European Bank for Reconstruction and Development - Aaa Stable

Transcription

1 European Bank for Reconstruction and Development - Stable ISSUER IN-DEPTH 27 September 217 Annual credit analysis Overview and outlook RATINGS EBRD Rating Outlook Long-Term Issuer STA Short-Term Issuer STA Senior Unsecured STA TABLE OF CONTENTS Overview and outlook Organizational structure and strategy Rating rationale Capital adequacy: Liquidity: Strength of member support: High Rating range Comparatives Rating history Annual statistics Moody s related research Related websites and information sources Contacts Evan Wohlmann VP-Senior Analyst evan.wohlmann@moodys.com Mickaël Gondrand Associate Analyst mickael.gondrand@moodys.com Dietmar Hornung Associate Managing Director dietmar.hornung@moodys.com Yves Lemay MD-Sovereign Risk yves.lemay@moodys.com The EBRD s ( stable) credit strengths are its prudent capital and liquidity policies and practices, as well as its consistently robust financial performances, despite a challenging operating environment. More than 2% of its 29.7 billion in subscribed capital is paid in, which is high relative to other multilateral development banks (MDBs). Moreover, over 9% of its callable capital is committed by investment-grade shareholders, including 63% by and Aa-rated member sovereigns or supranationals. The bank also exhibits lower leverage than its peers; its internal gearing ratio was 73% in 2161, well within its self-imposed threshold of 92%. Furthermore, the size and quality of its liquid asset base provides a cushion to cope with macroeconomic and financial shocks. The EBRD s credit challenges include a relatively high share of non-performing loans (NPLs, 5.5% of total loans in 216), stemming from the bank's greater focus than many peers on private sector lending, including from challenging conditions in Ukraine (around one-third of impaired loans). While the bank's NPL ratio has seen a notable decline over the first half of this year, to 4.5%, the share of impaired loans remains above prior years (average of around 3% during ) and asset quality will likely face challenges as the portfolio in Turkey (21.1% of operating assets and now the bank's largest country of operation) matures and as expansion into new and potentially volatile operating environments, such as southern and eastern Mediterranean continues. Additionally, the historical volatility in net profit reflects the risks posed by the EBRD s large equity portfolio. That said, the impact on financial performance has been manageable and the bank s strong capital base and prudent risk management serve as buffers against potential shocks in the future. The outlook on the rating is stable, reflecting our expectation that EBRD s strong capitalisation, high liquidity and steadfast shareholder support will continue to support its rating, despite an operating environment that we expect to remain challenging. Downward pressure would occur in the event of significant and persistent deterioration of asset quality reducing capital buffers and substantial increases in the gearing ratios. This credit analysis elaborates on the EBRD's credit profile in terms of capital adequacy, liquidity and strength of member support, which are the three main analytical factors in Moody s Supranational Rating Methodology.

2 Organizational structure and strategy The EBRD is an MDB. It is governed by the Agreement Establishing the Bank, signed in May 199, which states its general purpose and functioning rules. The EBRD s mandate stipulates that it must only work in countries that are committed to democratic principles. The EBRD was established to assist the economies of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) in their transition from centrally planned to market economies. Since its inception, it has progressively extended its operations out of Europe, initially towards Mongolia (Caa1 stable) in 26 and Turkey (Ba1 negative) in 29, and more recently the Southern and Eastern Mediterranean (SEMED) region, which consists of Egypt (B3 stable), Jordan (B1 stable), Morocco (Ba1 positive) and Tunisia (B1 negative), as well as Lebanon (B3 stable).2 In May 217, the EBRD's shareholders also approved the engagement of the bank in the West Bank and Gaza through a trust fund for an initial period of five years, although this is expected to remain a relatively small operation and is separate from the Bank's other operating assets (with no impact for EBRD's bondholders). In 214, in response to requests by the Governments of Cyprus (Ba3 positive) and Greece (Caa2 positive), the Board of Directors approved engaging in these countries on a temporary basis until 22. Operations in both countries now account for 3.% of total bank operating assets, with 29 active projects between them. While the composition of the Cyprus portfolio remains largely centred on the banking sector (with a 9% share), the Greece portfolio is well diversified, and includes a 33% share in the industry, commerce, and agriculture sectors (end 216). For instance, the Board approved 3 million in funding in March 217 to finance renewable energy projects. Exhibit 1 Exhibit 2 The EBRD operates in many countries... and sectors Operating assets by country, % of total (as of June 217) Operating assets by industry, % of total (as of June 217) Southern and Eastern Mediterranean 7% Cyprus and Greece 3% Property & Tourism 3% Russia 11% Equity Funds 4% Agribusiness IT & Communication 3% Bank Financial Institutions 22% 9% South-Eastern Europe 17% Central Asia 1% Non Bank Financial Institutions 5% Manufacturing & Services 11% Turkey 21% Eastern Europe and Caucasus 14% Central Europe and Baltics 17% Source: Moody's Investors Service Energy 22% Infrastructure 21% The bank fulfills its mandate by providing loans, guarantees and equity investments to sovereign and non-sovereign entities, although its main focus is in the private sector. It primarily invests as a partner alongside other lenders or shareholders. In this way, it aims to support and augment total investment rather than crowd out investments that would have been undertaken without its support. In addition to loans and share investments, the EBRD provides various technical assistance programmes to its recipients, most notably in the development of private enterprise. The global financial crisis gave the EBRD new impetus as it scaled up its operations in 28-9 to respond to the severe economic downturn affecting the regions in which it operates. In May 21, the Board of Governors approved a request from the EBRD s president for a 1 billion increase in authorised capital, a 5% rise from 29 levels. The amount included 1 billion which was moved from reserves to paid-in shares, which allowed it to shore up its capital base. This increase in capital allowed the bank to continue to expand its operations in 21-11, while maintaining existing crisis-related projects in recipient countries. Today, the EBRD has investments in 37 countries in Central Asia, Central Europe and the Baltic States, South-eastern Europe, Eastern Europe and the Caucasus, Russia and the SEMED region. In 216, annual bank investment3 remained unchanged from the previous year at 9.4 billion, a historical high. Moreover, the Russian share of the EBRD s portfolio continues on a declining trend, particularly since 2 27 September 217

