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. 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: BBB+/Stable; short-term foreign-currency issuer ratings: S-2/Stable) on 25 July 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 Black Sea Trade and Development Bank’s (BSTDB) BBB+/Stable issuer rating reflects the supranational’s very high capitalisation levels, 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. 

First, Scope expects the bank to retain its strategic importance to all its shareholders over the coming years as reinforced by the capital increase approved on 8 March 2023. This first step of the capital increase, which showed strong shareholder support with 10 of 11 member states participating and two over-subscribing, will increase the bank’s capital and help offset the financial impact of the Russia-Ukraine crisis. The target is for paid-in capital to increase by EUR 245m (in eight equal annual instalments of EUR 30.6m) during 2023-30 to EUR 931.5m. While the second step of the capital increase was not agreed in July as expected, the board of governors will hold an extraordinary meeting in the coming weeks to decide on the final allocation of shares, payment and transfer of voting rights. 

This is an important step as it not only strengthens the bank’s capital position but also affirms its shareholders’ commitment to the bank and its mandate despite the war and persistent tensions among some of its shareholders. Following the expected capital increase, Scope anticipates the bank’s governance and strategic outlook to shift towards EU and NATO members as well as Ukraine, positioning the bank to play an important role in the global reconstruction efforts of Ukraine once conditions allow. Conversely, delaying the completion of the capital increase would be credit negative and result in a rating review.

Second, given the prevailing geopolitical risks and the ongoing war there remain uncertainties as regards the timely repayment of the large due payments in 2023-24 of around EUR 270m from Russian and Ukrainian counterparties. As shown in the end-2022 financial results, the impact of the Russia-Ukraine war on the bank’s activities resulted in a decline of the net income to EUR -27.6m from EUR 43.9m in 2021, mostly due to impairment losses on loans. The NPL ratio, capturing loans overdue 90 days, increased from 0% in 2021 to 2.8% in H1-2022 and about 5% at H1-2023, while the ratio of loans classified as Stage 3 to total loans rose to 9.4% at end-2022 from 3.2% end-2021. This required an increase in provisions for impairments from EUR 44.2m in 2021 to EUR 106.5m in 2022. Over coming years, Scope expects the bank to record NPLs around 6-10% of total loans, significantly above the five-year average of around 1% before the war.

However, Scope notes positively the bank’s efforts to navigate the capital controls and sanctions regime based on its preferred creditor status as well as the careful winding down of its Russian exposure. This, together with the sustained efforts from Ukrainian counterparties to stay mostly current on their repayments, has already resulted in the bank receiving more repayments from Russian and Ukrainian counterparties per H1-2023 than it had conservatively planned for the full year 2023 (around EUR 50m), as laid out in its medium-term strategy, published in March 2023. Specifically, the bank has received about 80% (60%) from its expected repayments from its Russian and Ukrainian counterparties over the 2022 to H1-2023 period, supporting Scope’s assessment that significant additional impairments are unlikely, facilitating a gradual return to positive net income over 2023-24. 

Third, 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 420m bond due June 2024. The initial amount outstanding was USD 550m, but the bank repurchased USD 130m in June 2023 to reduce refinancing risks. The bank’s liquidity management requires a 75% coverage of maturing obligations over the next 12 months, which the bank currently exceeds with a coverage of about 90-95%. The decision by the Austrian Development Bank in July 2023 to grant a EUR 30m credit line (50% earmarked for projects in Ukraine) as well as the better-than-expected repayments from Russian and Ukrainian counterparties support Scope’s assessment that the bank will be able to honour the maturing 5Y USD 420m bond in June 2024 even without accessing public markets.

The Stable Outlook reflects Scope’s view that the bank’s high capitalisation reinforced via the capital increase, its preferred creditor status ensuring the eventual repayment of its exposures from Russian counterparties, and the prudent liquidity management mitigate the remaining uncertainty surrounding the final impact of the Russia-Ukraine war on the bank’s balance sheet.

The ratings could be downgraded if, individually or collectively: i) asset quality deteriorated beyond Scope’s baseline; ii) the bank’s preferred creditor status were to be questioned or even repealed due to events prompted by the crisis, particularly related to exposures in Russia; 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 receiving payments of the agreed capital increase or failure to return to growth from 2025 onwards; and/or v) shareholders’ commitment towards the bank 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 ratings/Outlooks could be upgraded if, individually or collectively: i) asset quality improved beyond Scope’s baseline; and/or ii) liquidity buffers increased permanently.

For the associated annex, click here.

* Editorial note: The monitoring note was republished on 31 on July 2023.

The methodology applicable for the reviewed ratings and 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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