Rating action

Scope Ratings GmbH has today affirmed the European Bank for Reconstruction and Development’s (EBRD) AAA long-term issuer and senior unsecured foreign-currency ratings, along with a short-term issuer rating of S-1+ in foreign currency. All Outlooks are Stable.

The AAA/Stable rating of the EBRD reflects its i) excellent institutional profile, given a strong mandate and excellent governance, ii) high capitalisation, prudent capital management and sustained underlying profitability, iii) adequate asset quality, reflecting its mandate and operating environment, iv) very high liquidity buffers and an excellent funding profile, and v) excellent shareholder support.

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Key rating drivers

High capitalisation, underpinned by an upcoming capital increase, and proven ability to generate and retain earnings

The EBRD’s capitalisation levels are exceptionally strong compared to peers and will be further bolstered by an upcoming paid-in capital increase of EUR 4bn, effective by the end of 2024.

Scope’s assessment reflects the bank’s conservative capital framework and its track record of generating and retaining capital over the cycle. Its capitalisation level relative to its outstanding assets ranks among the highest among supranationals. Scope estimates the EBRD’s total capital, comprising its equity, reserves and the highly-rated portion of its callable capital, at around EUR 23.9bn as of end-2023. The bank’s statutory leverage is limited to its unimpaired subscribed capital, accumulated reserves and surpluses, i.e. roughly EUR 44.6bn. Assuming, in line with Scope’s methodology, the EBRD were to use its remaining headroom under this limit, the resulting capitalisation ratio is around 54%, which is significantly above that of peers. The board of governors has approved the decision to relocate the statutory capital limitation to a board of directors level policy. In addition, Scope notes that the EBRD operates at an even higher actual capitalisation level of around 63%, based on total disbursed loans of about EUR 35bn (net of specific provisions) and share investments (EUR 4.5bn at cost) as of end-2023. Similarly, the bank’s self-reported gearing ratio based on disbursed assets stood at 85%, up from 71% in 2015 but within its policy threshold of 92%. Its risk-based capital requirement ratio stood at 62%, down from 80% in 2015 and thus well below its policy threshold of 90%.

The EBRD’s capital base will be supported in coming years by an increase of EUR 4bn in paid-in capital. The increase will become effective on 31 December 2024, with five annual instalments from April 2025. These additional financial resources will enable the bank to continue its increased level of activity in Ukraine both during wartime and reconstruction. This will increase the bank’s subscribed capital to around EUR 34bn, with paid-in capital at around EUR 10bn. The corresponding ratio of paid-in against total subscribed capital compares favourably to peers, highlighting strong shareholder support. Scope captures the positive impact of the capital increase via a one-notch positive trend adjustment to its ‘capitalisation’ assessment.

Further, the EBRD’s capitalisation profile is strengthened by the bank’s ability to generate and retain earnings. The bank has been profitable every year since 2010, except for 2014 and 2022. The war in Ukraine drove a revaluation of equity investments in Russia, Ukraine and Belarus, and a significant increase in stage 1 and 2 expected credit losses, resulting in a net loss of EUR 1.1bn for 2022. While this was the largest loss in the bank’s history, it was overcompensated by even stronger net profits of EUR 2.1bn in 2023, driven predominantly by a 61% increase in net interest income. The EBRD’s returns are volatile, primarily driven by mark-to-market valuation changes in its equity portfolio, but cumulative realised gains over the last ten years stood were EUR 2.2bn.

Conservative liquidity management, excellent funding access and profile

The EBRD’s excellent liquidity coverage and capital market access further strengthen its financial profile. Conservative liquidity management is driven by medium-term liquidity requirements for: i) net treasury liquid assets to cover at least 75% of the next two years’ projected net cash requirements; and ii) the bank to meet its obligations for at least 12 months under extreme stress. This prudent liquidity management results in a stable level of liquid assets, which Scope estimates at around EUR 27.2bn for YE 2023, slightly below the EUR 29.7bn figure for 2022. The estimate includes cash and cash equivalents (EUR 6.3bn), deposits (EUR 12.4bn) and highly rated debt securities (EUR 8.4bn). Conversely, debt that was either due to contractually mature or was callable within the next 12 months amounted to EUR 14.5bn (2022: EUR 12.9bn), while gross disbursements to customers are estimated at around EUR 9bn for 2024 (EUR 9.8bn in 2023).

The resulting 116% liquidity coverage ratio for 2023 indicates that the EBRD can finance all outstanding liabilities and committed disbursements due within a year can be financed with available liquid assets for 15 months without needing to access capital markets. This ratio is exceptionally strong, even compared to peers, and stable over time.

The EBRD’s AAA rating is further underpinned by its status as a global benchmark issuer, given its frequent issuances and its highly diversified funding strategy in terms of currencies and instruments. These provide the bank with a stable source of funding for its operations. Reflecting its appeal to global investors, the EBRD benefits from a broad and very diversified investor base led by investors in the EMEA region, followed by the Americas and Asia. Most investors are fund managers, pension and insurance funds, followed by bank treasuries and central banks. In addition, the EBRD is a leading supranational green and social bond issuer that has raised a cumulative EUR 10.1bn in green and social bonds since 2010, tapping into a growing ESG investor base. The bank also provides local currency financing to clients, with about 20% of its outstanding debt before swaps in emerging market currencies as of H1 2024, primarily in Turkish lira (4.0% of total) and Kazakh tenge (3.1%).