3 July 214, when the board gave guidance that new investments in the country were unlikely to be approved. The bank s strategy is for a continued gradual geographic expansion as the Russia portfolio declines, while maintaining its overall prudent risk profile. These trends are also reflected in the bank's operational results. Operating assets have shrunk slightly over the first half of 217 to 28.2 billion, a 5.1% decline compared to end-216. This in part reflects faster than expected repayments and cancellations of projects linked to the Russia portfolio (as well as foreign exchange movements). In 215, the EBRD s board approved the Green Economy Transition (GET) approach, and 216 marked the first year of implementation of this approach which aims to raise the share of environmental investment in overall bank financing to 4% by 22. Over the course of last year, the bank has invested in 161 projects (totalling 2.9 billion) under this approach, accounting for around a third of total annual investment. This initiative replaces the EBRD Sustainable Resource Initiative, one of several main strategic pillars, which accounted for 3% of Bank financing in 215. In addition, the board approved the first five-year EBRD strategy for Promotion of Gender Equality, where progress will be monitored in the banks corporate scorecard, alongside that of four other key initiatives. Similar to most MDBs, the EBRD benefits from preferred creditor status. As a result, borrowing member nations have committed, under articles 21 and 49 of the agreement, to exempt it from generalized payments moratoria or foreign-exchange controls. Sovereign loans also have special status in that it is the EBRD s policy not to reschedule the sovereign debt obligations of its borrowing members. Thus far, no sovereign borrower has defaulted on an EBRD loan. However, we note that the benefits of preferred creditor status are more limited for the EBRD than they are for other MDBs which have a purely public-sector focus. This is because the EBRD s focus is to support the private sector in borrowing countries. Exhibit 3 Exhibit 4 EBRD's shareholders include most of the world's largest economies... that have relatively strong credit profiles Breakdown of callable capital by rating category, % (as of September 217) Global shareholder structure, % of paid-in capital (as of September 217) EBRD region excluding EU (2) 8% Japan 9% Canada 3% B Ba.7% 6.8% Other 7% Caa 1.7% Baa 14.6% Not Rated.2% 39.1% USA 1% A 12.8% EU-28 (1) 63% (1) Includes European Community and European Investment Bank, each at 3.% and France, Italy, Germany, and the UK, each at 8.6%; (2) Includes Russia at 4.1% Aa 24.1% The bank s ownership structure comprises 68 shareholders, including most of the world s largest economies and two intergovernmental organizations. France (Aa2 stable), Germany ( stable), Italy (Baa2 negative), Japan (A1 stable), the UK (Aa2 stable) and the US ( stable) represent more than 5% of the EBRD s subscribed capital. At the beginning of 216, China (A1 stable) became a member of the Bank. In addition, borrowing member countries collectively own around 14% of the institution. The EBRD s relationship with China has also deepened with the launch of the bank s 35 million Equity Participation Fund (EPF) in September 216. The EPF is designed to make long-term investments which advance the aims of the bank, and is funded through commitments from two sovereign wealth funds, China s State Administration of Foreign Exchange (SAFE) and Azerbaijan s (Ba2 stable) State Oil Fund. Investors in the fund receive an equity return swap, allowing them to share in the value of new investments made by the bank in the ordinary course of its activities. As of June 217, the EPF has made investments worth 3 million, and is mandated to be fully invested by the end of September 217

