Scope has completed a monitoring review on the European Bank for Reconstruction and Development
Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or at minimum each six months in the cases of sovereign, sub-sovereign and supranational organisation issuers.
Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.
Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key ratings assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.
Scope completed the monitoring review for the European Bank for Reconstruction and Development (AAA/Stable; S-1+/Stable) on 14 April 2022.
This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.
Key rating factors
For the updated Annex accompanying this review, click here.
The European Bank for Reconstruction and Development’s (EBRD) 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 have slightly declined 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.
The bank faces a potential deterioration of its portfolio quality due to the Russia-Ukraine war, although its combined loan exposure to Ukraine (EUR 2.2bn), Russia (EUR 150m) and Belarus (EUR 518m) has declined by more than half to around EUR 2.8bn as of January 2022 from about EUR 6.2bn in 2010. Loans to the countries make up around 9.4% of the bank’s total lending as of January 2022, down from 40% in 2010. The bank has not signed new projects in Russia since 2014 and has suspended access by Russia and Belarus to its resources, excluding both countries from receiving funds for projects or technical cooperation. The EBRD has also closed its resident offices in Moscow and Minsk. Acknowledging the prevailing uncertainty, Scope expects an increase in non-performing exposures (4.9% at end-2021, down from 5.5% in 2020), and associated provisions, in 2022, reducing net profits. Nonetheless, the EBRD’s net profit of EUR 2.5bn in 2021 adds to the bank’s accumulated reserves of EUR 14.1bn as of end-2021, which provide the bank with significant buffers to absorb any losses stemming from the Russia-Ukraine shock this year.
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 methodology applicable for the reviewed ratings and/or rating Outlooks (Rating Methodology: Supranational Entities, 7 September 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Alvise Lennkh, Executive Director.
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