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 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 9 January 2024.

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 (EBRD) has a 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.

A recently-approved paid-in capital increase will underpin the bank’s sustained activities in Ukraine and highlights shareholders’ strong support. The EBRD is highly capitalised and displays conservative risk management practices. The bank’s paid-in capital ratio of 21% is one of the highest among peers. This will further increase with the increase of EUR 4bn in paid-in capital, with first payment instalments in 2025. Sustained profits in its core business have built the bank’s reserves, with EUR 1.7bn in net income in the first nine months of 2023, which overcompensates a net loss of EUR 1.1bn in 2022. Prudent capital and liquidity management and excellent market access are important mitigating factors for a comparatively risky business profile.

The bank’s focus on the private sector in transition and EMEs results in relatively higher non-performing loans (NPLs) and volatile returns. The bank’s NPLs amounted to 7.7% of gross loans at Q3 2023, but are well provisioned for. Further, risks related to the EBRD’s new investments of EUR 3bn in Ukraine in 2022-23 are mitigated by shareholder guarantees of an average 50%. The bank’s diversified portfolio across geographies, sectors and counterparties mitigates asset quality risk.

To support Ukraine’s economy and businesses, the EBRD’s commitments have increased to EUR 3bn over 2022-23, with the bank reaching its EUR 3bn target in October 2023. At the same time, the EBRD’s outstanding exposure in Ukraine (CC/Negative) slightly declined between YE 2021 and H1 2023 to EUR 2.34bn in loans and equity investments at fair value (6.3% of total exposure) as repayments outpaced new disbursements, and equity investments’ fair values have been reduced. Scope notes the challenging operating environments in Ukraine (46.4% of loans in the country are non-performing), Turkey (B-/Negative, 14.7% of total exposure, 7.7% are non-performing) and Egypt (B-/Negative, 6.8%, 4.8%).

Reflecting these challenges, Scope expects NPLs and associated provisions to remain high in 2024. The EBRD continues to manage asset quality risks conservatively, with a provision ratio of NPLs at 56.4% as of Q3 2023. Scope notes that these provisions do not reflect shareholder guarantees, and that the guarantees tend to lower the provisions as they impact the loss given default factor for these exposures. The bank maintains significant capital buffers, to be supported by EUR 4bn in additional paid-in capital over coming years.

The bank’s exposure to Russia (EUR 469m as of Q3 2023, 1.1% of total exposure) and Belarus (EUR 317m, 0.8%) is very small and 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.

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 shareholder base is expanding, with Iraq becoming its latest member in November 2023. Iraq is not a country of operation yet, but has signalled an interest to become one. Benin and Ivory Coast also had their membership requests approved by the bank’s board of governors – the first step in becoming a shareholder. The bank’s highly rated shareholders include the United States (AA/Negative), 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 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.

For the updated Rating Report accompanying this review, click here. 

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 Julian Zimmermann, Associate Director

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