Scope completes 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 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, including key rating assumptions and model. 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 (long-term foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term foreign-currency issuer ratings: S-1+/Stable) on 27 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 European Bank for Reconstruction and Development’s (EBRD) AAA rating reflects its ‘excellent’ intrinsic strength and 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 have built 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.
While the war in Ukraine weighs on the bank’s financial results, the bank maintains significant capital buffers to absorb the expected loss for 2022, which Scope expects to be below the EUR 1.7bn loss recorded as of Q3 2022 (EUR 2.2bn in H1 2022), and thus to be fully covered by the 2021 record profit of EUR 2.5bn. The expected improvement for the 2022 full-year results reflects the bank’s healthy core earnings capacity (absent equity valuation changes and loan impairments) and limited additional impairment charges and adverse valuation effects relative to levels as of H1 2022. Looking ahead, Scope expects the bank to return to profits in 2023.
The bank’s combined debt exposure to Ukraine (CC/Negative; EUR 2.2bn), Russia (EUR 127m) and Belarus (EUR 314m) has declined by more than half to around EUR 2.6bn as of YE 2022 from about EUR 6.2bn in 2010. Loans in these countries make up around 8.4% of the bank’s total lending as of November 2022, down from 40% in 2010. The bank has not signed new projects in Russia since 2014 and has suspended access by counterparties in Russia and Belarus to its resources, excluding them from receiving funds for projects or technical cooperation. The EBRD’s outstanding exposure to Ukraine has remained broadly stable since YE 2021, while commitments have increased with the bank aiming to provide up to EUR 3bn over 2022-23 to support Ukraine’s economy and businesses. EUR 1.46bn have been deployed in 2022, supported by shareholder’s EUR 1.4bn committed (and EUR 1bn signed) grants and guarantees. Scope also notes that debt exposures in Turkey (B-/Negative; 15.2% of total) and Egypt (8.0%) constitute additional challenges for the bank’s portfolio.
Acknowledging the prevailing uncertainty, Scope expects NPLs and associated provisions to remain high in 2023-24, resulting in an elevated NPL ratio. NPLs rose to 7.3% of exposures in Q3 2022 driven by repercussions of the war in Ukraine, which accounts for about 35% of total NPLs, while the five-year average stands at slightly above 5%. Still, NPLs remain well provisioned for at around 59% as of Q3 2022. In addition, Scope notes that significant general and specific provisions for exposures in Ukraine provide comfortable buffers, reducing the risk of further impairment charges in 2023. The bank’s diversified portfolio across geographies, sectors and counterparties further mitigates asset quality risks.
Finally, the EBRD benefits from a globally diversified, growing, and 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 of about EUR 15.1bn, covering 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.
For the updated Annex accompanying this review, click here.
The methodology applicable for the reviewed ratings and/or rating Outlooks (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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