4 Rating rationale Our determination of a supranational s rating is based on three rating factors: Capital adequacy, liquidity and strength of member support. For Multilateral Development Banks, the first two factors combine to form the assessment of intrinsic financial strength, which provides a preliminary rating range. The strength of member support can provide uplift to the preliminary rating range. For more information please see our Supranational Rating Methodology. Capital adequacy: Factor 1 Scale High Medium + Low Very Low - Capital adequacy assesses the solvency of an institution. The capital adequacy assessment considers the availability of capital to cover assets in light of their inherent credit risks, the degree to which the institution is leveraged and the risk that these assets could result in capital losses. Our assessment of the EBRD s Capital Adequacy is, similar to other large MDBs such as the Asian Development Bank (ADB; stable), Inter-American Development Bank (IADB; stable), the International Finance Corporation (IFC; stable) and the International Bank for Reconstruction and Development (IBRD; stable). Conservative financial policies maintain a strong capital position The bank maintains a 1:1 ceiling on its gearing ratio, which limits its operating assets to a maximum of 1% of its subscribed capital, reserves and surpluses. By this measurement, its gearing ratio was 69% as of June 217, well within its self-imposed ceiling of 92%, and the Banks Strategic Implementation Plan projects it to be in the 7-75% band. The 43% increase in subscribed capital from 21 to 216 has more than offset the growth in operating assets (growing by 39.6% over the same period) and the bank s 215 annual board meeting deemed the projected statutory capital levels of billion by end-22 to be appropriate for the coming period. Overall, the level of statutory capital reached 39.7 billion in 216, a.5 billion increase from the previous year. Moreover, in order to minimise the EBRD s need to resort to callable capital, its capital adequacy policy (CAP) stipulates that required economic capital to available economic capital must remain below a 9% threshold, which provides a 1% prudential capital buffer.4 In support of this, available economic capital has risen from 1.8 billion in 28 to 15.8 billion as of the first half of 217, equivalent to a capital adequacy utilisation ratio of 72% (lower than the 77% reported in 216). The available economic capital is expected to increase to 18 billion by 22. By our comparative metrics, EBRD s asset coverage ratio5 was 54% in 216, in line with values observed since 211. This is significantly higher than the median of around 32% in the same year.6 Furthermore, using an IRB Basel approach, the statutory capital ratio remained high at 19.5%, up slightly from 18.4% in 214. In addition, 1% of the EBRD s risk capital would be treated as Tier 1 capital under Basel III. As a consequence of its conservative capital adequacy policies, the EBRD s leverage ratio remains low compared to peers, with debt representing 246.5% of usable equity in 216, below the median of 282% for that year September 217

5 Exhibit 5 Exhibit 6 The EBRD's asset coverage ratio is stronger than most -rated peers... and its leverage is lower Debt, % of usable equity Usable equity (% of gross loans outstanding + equity operations) Usable equity is total shareholder's equity and excludes callable capital Sources: EBRD, Annual Reports, Moody's Investors Service Sources: EBRD, Annual Reports, Moody's Investors Service... which is necessary to support the bank s relatively riskier mandate These prudent limits are necessary to support the bank s operations, which subject the EBRD to credit risks potentially more acute than those faced by MDBs without, or with less of, a private-sector focus (55% of operating assets as of June 217 were in private sector loans and 21% in equity). The seven-year average for NPLs stood at 4.2% as of 216. While this ratio is higher than the NPLs of public sector-focused peers, it still remains comparable to private sector-focused MDBs and compares well to the IFC, where NPLs reached 5.4% of the gross operating portfolio in 216 and the seven-year average also stood at 4.2%. Nevertheless, EBRD has seen a deterioration in its asset quality since 214, notably through its exposure to Russia and Ukraine, although this has now broadly stabilised (see more details below), with the bank s NPL ratio easing to 5.5% in 216 and observing a significant and sharper than expected decline over the first half of 217, to 4.5%. The reduction in the NPL ratio over 217 to date was in large part driven by a reduction in NPLs in the Ukraine portfolio, which fell by a third between end-216 and June 217, but also reflected a broader improvement in recoveries and repayments as well as write-offs in other jurisdictions such as Russia, Azerbaijan and Turkey. On a sectoral basis, the EBRD's NPLs are most prevalent in loans to Industry, Commerce and Agribusiness (59% in the first half of 217). By contrast, lending to financial institutions, the largest sector for EBRD operations, showed NPLs of only 4% in the same period, below the overall average. However, the EBRD's strong standalone financial strength is able to sufficiently absorb increased risks, supported by a high and prudent degree of provisioning and a substantial loan loss reserve. Nevertheless, the NPL ratio is expected to remain above prior years, such as during when it averaged 3.1% September 217

6 Exhibit 7 Exhibit 8 The EBRD's NPL ratio is moderately higher than peers' Provisioning has remained prudent in recent years Gross NPLs, % of gross debt operating assets Gross NPLs and provisions, million NPLs (LHS) Provisions for losses (LHS) Loan Loss Reserve (LHS) NPLs as % of Operating Assets (RHS) Sources: EBRD, Annual Reports, Moody's Investors Service Avenues for further portfolio growth are more limited than in the past One of the main challenges the EBRD now faces is finding areas for further expansion. Since 214, the bank's activities have shifted away from Russia - its traditionally largest market - and focused on expanding into Turkey and the SEMED region, as well as Greece and Cyprus. These newer regions of operations have been the main drivers of growth over the past three years. However, the Turkey portfolio is now increasingly reaching maturity - with growth in operating assets largely flat over the first half of and while further opportunities for lending exist within the Central Asia region, SEMED, and Greece, their scope is likely to be relatively limited when compared to the decline in the Russian portfolio. Moreover, the EBRD's portfolio in Russia is likely to continue to shrink. In July 214, the European Union (EU) announced sanctions against Russia owing to ongoing tensions between Russia and Ukraine. The announcement included the EU s intention to use its position as a major shareholder (through the holdings of several EU member states) in the EBRD to stop the bank from investing in new projects in Russia. Following that, the EBRD s Board of Directors gave guidance in July 214 that new investment projects in Russia were unlikely to be approved until further notice. A Russian challenge to the decision was rejected by the EBRD's shareholders in May 217, and we expect the investment freeze to remain in place for the foreseeable future. Even if new investments were to restart, we would not expect the Russia portfolio to increase materially, given that it had already been on a structural decline for some years. The impact of Russia and Ukraine on the EBRD's credit profile has now stabilised The downturn in Russia and the conflict in Ukraine had a moderate yet manageable impact on EBRD's credit profile. The NPL ratio rose from 3.3% of total loan operating assets in 213 to 5.9% in 215. However, the bank continued to post solid financial results, highlighting its prudent operating policies and a very strong balance sheet. Exposure to Russia has now declined materially: while the bank continues disbursements under existing commitments, the country accounted for just 1.9% of total operating assets in the first half of 217, a sharp fall from around 26% in September 217

