Scope Ratings GmbH (Scope) has today affirmed the Council of Europe Development 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 associated Rating Report, click here.

Summary and Outlook

The Council of Europe Development Bank’s (CEB) AAA rating reflects the supranational institution’s ‘excellent’ intrinsic strength and ‘high’ shareholder support. The CEB’s institutional profile benefits from an increasing strategic role for its shareholder governments and excellent governance. Its social mandate has been strengthened in the context of the 2015 refugee crisis, Covid-19 pandemic and Russia’s war in Ukraine, underscoring the bank’s unique role among other European supranational institutions.

The CEB’s financial profile benefits from excellent asset quality with no non-performing loans (NPLs) and high average borrower quality due to its primary focus on the public sector, predominantly in Europe. It also benefits from preferred creditor status (PCS) for its sovereign exposures and growing geographical diversification towards Central and Eastern Europe. The CEB’s liquidity profile is exceptionally strong. The bank’s funding profile benefits from easy market access, especially for social inclusion bond issuance. Net profitability continues to strengthen its capital base. The key rating challenge is the CEB’s high leverage.

Finally, the CEB benefits from highly rated leading shareholders. Governments of Europe’s largest economies – Germany (AAA/Stable), France (AA/Stable), Italy (BBB+/Stable), Spain (A-/Stable), the Netherlands (AAA/Stable), Belgium (AA-/Stable) and Greece (BB+/Stable) – together with Turkey (B-/Negative) make up the CEB’s principal shareholders, with a weighted-average credit rating of A. This determines Scope’s assessment of strong shareholder support for the bank. However, at 13%, coverage of outstanding mandated assets by high-quality callable capital is relatively modest compared with similar institutions and has continuously declined over the past decade.

The Stable Outlook reflects Scope’s assessment of the CEB’s financial buffers against external and balance sheet-driven shocks. The rating could be downgraded if: i) the CEB records sustained losses leading to a marked deterioration of the capital base; ii) its liquidity buffers are significantly reduced; and/or iii) main shareholders are downgraded.

Rating rationale

The first driver of the CEB’s AAA rating is its very strong institutional profile.

This reflects the high and growing strategic importance of the bank for its shareholders. Europe’s 2015 refugee crisis, the Covid-19 health crisis, and the war in Ukraine have highlighted the unique role of the CEB and its ability to adapt rapidly to crises and social challenges. The crises have shown the responsiveness of shareholder governments to and the demand for CEB financing and expertise. After record activity in 2020, with project approvals and disbursements up by 50% and 57% from the previous year to support the bank’s response to the Covid-19 crisis, the CEB’s loan activity normalised in 2021¹. The volume of loans approved during the year was in line with levels adopted in the Development Plan 2020-2022. Despite this moderation, the CEB’s lending activity remains on a strong upward trend. Disbursements more than doubled between 2015 and 2021.

The Strategic Framework 2023-2027 is not expected to trigger any material changes in terms of the type of its activities, but it may result in additional volume of financing to meet demand for social loans. Greater cooperation with the European Union (AAA/Stable) further strengthens the bank’s role in European policy making. This includes fiduciary and grant-financing activities, such as the Regional Housing Programme and the Strengthening Health Infrastructure Care for All initiative in Turkey. Lastly, the CEB is an implementing partner for the social arm of the EU’s InvestEU Programme, which provides guarantees for eligible CEB projects, further enhancing European cooperation and the bank’s strategic importance.

While the bank has a social mandate, it also links its activities to environmental sustainability and the Paris Agreement. The bank has provided financing of around EUR 500m in 2021 for climate change mitigation and resilience, compared with about EUR 800m in 2020 and EUR 1bn in 2019². In this context, Scope has assessed the CEB’s potential environmental risk exposure and its environmental policies. This includes the risk of stranded assets and the reputational risk of pursing activities, either directly or through counterparties, that are contradictory to its mandate and environmental objectives. Scope assesses these risks as low compared with similar institutions. This is due to: i) the comparatively low transition and physical risk scores of the CEB’s main countries of operation based on Scope’s internal assessment; and ii) the CEB’s screening efforts within projects regarding their alignment with sustainable development goals and their environmental impact.

The second factor underpinning the CEB’s AAA rating is its excellent financial profile.

The CEB’s credit profile is supported by its excellent asset quality. Its loan book is characterised by zero NPLs, high average borrower quality, clear benefits from the PCS of its sovereign exposures, as well as low geographical concentration and low top-10 loan book concentration (around 28%), in line with its prudent lending policies. The bank’s main lending areas are aid to refugees and displaced persons, healthcare, social housing, regional infrastructure, greening the economy and supporting small- and medium-sized enterprises. The bank lends directly to sovereigns and sub-sovereigns via its Public Sector Finance Facility and via on-lending to commercial and state-owned banks. The bank may also offer guarantees (but currently none are outstanding) and does not invest in equities.

