Scope affirms European Investment Bank’s AAA rating with Stable Outlook
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 AAA rating of the European Investment Bank (EIB) reflects the supranational’s ‘Excellent’ intrinsic strength and ‘Very High’ shareholder support. The EIB’s institutional profile is characterised by a record of excellent governance and an irreplaceable mandate for its EU members. The bank has been critical for supporting EU policies, including its response to the Covid-19 crisis, closing investment gaps by leveraging the impact of member states’ Next Generation EU funds and the InvestEU programme, as well as catalysing Europe’s transition to carbon neutrality.
The EIB’s financial profile benefits from its ability to generate and retain capital every year since its inception in 1958, including during the Covid-19 crisis in 2020-21. 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 supported 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 moderate, albeit rising, liquidity buffers compared to peers’.
Finally, the EIB benefits from its highly rated key members. The six largest EU 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 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 sustained losses; ii) its liquidity buffers significantly reduced; and/or iii) highly rated key members were 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 members. In recent years, it has been at the forefront of implementing the European Fund for Strategic Investments (EFSI) and its successor programme, InvestEU. It also played a critical role in the EU’s response to the Covid-19 crisis in 2020-21. Looking ahead, Scope expects the EIB to continue to play a central role in the EU’s climate agenda by supporting the transition to a carbon-neutral and climate-resilient economy. Specifically, the EIB aims to: i) mobilise EUR 1trn in investment for climate action and environmental sustainability by 2030; ii) allocate more than 50% of its financing to climate action and environmental sustainability from 2025 onwards; and iii) align all new financing activities with Paris Agreement goals. The bank also stopped lending to new unabated fossil-fuel energy projects in 2021 and introduced a target of increasing the share of adaptation support to 15% of the bank’s overall finance for climate action financing by 20251.
Scope assesses the EIB’s potential environmental risk as lower than peers’, including the risk of stranded assets as well as the reputational risk of pursuing activities that contradict its mandate and environmental objectives, either directly or through counterparties. This is due to: i) the low transition and physical risk scores of the EIB’s main countries of operation, based on the EIB’s own assessment and Scope’s sovereign transition and physical risk scores; and ii) the effectiveness of both past and current measures regarding project and counterparty selection. The EIB screens counterparties for climate risk. It also screens, assesses and reports on climate-related physical and transition risks in its lending operations.
For 2021, the EIB assessed 80% of its exposure (at the EIB Group level, that is, including the European Investment Fund) and identified high physical risk for only 1% of its exposures and high transition risk for only 5%. Moreover, the EIB includes a shadow cost of carbon of EUR 80 per tonne of CO2 emissions, which will be raised to EUR 250 by 2030. These measures significantly reduce the risk of financing projects with high transition risks. They also support the EIB’s 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 profile2.
The second driver underpinning the EIB’s AAA rating is its very strong financial profile.
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 result in 2021 was EUR 2.6bn, up from EUR 1.7bn in 2020, resulting in a return on equity of about 3.5% for 2021.
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 and its successor programme InvestEU. Its widely diversified portfolio across geographies, sectors and counterparties and its strong collateralisation also play an important role. Equity-type operations, while growing, remain moderate. Looking at the loan exposure at the EIB Group level, Scope notes that of the EIB’s EUR 405.1bn in total disbursements, about EUR 228.7bn was ultimately lent to or backed by sovereigns or public institutions. Of the remaining EUR 176.4bn, about EUR 111.3bn or 27.5% of the total portfolio relates to 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, according to which about 83.5% of its exposures – based on the better of the borrower’s and the guarantor’s internal ratings – are investment grade, while less than 4.0% are ‘high risk’ (‘b’) or worse3.
Looking ahead, Scope notes that the EIB’s higher-risk activities will increase from about EUR 6.8bn in 2021 to EUR 15.9bn in 2022, EUR 16.8bn in 2023 and EUR 19.4bn in 2024, above the levels in 2019 (EUR 14.7bn) and 2020 (EUR 15.2bn). This will be driven by projects on own higher-risk resources and the InvestEU programme. These activities generate higher additionality, reaching new clients and sectors and developing innovative financing structures and products that address market needs. Similarly, EIB investments outside of the EU will also increase slightly to an average EUR 10.1bn over the next three years from an average EUR 8.3bn over 2019-21, mostly under own resources4.
