Scope has completed a monitoring review for the Council of Europe Development Bank
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.
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Scope completed the monitoring review for the Council of Europe Development Bank (long-term foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term foreign-currency issuer ratings: S-1+/Stable) on 26 October 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
For the updated Annex accompanying this review, click here.
The Council of Europe Development Bank (CEB)’s AAA rating reflects the supranational’s ‘excellent’ intrinsic strength and ‘very high’ shareholder support. The CEB’s institutional profile benefits from a growing strategic role for its shareholder governments and excellent governance. Its social mandate has been strengthened in the context of the Covid-19 pandemic and the Ukraine crisis, underscoring the bank’s unique role among European supranational institutions. This is reflected in the large increase of paid-in and callable capital approved in December 2022, alongside the bank’s new Strategic Framework for 2023-27.
The CEB’s financial profile benefits from excellent asset quality with no non-performing loans (NPLs) and high average borrower quality due to its focus on the public sector, predominantly in Europe. It also benefits from preferred creditor status (PCS) for its sovereign exposures and growing geographical diversification towards Central and Eastern Europe. The CEB’s liquidity profile is exceptionally strong. The bank’s funding profile benefits from strong market access, especially for social inclusion bonds as the bank operates benchmark issuances and expands into new currencies. Net profitability improved in H1 2023 thanks to the rise in core earnings, driven by the positive evolution in the interest margin and lower provisioning for credit risk, enabling the bank to continue strengthening its capital base, with total equity rising by EUR 16.9m over the period. Following an agreement by the CEB’s governing bodies in July 2022, Ukraine became the 43rd member state in June 2023 and eligible for direct funding. Current shareholders funded Ukraine’s accession through general reserves, with the CEB’s subscribed capital increasing by EUR 101.9m and paid-in capital by EUR 11.3m. The bank plans to start operations in Ukraine in Q4 2023. The Strategic Framework for 2023-27 set the average annual volume of loan approvals at EUR 4.3bn over the period, including a cautious and gradual path of activity in Ukraine. The Framework also strengthens the CEB’s focus on Target Group Countries, mainly in Central and Eastern Europe. Overall, the implementation of the Framework is supported by the substantial capital increase of EUR 4.25bn approved in December 2022, of which EUR 1.2bn is to be paid-in, demonstrating the importance and growing relevance of the CEB for its membership. The capital increase will be effective once at least 67% of the subscription is approved by the membership. As of mid-October, more than 40% of member states have subscribed to the capital increase. The key rating challenge is the CEB’s high leverage, as reflected in a temporary and moderate increase of the gearing ratio until end 2023, although the capital increase will improve room to manoeuvre and increase the CEB’s lending capacity over the coming years.
Finally, the CEB benefits from highly rated leading shareholders. The governments of Europe’s largest economies – Germany (AAA/Stable), France (AA/Negative), Italy (BBB+/Stable), Spain (A-/Stable), the Netherlands (AAA/Stable), Belgium (AA-/Negative) and Greece (BBB-/Stable) – make up the CEB’s principal shareholders along with Turkey (B-/Negative), for a weighted average credit rating of A. This determines Scope’s assessment of very high shareholder support for the bank. However, at 13%, coverage of outstanding mandated assets by high-quality callable capital is moderate compared with similar institutions and has declined over the past decade. Still, Scope expects this ratio to improve with the increase in callable capital provided by highly rated shareholders.
The Stable Outlook reflects Scope’s assessment of the CEB’s financial buffers against external and balance sheet-driven shocks. The rating could be downgraded if: i) the CEB recorded sustained losses, leading to a marked deterioration in the capital base; ii) its liquidity buffers were significantly reduced; and/or iii) its main shareholders were downgraded.
The methodology applicable for the reviewed ratings and/or rating Outlooks (Supranational Rating Methodology, 3 August 2023) 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 Thomas Gillet, Director
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