Excellent shareholder support, key mandate for a growing shareholder base

The EBRD benefits from a highly rated shareholder base, including the United States (AA/Negative), Japan (A/Stable), the UK (AA/Stable) and all EU-27 member states with a weighted average rating of AA-. This is one of the highest key shareholder ratings among supranationals, which drives Scope’s assessment of EBRD shareholders’ ability to provide support if necessary.

Moreover, Scope assesses shareholders' willingness to provide support as ‘high’. This is underpinned by its track record of capital increases, supporting the bank’s continued growth in its activities, with a latest capital increase becoming effective by end-2024. Further, the bank’s capital call mechanism rests on a strong legal basis. According to Article 17 of its Basic Documents and Section 8 of its By-Laws, the bank’s board of directors could call up to EUR 23.5bn in callable capital. Under Article 6.4 of the Articles Establishing the Bank, callable capital is available to meet liabilities to creditors, where in accordance with Articles 17.2 and 42.2, any call would be reserved for an extreme scenario and after other loss bearing instruments are exhausted. No call has occurred to date.

Recently, Iraq and Benin became the 74th and 75th shareholder, respectively, in line with the bank’s strategy of a gradual expansion of operations in Iraq and Sub-Saharan Africa. Furthermore, the bank’s increased role in Ukraine, in combination with elevated disbursements in the bank’s other core countries of operation, underpins the bank’s role. In 2023, the bank’s investments in 34 countries reached EUR 13.1bn, slightly up from 2022, the highest level in the bank’s history. Looking ahead, Scope expects the EBRD to play a critical role in the transition of its countries of operation to a carbon-neutral, climate-resilient economy. Specifically, the bank has aligned all its processes and activities with the Paris Agreement and committed to increase the share of its annual investments classified as contributing to the Green Economy Transition (GET) initiative to at least 50% by 2025. The bank has already met its 50% target ahead of schedule for 2021-23.

Finally, since the invasion of Crimea in 2014, the bank has suspended all new lending to Russia. More recently, since the outbreak of the Russia-Ukraine war, activities have also been suspended in Belarus, and the bank has significantly increased its activities in Ukraine, with new investments of just over EUR 3bn in 2022/23, which benefit from guarantees from shareholder donor funds at an average 50% of total investment. The bank aims to disburse around EUR 1.5bn annually in the country during wartime. The bank’s expertise in the region is likely to underpin its critical role to support the international reconstruction effort of Ukraine over coming years.

Credit challenge: Weaker asset quality and higher NPLs compared to highly-rated peers, reflecting its mandate and operating environment

The EBRD’s ‘adequate’ asset quality and comparatively higher NPLs reflect its relatively risky business profile, driven by its focus on private sector lending and equity investments in transition economies that are usually rated non-investment grade.

As of end-2023, the bank’s total signed loan portfolio and guarantees increased to about EUR 49.7bn from EUR 46.9bn in 2022, markedly above the EUR 25bn in 2010. Of this, about 32% relates to sovereigns (up from 20% in 2011), about 23% relates to banks and 45% to corporates. In terms of geography, the EBRD’s exposures in Turkey (B/Positive), Egypt (B-/Stable) and Ukraine (SD) comprise about one third of the total since 2017. For this reason, only 17% of the bank’s exposures are assessed as investment-grade. Scope estimates the bank’s weighted average portfolio quality at around ‘b-’, lower than most of its highly rated peers.

Non-performing loans stood at around 7.9% of total loans at YE 2023 from 4.9% as of end-2021 on account of the war in Ukraine. The EBRD has no more loan exposure in Russia as of H1 2024 and its exposure in Belarus declined to EUR 225m, most of its classified as non-performing.

Geographically, NPLs were concentrated in Ukraine (around half of total NPLs as of H1 2024), Turkey (13%), Belarus (8%) and Poland (8%). Around half of EUR 2.4bn in loans in Ukraine are non-performing, but associated risks to the bank are well-covered. Total impairment (Stage 1,2 and 3) amounted to around EUR 900m for Ukrainian exposures. Further, the bank broadly maintained its level of post-model adjustments related to Ukraine at EUR 392m, from EUR 387m at YE 2023. Finally, allocated donor fund guarantees to specific projects in Ukraine amounted to a further EUR 549m at H1 2024, further mitigating risks.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1.      asset quality deteriorated materially, resulting in sustained losses;
    
2. liquidity buffers were significantly reduced.

Factoring of environment, social and governance (ESG)

Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. ESG factors are explicitly captured in Scope’s assessment of the institutional profile, which Scope assesses as ‘Excellent’ for the EBRD, and the assessment of potential climate risks under the portfolio quality assessment.

Supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘aaa’ rating for the EBRD. Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect the creditworthiness of the issuer.

No adjustment was made to the indicative rating of the EBRD.

A rating committee has discussed and confirmed these results.

For further details, please see Appendix II of the rating report.

Rating Committee
The main points discussed by the rating committee were: i) institutional profile; ii) financial profile, including capitalisation, asset quality, liquidity and funding; iii) shareholder support; iv) additional considerations; and viii) consideration of peers.

Methodology
The methodology used for these Credit Ratings and Outlooks (Supranational Rating Methodology, 21 June 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   YES
With access to internal documents                                YES
With access to management                                         NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 10 July 2020. The Credit Ratings/Outlooks were last updated on 21 July 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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