operates. While the bank’s return on equity is volatile, driven by valuation changes in its equity portfolio, the bank has demonstrated a continued ability to record strong, stable underlying profits over the past decade, supporting Scope’s excellent capitalisation assessment.
The EBRD’s excellent liquidity coverage and capital market access further strengthen its financial profile. Conservative liquidity management is driven by medium-term liquidity requirements for: i) net treasury liquid assets to cover at least 75% of the next two years’ projected net cash requirements; and ii) the bank to meet its obligations for at least 12 months under extreme stress. This prudent liquidity management results in a stable and growing level of liquid assets, which Scope estimates at around EUR 27.9bn for YE 2020, slightly below the EUR 29.6bn figure for 2019. The estimate includes cash and cash equivalents (EUR 3.9bn), deposits (EUR 14.7bn), and highly rated debt securities (EUR 9.2bn)*. Conversely, liabilities maturing within a 12-month period amounted to EUR 15.4bn (2019: EUR 19.4bn), while gross disbursements to customers increased to EUR 7.6bn in 2020 from EUR 7.2bn in 2019. The resulting 121% liquidity coverage ratio for 2020 implies that all outstanding liabilities and all committed disbursements due within a year can be financed with available liquid assets for more than 12 months without needing to access capital markets. This ratio is exceptionally strong, even compared to peers, and it has remained above 100% every year since 2017.
The EBRD’s AAA rating is further underpinned by its status as a global benchmark issuer, given its frequent issuances and its highly diversified funding strategy in terms of currencies and instruments. These provide the bank with a stable source of funding for its operations. Reflecting its appeal to global investors, the EBRD benefits from a broad and very diversified investor base led by investors in the EMEA region (45%), followed by the Americas (30%) and Asia (25%). Most of them are fund managers, pension and insurance funds (49%), bank treasuries (28%) or central banks (20%). In addition, the EBRD is a leading supranational green and social bond issuer that has raised a cumulative EUR 7.7bn in green bonds since 2010, tapping into a growing ESG investor base3, 4.
Further reflecting its agency and ability to develop capital markets, the EBRD provides local currency financing to clients. As of November 2021, about 20% of its outstanding debt before swaps was in emerging market currencies with the largest shares in Turkish lira (4.7% of total) and Kazakh tenge (4.3%).
The third driver of the EBRD’s AAA rating is its very high shareholder support.
Its highly rated shareholders include the United States (AA/Stable), Japan (A/Stable), the UK (AA/Stable) and all EU-27 member states with a weighted average rating of AA-. This is one of the highest key shareholder ratings among supranationals, which drives Scope’s assessment of EBRD shareholders’ ability to provide support if ever needed. This is further supported by the EBRD’s high-quality callable capital of EUR 15.1bn, which currently covers about 45% of its outstanding mandated assets.
Despite these credit strengths, the EBRD also faces the following credit challenges:
The EBRD’s ‘moderate’ asset quality and comparatively higher NPLs reflect its relatively risky business profile, driven by its focus on private sector lending and equity investments in transition economies that are usually rated non-investment grade.
As of end-2020, the EBRD’s total signed loan portfolio and guarantees increased to about EUR 42.3bn from EUR 39.9bn in 2019, markedly above the EUR 25bn seen in 2010. Of this, about 32% relates to sovereigns directly (up from 20% in 2011), about 20% relates to banks and 48% to corporates. In terms of geographic exposures, the EBRD’s exposures in Turkey (B/Negative), Egypt and Ukraine have comprised about one third of total exposures since 2017. For this reason, only 14% of the bank’s exposures are assessed as investment grade. Scope estimates the bank’s weighted average portfolio quality at around ‘b’, lower than most of its highly rated peers. In addition, the EBRD’s equity investments of about EUR 6.0bn as of June 2021 constitute around 30% of available capital. This is an improvement when compared to the bank’s capital position, given retained earnings over the past few years. Yet it is still an elevated level, and it results in volatile earnings given valuation changes. That being said, the EBRD’s preferred creditor status and its well-diversified portfolio across regions, sectors and individual counterparties – with the top 10 nominal exposures amounting to only 19% of the portfolio – mitigate some of these asset quality risks.
Finally, Scope notes that the EBRD’s NPLs – defined as amounts more than 90 days in arrears – totalled EUR 1.6bn as of June 2021, up from EUR 1.2bn at end-2019. This represents about 5.4% of the bank’s portfolio (up from 4.2% in 2019), one of the highest such ratios among peers. Still, the upward trend in NPLs is likely to have come to a halt in 2021, reflecting, among other factors, the robust economic recovery in the EBRD’s countries of operation. In addition, while Stage 3 provision cover has fallen from above 70% in 2017, it remains high at about 51% (roughly EUR 792m) as of June 2021. The key challenge from a portfolio perspective is the bank’s exposures in Turkey, although these have declined from about 18% of total exposures to 14% in 2020.
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 EBRD.
Scope’s supranational scorecard
Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative AAA rating for the EBRD. 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.
No adjustment was made to the indicative rating of the EBRD.
A rating committee has discussed and confirmed these results.
For further details, please see Appendix II of the rating report.
*This estimate includes debt securities with an EBRD internal rating of ‘excellent’ or ‘very strong’, which corresponds to ratings above the AA- threshold of Scope’s methodology.
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.
1. Task force on climate-related financial disclosures, 2020
2. Financial report, 2020
3. Investor presentation, September 2021
4. Environment presentation, September 2021
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology:Supranational Entities, 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 YES
With access to management YES
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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 10 July 2020.
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