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 ‘excellent’ shareholder support. The bank has a proven track record of excellent governance and a very strong mandate from its shareholders, being at the forefront of facilitating the transition to market and sustainable 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.
The 2021 record profit of EUR 2.5bn fully offsets the loss of EUR 2.2bn as of Q2 2022, driven by the war in Ukraine, while NPLs increased to 6.6% of total exposure in Q2 2022 from 4.9% as of end-2021, and are likely to increase further until year end. Still, at around 50%, they are well provisioned for. 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/Negative), the UK (AA/Stable) and all EU-27 member states with a weighted average rating of AA-. This drives Scope’s ‘excellent’ assessment of shareholder support. Further support comes from the EBRD’s high-quality callable capital (from shareholders rated AA- or higher) of about EUR 15.1bn, which currently covers around 42% 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 Covid-19 crisis via its ‘Solidarity Package’ centred around the Resilience Framework. Totalling EUR 4bn (up from the original EUR 1bn), the package provided clients with short-term liquidity, working capital and trade finance.
Moreover, since the invasion of Crimea in 2014 the bank has suspended all new lending to Russia. More recently, since the outbreak of the Russia-Ukraine war, activities have also been suspended in Belarus, and the bank has committed an initial EUR 2bn resilience package to support businesses and public services in Ukraine and neighbouring countries. Once conditions allow, given its expertise, Scope expects the EBRD to play an important role in the financing of the reconstruction of Ukraine over the coming years, underpinning the importance of its mandate to shareholders.
Looking ahead, Scope also 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 annual investments classified as contributing to the Green Economy Transition (GET) initiative to at least 50% by 2025. As of end-2021, this share was already at 51%, up from 29% in 2020.
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 years1.
Scope notes that the EBRD’s transition risks are 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.
The EBRD uses three factors to assess its climate-related credit risks: i) time horizon; ii) industry sector; and iii) geography. While 47% of the EBRD’s portfolio is considered long-term, which could increase the bank’s exposure to climate risk, 49% of these exposures are sovereign deals while 63% of medium-term exposures are to projects with less than five-years remaining. Financing for renewable energy projects increased with clients in a number of sectors and financing to exclusively renewable energy companies grew to 6% of the portfolio in 2021.
Notably, the EBRD’s coal-related exposure comprises EUR 895m at year end 2021. Some 95% of this exposure is indirect, which means proceeds are used to finance projects related to energy-efficiency improvements, renewables and CO2 reduction. The bank’s EUR 49m of direct exposure to coal is legacy and expected to mature by 2025. The bank’s direct exposure to the oil and gas industry amounted to 9% of the banking portfolio at year end 2021. Of this, 65% of loans are sovereign guaranteed or state-owned or municipal companies and 52% of the bank’s oil and gas legacy exposure is expected to mature by 2030. 36% of the oil and gas exposure supports the industry’s transition to a low-carbon pathway and 13% are short-term lines in response to emergency financial needs due to COVID-19 and/or energy crisis.
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 17.6bn as of H1-2022. Its statutory leverage is limited to its subscribed capital, accumulated reserves and profit, i.e. roughly EUR 42.4bn. This results in a capitalisation ratio of about 41%, which is significantly above that of peers. In addition, Scope notes that the EBRD operates at an even higher actual capitalisation level of around 50%, based on total disbursed loans of about EUR 28bn (excluding provisions), guarantees (EUR 1.9bn) and share investments (EUR 4.4bn) as of H1-2022. Similarly, the bank’s self-reported gearing ratio based on disbursed assets stood at 79%, unchanged from 2021 and 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 68%, 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) and posted a record EUR 2.5bn in 2021. However, the war in Ukraine is driving a revaluation of equities based in Russia, Ukraine and Belarus, and a significant increase in stage 1 and 2 expected credit losses against loans based in those countries, resulting in a net loss of EUR 2.2bn as of H1 2022. While this would be the largest loss in the bank’s history, its capital base would remain high at around EUR 17.6bn broadly in line with its 2020 capital base. Moreover, 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 level of liquid assets, which Scope estimates at around EUR 32.1bn for YE 2021, slightly above the EUR 27.9bn figure for 2020. The estimate includes cash and cash equivalents (EUR 5.2bn), deposits (EUR 17.4bn), and highly rated debt securities (EUR 9.5bn) . Conversely, liabilities maturing within a 12-month period amounted to EUR 12.0bn (2020: EUR 15.4bn), while gross disbursements to customers are estimated at around EUR 8bn for 2022 (EUR 7.3bn in 2021).
The resulting 160% liquidity coverage ratio for 2021 implies that all outstanding liabilities and all committed disbursements due within a year can be financed with available liquid assets for more than 18 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, followed by the Americas and Asia. Most of them are fund managers, pension and insurance funds, followed by bank treasuries and central banks. In addition, the EBRD is a leading supranational green and social bond issuer that has raised a cumulative EUR 8.0bn in green bonds since 2010, tapping into a growing ESG investor base. Further reflecting its agency and ability to develop capital markets, the EBRD provides local currency financing to clients. As of H1 2022, about 20% of its outstanding debt before swaps was in emerging market currencies with the largest shares in Turkish lira (4.4% of total) and Kazakh tenge (3.1%)3.
The third driver of the EBRD’s AAA rating is its excellent shareholder support.
Its highly rated shareholders include the United States (AA/Stable), Japan (A/Negative), 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 (shareholders rated AA- or higher) of EUR 15.1bn, which covers about 42% of outstanding 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-2021, the bank’s total signed loan portfolio and guarantees increased to about EUR 44.1bn from EUR 42.3bn in 2020, 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 (CC/Negative) have comprised about one third of total exposures since 2017. For this reason, only 12% 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, Scope notes that the EBRD’s non-performing loans increased to around 6.6% of the portfolio (about EUR 2.0bn) from 4.9% as of end-2021 (EUR 1.5bn) on account of the war in Ukraine. This is above the bank’s seven-year average of about 5.0% and that of most of its peers. The majority of the EBRD's outstanding exposure in Russia (EUR 0.8bn, mostly equity), Belarus (EUR 0.5bn, mostly debt) and Ukraine (EUR 2.4bn, mostly debt) has been moved onto the watchlist and Stage 2, thus requiring provisioning. Turkey (B-/Negative) also remains an important challenge for the EBRD’s credit quality, comprising 31% of NPLs, followed by Ukraine (17%), Belarus (10%), and Lebanon (7%). Looking ahead, Scope expects the NPL ratio to rise slightly in the coming quarters, particularly on account of developments in Ukraine. Still, it is not Scope’s baseline for the full Ukraine portfolio to become non-performing, which would increase the NPL ratio to around 10-13%. Moreover, Scope notes positively that Stage 3 provision cover remains high at about 57% as of H1 2022.
Finally, the EBRD’s equity investments of about EUR 4.4bn as of June 2022 constitute around 25-30% 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. Still, 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 18% of the portfolio – mitigate some of these asset quality risks.
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.
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, 2021
3. Investor presentation, September 2022
The methodology used for these Credit Ratings and/or Outlooks, (Supranational Rating Methodology, 11 August 2022) 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.
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, 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.
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 ratings/outlook were first released by Scope on 10 July 2020. The Credit Ratings/Outlooks were last updated on 3 December 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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.