7 Exhibit 9 Exposure to Russia has significantly declined Operating assets in Russia, millions Loans Equity H117 However, the remaining exposure remains a potential source of risk for the EBRD' asset quality, given a relatively high NPL ratio (8.4% as of June 217) and the higher than average proportion of equity (59.4% of operating assets as of the first half of 217, a share that has increased over the past year due to the faster than expected shrinking of lending operations in the country). That said, the risks to the EBRD's balance sheet are mitigated by a diversified portfolio of projects in Russia, many of which are joint ventures with foreign companies that manufacture their products for both domestic and overseas markets (providing some diversification away from the Russian economy). As of June 217, 48% of the remaining Russian portfolio was in industry, commerce and agriculture; 24% was in infrastructure, 23% was in financial institutions, and 5% was in the energy sector. Ukraine is the EBRD's third-largest portfolio and constitutes the largest concentration of impaired loans, with 7.9% of the bank's operating assets but 32% of its NPLs as of June 217 (although down from 46% at end 215). The Ukrainian portfolio also has a materially lower than average share of equity, constituting 17% of operating assets. The deterioration of the economic and geopolitical situation in Ukraine from 214 onward and local liquidity pressures caused a significant deterioration in quality in Ukrainian debt operating assets, where the NPL ratio rose sharply from 7.2% in 213 to 2.2% in 216. That said, a strong pace of repayments and cancellations has helped to drive a larger than expected decline in impaired loans in the Ukrainian portfolio since the second half of 216, with a total of 12.4 million repaid over the past four quarters. At the same time, the asset quality of the Ukrainian portfolio is expected to stabilize over the course of the coming years as its economic performance improves from a contraction in real terms of 9.8% in 215 to estimated growth of 2.% for 217, although there may still be an increase in defaults and distressed restructurings in the next few quarters given continuing fragility. Furthermore, potential losses appear manageable given that 18.3% of Ukrainian debt operating assets are already provisioned and the disbursement of loans to the sovereign (3.2% of operating assets as at June 217) and municipalities is slow and allows restructuring of loans if needed. Lastly, only 148 million or 4% of the Ukraine portfolio as of 11 July 217 is in vulnerable regions (Crimea, Lugansk and Donetsk), with most of it is provisioned September 217

8 Exhibit 1 NPL ratio for Ukraine has stabilised Impaired loans, million Ukraine Share of EBRD total (RHS) Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 The EBRD is also exposed to the operating environment of the Central Asian economies and Mongolia, which due to their strong linkages with the Russian economy, are negatively affected by the economic slowdown and rising geopolitical risks in Russia. Central Asia and Mongolia account for 1% of total exposure and there has been some deterioration in asset quality, with the region now accounting for 19% of the bank's NPLs (the majority within Mongolia). Bank's growth focus has shifted towards Turkey and the SEMED region The EBRD has significantly grown its operations in Turkey, which now stands as its largest country exposure (21.1% of operating assets in the first half of 217, compared to 17.4% in Q1 216). The portfolio has expanded rapidly since 29, and operating assets continued to grow at a strong rate of 22.5% in 216 compared to the year before. However, we expect the pace of growth to moderate going forward, given both the economic and political challenges of investing in Turkey and the existing large share of the portfolio in the bank's overall total. Indeed, operating assets remained largely flat over the first half of 217 compared to end-216. However, the portfolio benefits from a relatively low share of equity investments (14% of operating assets) together with a very small, but growing, incidence of problem loans. The NPL ratio of operating assets in Turkey stood at just 1.3%, much lower than the bank's average, although this is expected to increase as the portfolio in Turkey starts to mature (NPLs in Turkey now account for around 6.5% of total Bank NPLs in H1 217, up from around 1% at end 215). The EBRD has also increasingly focused on the SEMED region, which now represents 6.5% of operating assets, with a number of investments in large scale energy-related projects. While the EBRD will likely face challenges from a new and potentially volatile operating environment, the exposures have continued to perform well (NPLs in the region represented just 3% of the bank's total impaired loans in the first half of 217). Furthermore, the total portfolio remains relatively small which, together with co-financing arrangements for a number of existing investments in the region and the EBRD s track record of prudent risk management, will limit the risks from a potential deterioration in asset quality. However, despite the challenges posed by the unstable external environment and domestic risks in many of these new operating countries, the EBRD's weighted average PD internal ratings for new signings has remained broadly unchanged in recent years (5.72 in the first half of 217 versus 5.72 in 215). Furthermore, the share of debt operating assets which are investment grade has seen a slight increase to 13.3% in the first half of 217, compared to around 12% in Q Overall, we expect NPLs to remain at this elevated level in the coming years, given the geographical development of the portfolio and the expected maturing of the Turkish portfolio - as well as the continued, although improving, challenges in Russia and Ukraine. Nevertheless, risks are mitigated by the fact that paid in and callable capital is around 572% of the current operating asset exposure in Russia and Ukraine combined (as at June 217), while total capital also covers the operating assets in Turkey by around fivefold September 217

