Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

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 ratings’ 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 rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Black Sea Trade and Development Bank (long-term foreign-currency issuer and senior unsecured debt ratings: A-/Negative; short-term foreign-currency issuer ratings: S-1/Negative) on 20 February 2023.

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 rating history can be found on www.scoperatings.com.

Key rating factors

The A- issuer rating assigned to the Black Sea Trade and Development Bank (BSTDB) reflects the supranational’s conservative risk management practices, strong capitalisation, adequate liquidity and funding profile, and well-diversified portfolio, which benefits from credit protections including its preferred creditor status. Challenges include a very difficult operating environment, and particularly its elevated exposures to Russia and Ukraine which constitute about 30% of its outstanding loans.

Scope expects the bank to retain its strategic importance to all its shareholders over the coming years and to resolve transaction-related delays with counterparties in Russia given the prevailing capital controls and sanctions over the coming quarters on the basis of its preferred creditor status. As shown in the H1-2022 financial results, the first impact of the Russia-Ukraine war on the bank’s activities resulted in a decline of the net income to EUR -32.9m from EUR 43.9m in 2021, mostly due to increasing impairment losses on loans. The NPL ratio, capturing loans overdue 90 days, increased from 0% in 2021 to 2.8% in H1-2022, while the ratio of loans classified as Stage 3 according to the IFRS 9 standard to total loans rose to 15% from 3.2% end-2021. This required an increase in provisions for impairments from EUR 44.2m in 2021 to EUR 97.4m in mid-2022. However, the bank continues to manage its activities prudently, restricting its disbursements to fewer and smaller projects only, at least until mid-2024. Even though the bank’s cost of market funding has increased significantly, Scope expects the bank to obtain funds in the coming months to ensure a comfortable liquidity-coverage ratio, including after the redemption of the USD 550m bond due June 2024. Finally, the completion of the capital subscription in Q1 this year is expected to confirm the extent of the additional capital member states will provide to support the bank’s activities, and any related shifts in ownership shares and voting power.

The Negative Outlook reflects the elevated uncertainty surrounding the final impact of the Russia-Ukraine war on the bank’s balance sheet, strategy and shareholder relations.

The ratings could be downgraded if, individually or collectively: i) asset quality deteriorated beyond Scope’s baseline, lowering the bank’s profitability and capitalisation; ii) the bank’s preferred creditor status were to be questioned or even repealed due to events prompted by the crisis; iii) liquidity buffers declined significantly; iv) the bank’s implementation of its strategy diverged significantly from self-imposed targets, for instance, via a delay in the planned capital increase; and/or v) shareholders’ commitment towards the bank’s mandate and willingness to provide associated support deteriorated, weakening the bank’s governance and efforts to establish itself as a financially and developmentally relevant international institution in the Black Sea region.

Conversely, the Outlooks could be reversed to Stable if, individually or collectively: i) asset quality improved beyond Scope’s baseline; ii) liquidity buffers increased; and/or iii) shareholders provided additional support, for example, via accelerating and increasing their payments of the already agreed capital increase.

For the associated annex, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Supranational Rating Methodology, 11 August 2022) 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-Yunus, Executive Director

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