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 its loans. As a result, at the EIB Group level, the top 10 nominal exposures constitute only 10.3% 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 overdue payments beyond 90 days amounted to EUR 118.7m in 2021, down from a peak of EUR 180m in 2017. This represents just 0.03% of the EIB’s portfolio, one of the lowest ratios among peers. Looking at the wider definition of impaired exposures – i.e. amounts that will probably not be collected in full – the EIB’s record is also exceptional, with around EUR 1.5bn of impaired exposures as of YE 2021, or about 0.3% 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 136.5bn in EIB euro-denominated debt since March 2015, about 32% of its outstanding debt securities in 2021. The EIB’s annual funding of around EUR 50bn-70bn over the past decade is, cumulatively, by far the highest among peers. This, along with its highly diversified funding strategy in terms of currencies (21 in 2021) and instruments (including around EUR 11.5bn of green and sustainability bonds with dedicated use-of-proceeds in 2021), underlines its status as a global benchmark issuer. As of July 2022, the EIB already funded EUR 31.2bn or almost 69% of its targeted EUR 45bn announced programme for the year.
In the coming years, Scope expects the EIB to issue EUR 45bn-55bn 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 (64%), followed by Asia (20%) and the Americas (14%). Bank treasuries (37%), fund managers, pension and insurance funds (27%), and central banks and official institutions (32%) account for most of the EIB’s investors.
The EIB is also the second largest supranational issuer of green and sustainability bonds after the EU, reflecting its agency and ability to develop capital markets. It has raised EUR 59.6bn in green and sustainability bonds across 22 currencies since 2007.
Finally, Scope notes positively that the EIB is the world’s only supranational 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 EU 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 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 relative to its outstanding assets is one of the lowest among supranationals. The EIB’s equity and reserves stood at around EUR 76.1bn as of end-2021. The EIB’s statutory leverage is up to 2.5 times its subscribed capital, accumulated reserves and profit, i.e. allowing for potential mandated assets of roughly EUR 756.7bn. 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 member, the EIB’s subscribed capital increased given the capital increase 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 17%. The EIB’s CET 1 ratio has also stayed above 30% since 2018 and was 32.3% at end-2021, mitigating risks from its high leverage.
Second, while the EIB’s conservative liquidity management results in stable liquid assets, its liquidity coverage ratio is estimated at around 79%, higher than in previous years but still below that of some peers. Scope estimates liquid assets at around EUR 107.3bn for YE 2021, significantly above the EUR 86.5bn for 2020. Conversely, Scope estimates elevated liabilities coming due within 12 months at about EUR 136.4bn at YE 2021, including future disbursements estimated at around EUR 46.3bn for 2022. While the 79% liquidity coverage ratio implies that all outstanding liabilities and committed disbursements due within a year can be financed with available liquid assets for about nine months without needing to access capital markets, this ratio is lower than that of peers. It has, however, been rising over the past two years (65% in 2020 and 57% in 2019) and, should the present liquidity coverage be sustained, Scope could increase its already high liquidity assessment further by one notch.
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 18.3bn, or about 23% of its equity and reserves (up from around 5% in 2010). Similarly, the EIB’s guarantees have grown to around EUR 22.6bn in 2021 (or about 21% of estimated liquid assets). Still, potential risks from these exposures are curtailed by the overall strong credit quality of the positions (81.5% 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. TCFD Report 2021
3. EIB Financial Report 2021
4. The EIB Group Operational Plan 2022-2024
5. EIB Investor Relations Presentation, May 2022
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Supranational Entities, 7 September 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/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://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://scoperatings.com/governance-and-policies/rating-governance/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 NO
With access to management NO
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, 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-Yunus, 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 17 September 2021.
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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