9 Exhibit 11 EBRD's capital is sufficient to cover potential losses Risk-adjusted exposure, billion, June 217 Debt Equity Usable Equity Callable Capital Ukraine Russia Turkey Usable Equity Callable Capital Usable equity includes paid-in capital, retained earnings, and other reserves. Equity investments shown at cost. At the same time, provisioning remains high and prudent, with 926 million of general and specific provisions. The Bank remains well provisioned at 72% of impaired loans in the first half of 217, sharply up from 63% in Q1 216 and 54% in 214. In addition, the EBRD has a 1.15bn loan loss reserve (up substantially from 738mn in 214 following a large transfer from retained earnings following the change in provisioning policy see the box below). These loan-loss reserves cover 9.3% of total loan operating assets and 28% of gross impaired assets as of the first half of 217. Box 1: Change in provisioning policy supports profits but gains transferred to reserves During 215, a review of the EBRD s provisioning policy analysed the parameters driving provisions during the global crisis, finding that the EBRD s highly prudent approach meant that general provisions at the start of each year exceeded specific provisions during that year. As a result, a couple of changes were implemented which give more weight to internal estimates of probability of default and loss given default:» Continue to supplement the EBRD s own impairment experience with default data but move to a greater focus on emerging markets to reduce influence of United States» Increase weight given to Bank s own experience from 5% to 67%» Simplify loss given default estimates to 45% for senior debt and 75% for subordinated As a result, there was a net release of provisions of 121 million in 215 which compared to charge of a 438 million in 214 and 138 million in 213. Despite the improvements to profitability, we do not expect these changes to have a significant impact on the bank operations given the decision to transfer the resultant profits to the loan loss reserves. Underlying profitability has remained relatively stable despite fluctuations from unrealized gains The relatively high share of equity investments (21% of exposure as of June 217) adds a significant element of volatility to the overall profitability of the EBRD, although the Bank s net interest margin has proven to be relatively stable over the past decade, at around 2.2% of earning assets over the last 1 years September 217

10 Exhibit 12 Profitability is affected by mark-to-market losses/gains on share investments Breakdown of net income, million Net interest Income Impairment provisions Other Net gains/losses on share investments* General Administrative Expenses Net Income *Held at fair value or available for sale until 29 Indeed, the EBRD s overall profitability has been impacted in past years by valuation swings in its equity portfolio, most of which have been concentrated in Russia. In particular, the Bank recorded a net loss of 568 million ( 13 million pre-provisions) in 214 as a result of valuation losses on its equity portfolio ( 748 million), mostly related to the depreciation of the rouble. The EBRD s net profit returned to positive in 215 ( 82 million net profits before transfers) benefitting from equity valuation changes. For example, the recovery in the Russian rouble helped to drive net share investment gains of 197 million compared to a 748 million loss in 214, and these profits were further supported by the release of 121 million of provisions resulting from the change in policy described in the box above. The Bank s financial performance remained robust in 216, despite a challenging operating environment. Net profit for the year from continuing operations before transfers was 985 million, up by 23% from 215. Indeed, excluding the one-off release from the change in provisioning policy in 215, net profit improved by.5 billion. This reflects in part a continued recovery in the valuation of the bank s equity portfolio, with a 326 million gain last year. However, lower equity divestments during the year (see exhibit below) meant that most of these gains were unrealised, such that profitability excluding unrealised gains and provisions was much lower than in 215 ( 642 million compared to 985 million). Furthermore, the EBRD s ability to borrow at attractive rates has enabled it to maintain favourable spreads that contribute to the broad stability of its interest margin. Net interest income fell slightly in 216 to 815 million, down 1% compared to 215 as income from banking loans was below the prior year. However, net interest income in the first half of 217 has remained stable relative to the same period of 216, while net profit before provisions and unrealised gains in the first 6 months of this year was around 4% higher than for the similar period in 216. Dividend income has been stronger than average, reaching a record 141 million in the first half of this year (compared to 97 million in the whole of 216). Despite the recovery over the past two and a half years, the equity portfolio continues to remain valued below cost. Nevertheless, the bank s strong financial position allows it to wait before exiting and, while equity divestments have been lower in 216, the realised gains since 25 has been substantial. EBRD has recognised 4.8 billion in equity gains at an average money multiple of 1.64 times cost, although these gains have moderated in recent years. This includes a very stable dividend income, averaging around 1 million per year over the last five years September 217

11 Exhibit 13 The EBRD's realised equity gains have been substantial, albeit lower in 216 Divestments and net realised equity gains, million Divestments Net realised equity gains Cumulative realised equity gains Overall, in the context of the uncertain operating environment in EBRD s member countries and persistent market volatility, it is unlikely that EBRD will generate the extraordinary level of profits recorded in 25-7, as impairment provisioning and volatility in equity valuations will adversely affect the coming years. Nevertheless, we consider that the EBRD s inherent credit strengths - including its strong capital base and prudent risk management - will sustain its creditworthiness and mitigate the effect of additional shocks September 217