The bank benefits from a loan book with high average borrower quality, which Scope estimates to be in the high ‘bbb’ category before credit enhancements, based on Scope’s estimate of the geographical and sectoral distribution of aggregate loans outstanding and Scope’s sovereign ratings. The relatively stable operating environment reflects that around 30% of outstanding loans are in France, Germany, Belgium, and Spain, with a recent shift to relatively higher-rated countries such as the Netherlands (AAA/Stable) and the Czech Republic (AA/Stable). Turkey (B-/Negative) represents the riskiest exposure in the CEB’s loan portfolio, accounting for around 7% of total loans. Public sector exposure amounted to more than 80% of the CEB’s total loan book after credit enhancements, reflecting the bank’s mandate to lend mostly to sovereigns, sub-sovereigns, and state-owned financial institutions. The overall share of investment grade exposure, as reported by the bank, stood at 86% after credit enhancements³.

The CEB’s loan book benefits from a high degree of credit protection overall. The bank benefits from PCS as shown most recently during the default episode of Greece and Scope thus expects the CEB to benefit from PCS on its high share of public sector exposure. Looking at the private sector exposure, about 20% of the loan book comprises on-lending to commercial banks – with the CEB transferring the ultimate risk of the borrower to the implementing bank. Furthermore, counterparties provided collateral or guarantees amounting to EUR 6.7bn at end-2021, equalling around 35% of the total loan book. In sum, Scope estimates that over 80% of the total loan book benefits from PCS or other credit enhancements.

In addition, the CEB’s loan portfolio is well diversified across member states. In 2021, the largest aggregated exposures were in Spain (around 10% of total loans), Poland (8%), France (8%), and Turkey (7%). In terms of sectoral concentration, the loan portfolio is concentrated among sovereigns and sub-sovereigns, and to a lesser degree, financial institutions, in line with the nature of the CEB’s lending. The CEB actively manages large exposure risks. It has imposed a limit of 25% of prudential equity for any non-sovereign counterparty or connected group of counterparties, equalling around EUR 808m at end-2021. No non-sovereign exposure exceeded that limit at the end-2021, and the sum of large exposures to non-sovereign borrowers was EUR 4bn, or around 21% of gross loans. Overall, these factors increase Scope’s assessment of the CEB’s portfolio quality after credit enhancements to the highest category of ‘very strong’. The bank’s excellent portfolio quality is also reflected in a track record of recording no NPLs since 2009 and only one NPL in its entire history.

The CEB’s financial profile is further underpinned by conservative liquidity management and high liquid asset buffers. Internal liquidity guidelines stipulate, among other things, a self-sufficiency period of at least six months. This assesses the bank’s ability to cover expected net cash outflows in a severe stress scenario given full operationality without access to funding markets and without selling or repo-ing its financial assets. In addition, the bank monitors short-term liquidity ratios over different time horizons of up to one year, for which the limit is set at 100%. The same guidelines apply to its liquidity coverage ratio and net stable funding ratio. Finally, the bank stress-tests its contingent liquidity requirements deriving from two-way margin requirements for its derivative contracts. In addition, the CEB hedges all foreign exchange and interest rate risks stemming from its lending, treasury, and funding operations.

The CEB’s prudent liquidity policies result in a high and stable liquid assets, providing a substantial cushion in the context of higher lending volumes resulting from the bank’s response to the Covid pandemic and war in Ukraine. This enables the CEB to fulfil its mandate, particularly in times of heightened activity and uncertainty. Specifically, Scope estimates total liquid assets at around EUR 9.2bn for end-2021. Conversely, total liabilities maturing in one year or less at end-2021 and disbursements in 2022, estimated at around EUR 3.6bn, amount to around EUR 8.8bn. Scope uses this as a basis to calculate the bank’s liquid assets ratio, which stood at around 105% in 2021 (on a three-year weighted average basis). This ratio implies that the bank’s available liquid assets cover all outstanding liabilities and loan disbursements within 12 months without the need to access capital markets. This is one of the strongest liquidity cushions among supranational institutions.