12 Liquidity: Factor 2 Scale High Medium Low Very Low + - A financial institution s liquidity is important in determining its shock absorption capacity. We evaluate the extent to which liquid assets cover debt service requirements and the stability of the institution s access to funding. Our assessment of the EBRD s Liquidity is, supported by its conservative treasury management policies, favourable debt structure, and strong indicators of market access. Other MDBs that score on this factor are the Asian Development Bank ( stable), the Inter-American Development Bank ( stable), the International Finance Corporation ( stable) and the IBRD ( stable). Liquidity policies are prudent The EBRD is one of the most liquid MDBs that Moody s rates. Under its internal guidelines approved in late 215, net liquid assets must cover a minimum of 75% of projected net cash requirements over the next two years (revised from a 45% minimum and a three-year period), and the Bank must be able to meet its obligations for at least 12 months under an extreme stress test scenario (1 in 1 year event based on EBRD stress tests). Lastly, the minimum liquidity requirements need to be able to obtain the highest possible liquidity rating by credit rating agencies. Exhibit 14 Enhanced policy supports a very prudent liquidity position Liquidity policy Higher of: 1) Survive market meltdown 2) Funding the strategic plan To meet obligations for at least 12 months under 1:1 year event without access to funding markets as per annual Bank-wide stress test. At least 75%, without recourse to funding markets. Ensure 1% coverage under stressed one year liquidity ratio. Computed on monthly basis. 3) Obtain the highest rating agency liquidity rating Commitment to retain sufficient high quality liquidity, should always be considered a strong/positive rating factor. = Minimum liquidity level + Opt out of an expensive funding market Sufficient projected cash flows from maturing assets (i.e., without recourse to market, or selling assets) to meet obligations for at least three months. Defined short term liquidity ratio must be a minimum of 1% over 3 and 9 day timeframe. Monitored weekly. +Buffer to absorb variations in CFs = Operating liquidity target To achieve this, the bank s liquidity targets are set at a comfortable level above the policy minimum. The bank also introduced a shortterm liquidity ratio broadly based on a Basel III-proposed liquidity coverage ratio (3- and 9-day horizon) at the end of 212, which also ensures that cash outflows are fully covered by cash inflows and highly liquid assets, helping to ensure that EBRD is able to opt out of an expensive funding market if required and preserving some distance between the operational targets and minimum policy requirements. Based on the these guidelines, net liquid assets in the first half of 217 were 152% of projected net cash requirements, more than twice the 75% requirement. Furthermore, the EBRD benefits from high quality liquid assets, with the share of Treasury (cash and deposit) liquid assets having increased to 46% in the first half of 217 from 35% in September 217

13 Furthermore, liquidity remains high relative to other -rated MDBs. Liquid assets - as a percentage of total assets - were 42.8% for the EBRD in 216, much higher than the ADB (21.4%), the IBRD (14.8%), or the EIB (14.2%), and at a comparable level to the IFC (51.1%). Using our methodology, the Debt Service Coverage Ratio7 rose to 59% in 216, the highest level since 29, due to a spike in maturing debt - with several large benchmark issuances coming due at the same time. Nevertheless, the ratio remains lower than other -rated MDBs, such as the EIB (99% in end-216), the IBRD (63%), and the ADB (69%). Exhibit 15 Exhibit 16 Liquid assets are very high relative to most peers Debt service coverage ratio increased in 216, but remains below most peers Liquid assets as % of total assets Debt service coverage ratio, % ( average) EIB IBRD ADB IADB IsDB NIB AfDB EBRD IFC EIF Sources: Annual reports, Moody's Investors Service IFC AfDB Median IsDB EBRD IADB NIB ADB IBRD EIB Sources: Annual Reports, Moody's Investors Service Strong market access supported by a diverse investor base The bank enjoys strong market access. The EBRD has no minimum size for new issuances or buybacks, which use the Bank s exceptionally strong liquidity position to offer investors a secondary market bid for all its bonds. Furthermore, the Bank has the funding capacity to issue innovative structures to meet investor demands, including exotic currencies and equity linked structures, and the frequency of issuance allows the Bank to tap existing issues. In 215, new bond issuances dipped to their lowest level since 28, with only 4.2 billion of medium- to long-term debt issued over the year. However, the EBRD has since stepped up its borrowing, issuing 5.9 billion of debt in 216 (with an average tenor of 3.8 years, and including the second-ever Global Green Bond to support its environmentally and socially sustainable projects, as well as a large global benchmark US dollar bond) and 6.1 billion in the first eight months of this year. The Bank currently has 27.7 billion in outstanding debt, 66.7% of which is denominated in US dollars (before swaps). Furthermore, the EBRD raises financing in other markets besides public bonds, including private placements (PP) transactions, which increases the diversity of its funding sources. As at end-216, there were 6 PPs transactions and EBRD s PP issuance has gathered pace in recent years, with 111 issues over 216 and a further 57 issues by mid-217, a substantial increase on previous years September 217

14 Exhibit 17 Exhibit 18 The EBRD's investor base is diversified in terms of source... and geography 216 issuance by investor type, % of total 216 issuance by region, % of total Retail 9% Other Asia 8% Financial Institutions 26% Japan 19% Central Banks 2% Asset Managers/ Pension Funds/ Insurance 45% Americas 21% EMEA 52% In addition, the investor base is relatively diversified, being split among central banks (2% of 216 issuances), institutional investors (45%), and financial institutions (26%), with a sizeable share of retail investors. Furthermore, in 216, only around half of investors came from Europe, the Middle East and Africa (EMEA), with a sizeable share also from Asia (27%) and the Americas (21%). In addition to maintaining a conservative debt-maturity profile, the EBRD matches its assets and liabilities by: (1) hedging foreigncurrency and interest-rate risks through swaps and derivatives; and (2) borrowing and lending in a wide range of currencies and interest-rate structures. Its local-currency issuances also support its efforts to develop the private sector and capital markets in recipient countries. For example, the EBRD issued over 216 the equivalent of 5 million denominated in or linked to nine local currencies. These transactions help to raise funds for local projects and develop the country's debt market September 217

15 Strength of member support: High Factor 3 Scale High Medium Low Very Low + - Contractual support primarily manifests itself in the callable capital pledge, which is a form of emergency support. Extraordinary support is a function of shareholders ability and willingness to support the institution in ways other than callable capital. Strength of member support can increase the preliminary rating range determined by combining factors 1 and 2 by as many as three scores. The EBRD s high-quality capital resources support our assessment of its rating. Our rating assessment of the EBRD, as is the case for most MDBs, also includes the institution s 23.5 billion of callable capital. Callable capital is a full faith and credit obligation of each member country, and provides a substantial cushion that could be called in the remote event that the EBRD encounters difficulties repaying its borrowings. In particular, more than 2% of its 29.7 billion of capital is paid in, a share that is higher than the median of other MDBs (6.8%). However, this results in a total debt to callable capital ratio at 183.7% as of 2168 which is higher than peers. Around 9% of the EBRD's callable capital is committed by investment grade countries, including 63% by and Aa-rated shareholder members. As of September 217, 1 of the borrowing member countries were rated investment grade by Moody s, including most of the larger borrowing member countries.9 Exhibit 19 Creditworthiness of largest shareholders exemplifies strength of contractual support Capital subscriptions by country, December 216 Par Value of Shares %of Total Paid-in Capital Total Members Callable 1.1 3,1 2, Germany ( stable) 8.6 2,557 2, United Kingdom (Aa2 stable) 8.6 2,557 2, France (Aa2 stable) 8.6 2,557 2, Italy (Baa2 negative) 8.6 2,557 2, Japan (A1 stable) 8.6 2,557 2, , United States ( stable) Russia (Ba1 stable) Canada ( stable) 3.4 1, Spain (Baa2 stable) 3.4 1, European Union ( stable) European Investment Bank ( stable) ,827 16,485 4,342 Others ,876 7,11 1,865 Tot al 1 29,73 23,496 6,27 Subt ot al In addition, borrowing members account for 14% of the capital base which, in addition to the relative geographical diversification of its shareholders, somewhat mitigates the risk of any circular deterioration in asset quality and support capacity from shareholders. The largest shareholder countries the US, Japan, France, Germany, Italy and the UK together own over 5% of the institution September 217

16 Strong indications of commitment from a creditworthy member base In May 21, the Board of Governors approved a 5% increase in total authorised capital to 3 billion. The 1 billion increase in capital which comprised a 1 billion rise in paid-in shares through the capitalisation of reserves, and increased callable capital of 9 billion has allowed the EBRD to scale up its lending operations, while retaining ample reserves and respecting its statutory gearing limit. In the Annual Meeting of 215, the Board of Directors reviewed the redeemable status of the 9 billion of callable capital approved during the 21 general capital, and agreed to remove the redemption feature. Consequently, the callable capital approved in the 21 is now permanent, which further strengthens the bank s capital base. Furthermore, the Strategic Capital Framework approved by the EBRD Board of Directors projects capital will increase by between 4% and 6% per year, which underlies the commitment of existing support. Additionally, the EBRD has extended new investments in Greece and Cyprus on a temporary basis to 22, illustrating the shareholders view of the Bank s expertise and product mix in reviving private sector growth in crisis countries. The Bank s shareholder base has also been bolstered by the inclusion of China as a member state in January 216. High assessment of extraordinary support In our methodological framework, we assess extraordinary support - the shareholders ability and willingness to support the institution above and beyond contractual obligations - for the EBRD to be High. The weighted median shareholder rating on a weighted average basis is which, as discussed above, outlines the very strong ability of shareholders to support the EBRD. Exhibit 2 The shareholder base is one of the most creditworthy among -rated MDBs Weighted median shareholder rating by MDB (216) 12 Aa2 1 Aa3 8 6 A3 4 Ba1 2 EIF NIB EBRD EIB EU IFC ADB IBRD IADB IsDB AfDB Source: Moody's Investors Service However, when looking at the largest shareholders, and their obligations and ownership shares in other supranational entities, we would estimate a Medium rank order of priority of support for the bank in times of hypothetical extreme stress. Nonetheless, our assessment of the overall strength of member support remains High, and together with the EBRD s very strong intrinsic financial strength, leads to our overall rating September 217