Another credit strength is the CEB’s strong market access. The bank’s bond issuance is designated as Level 1 high-quality liquid assets, which are granted a 0% risk weight under the Basel Framework and are eligible for the ECB’s asset purchase programmes. This preferential regulatory treatment, along with an established track record on capital markets and a strong shareholder and capital base, underpins the CEB’s market access for its annual issuance volumes of around EUR 4.8bn between 2019-21. Furthermore, the bank’s prudent funding strategy is reflected in the roughly six-year weighted average maturity of its issuance, which limits refinancing and maturity mismatch risks. Its diversification in terms of instruments and currencies is shown by bond issues in eight different currencies during 2021, up from five in 2020 and three on average over 2012-19. Since 2017, the CEB has issued multiple social bonds that follow the bank’s social inclusion bond framework and align with the ICMA’s social bond principles. These include bonds issued to fund the bank’s pandemic response after it added the health sector to its social bond framework, further underscoring its unique social mandate⁴. Even though the CEB is a relatively small issuer on capital markets compared with other development banks with AAA ratings, it operates under similarly favourable funding conditions.

The third driver of the CEB’s AAA rating is the high level of shareholder support.

The CEB’s key shareholder group comprises the largest European economies – Germany (AAA/Stable), France (AA/Stable), Italy (BBB+/Stable), Spain (A-/Stable), the Netherlands (AAA/Stable), Belgium (AA-/Stable) and Greece (BB+/Stable) – and Turkey (B-/Negative). This results in a weighted-average credit rating of A based on Scope’s sovereign ratings, signalling deep shareholder capacity to support the CEB. However, exceptional support in the form of the bank’s callable capital, if ever needed, is assessed as relatively moderate compared with similar institutions. High-quality callable capital of shareholders rated AA- or higher amounted to around EUR 2.5bn, or 13% of outstanding mandated assets.

Despite these credit strengths, the CEB also faces the following credit challenges:

The CEB’s capitalisation relative to its outstanding assets is low compared with similar institutions. Scope expects no change in the coming years given the high stock of approved projects to be financed, worth EUR 8.9bn at the end of 2021. Scope estimates the CEB’s equity and reserves at around EUR 3.2bn. The CEB’s operational gearing ratio – which limits total loans after swaps and guarantees to 2.5 times its own funds (subscribed capital, reserves, and net profits) – acts as an operational target that is credibly enforced. This limit stood at around EUR 20.5bn in 2021. The bank has a capitalisation ratio of about 16%, below that of peers, but still higher than the 10% observed for the European Investment Bank (AAA/Stable), assuming maximum operations under the gearing ratio limit and the CEB’s current capitalisation. The CEB’s actual capitalisation ratio, based on disbursed gross loans, is slightly higher at around 17%, signalling that the bank was operating close to the gearing ratio limit at end-2021.

At the same time, Scope acknowledges several factors which compensate for the institution’s low capitalisation. First, the CEB’s record of ensuring high asset quality protects its capital base. Secondly, stable levels of profitability – averaging EUR 108m over the past 10 years – enable the bank to continuously retain earnings and build up reserves and the capital base. The CEB’s net income in 2021 of EUR 95m, or 2.9% of equity, was significantly up from 2020 (+27%), indicating a robust recovery from the pandemic, though it remained below its pre-crisis average. Growth of the loan portfolio and rising interest rates should support future profitability, despite economic uncertainty resulting from Russia’s war in Ukraine.

In addition, the bank’s prudential framework ensures strong capital adequacy with the bank’s reported capital adequacy ratio, which measures its prudential equity (paid-in capital, reserves, and net profit) versus risk-weighted assets at 29.1% at end-2021. This is significantly above the internal floor of 10.5% and above the CEB’s comfort-zone of over 25%, which is intended to ensure a sufficient buffer. In addition, the bank limits its leverage, or indebtedness ratio after swaps, to 10 times its prudential equity – with a ratio of 7.3 in 2021.

Finally, Turkey (B-/Negative) is the fourth largest exposure and the steady deterioration of its macro-economic environment, as highlighted by Scope’s negative outlook, signals heightened credit risks. However, these risks are mitigated by the declining share of Turkey in total loans (from around 10% in 2018 to 7% in 2021), the PCS on the direct sovereign exposures (about 50%), the public guarantees granted to state-owned banks which comprise the remaining exposure in Turkey, as well as the absence of any impairments during previous Turkish financial crises. Overall, Scope thus assesses this exposure as manageable.

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 CEB.

Scope’s supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative AAA rating for the CEB. 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 CEB, no additional consideration has been identified.

A rating committee has discussed and confirmed these results.

For further details, please see the Rating Report.

Rating committee
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. Activity Report 2021 
2. Sustainability Report 2021
3. Financial Report 2021
4. Social Inclusion Bond Framework 

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Supranational Entities Rating Methodology, 7 September 2021), is available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
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-governance/definitions-and-scales. 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/eu-regulation. 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-governance/definitions-and-scales. 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/ratings-and-research/structured-finance/methodologies.
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
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
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.

Regulatory disclosures
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-Yunus, Executive Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 2 October 2020. The Credit Ratings/Outlooks were last updated on 17 September 2021.

Potential conflicts
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.

Conditions of use / exclusion of liability
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