17 Rating range Combining the scores for individual factors provides an indicative rating range. While the information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ from the ones implied by the rating range. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the indicative rating range. For more information please see our Supranational Rating Methodology. Exhibit 21 Supranational rating metrics: EBRD Capital Adequacy How strong is the capital buffer? Sub-Factors: Capital Position, Leverage, Asset Performance High Medium Low Very Low + - Intrinsic Financial Strength How strong is the institutions' shock absorption capacity? Liquidity + High Medium Low Very Low - Sub-Factors: Position, Funding High Medium Low Very Low + - Rating Range: -Aa2 How strong is members' support of the Strength of Member Support institution? Sub-Factors: Contractual Support, Extraordinary Support + High Medium Low Very Low - Assigned Rating: Source: Moody's Investors Service September 217

18 Comparatives This section compares credit relevant information regarding EBRD with other supranational entities rated by Moody s Investors Service. It focuses on a comparison with supranationals within the same rating range and shows the relevant credit metrics and factor scores. The EBRD s capital adequacy is, similar to other large multilateral development banks (MDB), such as the Asian Development Bank ( stable). The EBRD s focus on private-sector financing subjects it to credit risks (and, as such, it has a higher ratio of non-performing loans to total loans relative to its -rated peers) potentially more acute than those faced by MDBs without such a private-sector focus. However, risks are offset by EBRD s relatively strong capital position and comparatively low gearing levels. Moreover, our assessment of the bank s liquidity is, supported by its conservative treasury management policies, favorable debt structure, and strong indicators of market access. Indeed, the EBRD is one of the more liquid MDBs that Moody s rates. We assess the strength of member support as High, based on the shareholders contractual commitments (including a high level of paid-in capital) and a highly creditworthy member base on par with its -rated peers. Exhibit 22 EBRD key peers Year EBRD ADB IADB IBRD IFC AfDB Median /STA /STA /STA /STA /STA /STA 59, , , ,26 9,434 55,378 59,249 High Aa2 High High Medium Rating/Outlook Total Assets (US$ million) 216 Factor 1 Usable Equity/Gross Loans Outstanding + Equity Operations (%) Debt/Usable Equity (%)[1] Gross NPLs/Gross Loans Outstanding (%) [2] [1] Factor 2 ST Debt + CMLTD/Liquid Assets (%) [3] Bond-Implied Ratings (Long-Term Average) Intrinsic Financial Strength (F1+F2) Factor 3 Total Debt/Discounted Callable Capital (%)[4] Weighted Median Shareholder Rating (Year-End) 216 Aa3 A3 Aa3 Aa2 Ba1 Aa2 -Aa2 -Aa2 -Aa2 -Aa2 -Aa2 -Aa2 Rating Range (F1+F2+F3) Source: Moody s Investors Service September 217

19 Rating history Exhibit 23 European Bank for Reconstruction and Development (EBRD) Issuer Rating Senior Unsecured Long-term Short-term Rating Assigned Rating Assigned Rating Affirmed Outlook Date Stable Sep-16 P1 Stable Dec-4 Stable Dec-94 Source: Moody's Investors Service September 217

20 Annual statistics Exhibit 24 European Bank for Reconstruction and Development (EBRD) Balance Sheet, EUR Millions Asset s Cash & Equivalents 4,153 6,23 8,115 7,513 1,669 11,737 14,11 Securities 9,692 11,538 12,41 12,537 11,794 12,76 9,97 Derivative Assets 4,168 5,111 4,671 3,94 4,978 4,596 4,319 14,834 17,655 18,844 18,864 19,487 21,73 22,154 5,34 Net Loans Net Equity Investments 5,854 6,95 6,713 6,553 5,131 5,96 Other Assets Total Assets 39,327 47,36 51,142 48,958 52,487 55,26 56,15 24,947 31,85 34,91 31,22 35,456 36,87 38,9 1,7 1,643 1,752 2,475 2,43 2,993 2,17 Other Liabilities Total Liabilities 26,35 33,863 37,192 34,82 38,338 4,44 4,719 2,793 28,38 29,61 29,673 29,674 29,674 29,73 14,596 22,181 23,399 23,471 23,472 23,472 23,496 6,197 6,199 6,22 6,22 6,22 6,22 6,27 Retained Earnings (Accumulated Loss) 5,524 5,564 5,518 6,795 4,726 6,683 7,496 Reserves 1,256 1,41 2,23 1,879 3,221 1,71 Liabilit ies Borrowings Derivative Liabilities Equit y Subscribed Capital Less: Callable Capital Less: Other Adjustments Equals: Paid-In Capital Total Equity 12,977 13,95 14,876 14,149 14,586 1,728 15, Net Int erest Income ,133 Income St at ement, EUR Millions Interest Income 776 1,46 1,26 1,97 1,152 1,28 Interest Expense Net Non-Int erest Income Net Commissions/Fees Income Income from Equity Investments Other Income Ot her Operat ing Expenses Administrative, General, Staff , ,141 1, , Grants & Programs Other Expenses Pre-Provision Income Loan Loss Provisions (Release) Net Income (Loss) Other Accounting Adjustments and Comprehensive Income Comprehensive Income (Loss) September 217 1, ,