International Finance Corp.

Transcription

1 Primary Credit Analyst: Elie Heriard Dubreuil, London (44) ; Secondary Contact: John B Chambers, CFA, New York (1) ; john.chambers@standardandpoors.com Research Contributor: Marina Stefani, London; marina.stefani@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Stand-Alone Credit Profile: 'aaa' Business Profile: Very Strong Policy Importance Governance And Management Expertise Financial Profile: Extremely Strong Capital Adequacy Capital And Earnings Risk Position Funding And Liquidity DECEMBER 11,

2 Table Of Contents (cont.) Likelihood Of Extraordinary Shareholder Support Related Criteria And Research DECEMBER 11,

3 Major Rating Factors Strengths: 'aaa' stand-alone credit profile (SACP), reflecting our assessment of IFC's "very strong" business profile and "extremely strong" financial profile, as our criteria define these terms. Very solid franchise value, supported by 184 member countries, and a track record of more than 50 years. 29% risk-adjusted capital (RAC) ratio after adjustments. Prudent financial management and policies. Counterparty Credit Rating Foreign Currency AAA/Stable/A-1+ Local Currency --/--/NR Weaknesses: Higher risk (private-sector focused) mandate than most multilateral lending institutions (MLIs), with equity markets significantly influencing income. Large distributions to the benefit of another World Bank group member as well as various development initiatives. Rationale The ratings on the International Finance Corp. (IFC) are based on its "very strong" business profile and "extremely strong" financial profile, as our criteria define these terms. Its SACP is 'aaa'. Standard & Poor's Ratings Services' "very strong" assessment of IFC's business profile reflects our view of its role, mandate, and governance, its relationship with shareholders, and the preferential treatment that shareholders give to the IFC vis-à-vis commercial lenders. IFC is a member of the World Bank Group, and although it cooperates closely with other institutions in the group, it is legally and financially independent of other World Bank Group entities. It was established in 1956 to complement the activities of the International Bank for Reconstruction and Development (IBRD) by encouraging the growth and development of the private sector in developing member countries. IFC has gradually increased its number of shareholders during the past 57 years: it began with 56 members, and currently has 184 members--second only to IBRD, among rated MLIs, in terms of the breadth of global representation among shareholders. IFC pursues its mandate principally by lending to and investing in private-sector entities, without government guarantees. Although in the past IFC obligors have been exempted from exchange controls when debtors of commercial external creditors have not, and although IFC has greater influence on governmental policy formation regarding the members' business environment, in our view it does not benefit from preferred creditor treatment (PCT) in the same manner as an MLI lending only to the public sector. Our assessment of IFC's financial profile is "extremely strong". IFC increased its total assets by 2% during the fiscal year 2013 (ending June 30) to US$78 billion, of which US$25 billion were loans and debt issued by clients and US$12 billion was equity investments. In addition, IFC had US$4 billion in guarantees outstanding, bringing its DECEMBER 11,

4 purpose-related exposure (PRE) to US$40 billion, or 49% of total assets plus guarantees, a 10% year-on-year increase. As a global institution, IFC's geographic exposure is well diversified, both within countries and aggregating exposures at the country level. In terms of aggregate country level exposures, the Republic of India has been IFC's largest country of exposure for several years, with about 10% of its disbursed investment portfolio at fiscal year-end Its five largest country PREs totaled less than 33% of total exposure. IFC's high level of geographical and sectorial diversification accounts in part for our calculation of RAC after adjustments of 29% being higher than our figure of 16% before adjustments. In addition, IFC's loss experience has been modest. It wrote-off US$25 million in loan principal in the last two years (less than 0.5% of total loans as of fiscal 2013 year-end and partially offset by recoveries of US$2 million). We expect IFC to be able to finance a large part of its growth through internal capital generation, given its profitable record despite habitual grants to IDA and other board-of-governors-approved transfers (US$340 million in fiscal 2013) reducing the flow from income to retained earnings. However, IFC recorded a significant decrease both in net income and in operating income in fiscal 2013 to US$1.0 billion and US$588 million. This weaker performance was primarily the result of sharply lower realized gains on equity investments and higher loan provisions. In addition, on March 9, 2012, IFC's board of governors approved a US$200 million increase in paid-in capital, to be paid in no later than June 27, Of this, the IFC received US$31 million in fiscal year Our funding and liquidity ratios for IFC indicate that it would be able to fulfill its mandate as planned for at least one year, even under stressed market conditions, without access to the capital markets. We believe IFC benefits from strong access to capital markets, bolstered by frequent issuance in many markets and currencies. IFC borrowed US$12.8 billion in 14 currencies during fiscal 2013 and has an authorized borrowing program of US$13.5 billion for IFC has no callable capital, unlike most MLIs, so our issuer credit ratings reflect our 'aaa' SACP. Outlook The outlook on IFC is stable. We expect IFC's capital position and liquidity to remain strong enough to withstand severe financial distress in its countries of operation. The most recent capital increase, while small, nevertheless shows continued shareholder commitment to the MLI. If--contrary to our expectations-- either IFC's capitalization or liquidity ratios were to decline materially, or we were to observe that shareholder support for its public policy importance had diminished, the ratings could come under pressure. Stand-Alone Credit Profile: 'aaa' We assess IFC's SACP at 'aaa', reflecting our assessment of its "very strong" business profile and "extremely strong" financial profile, as defined by our criteria. DECEMBER 11,

5 Business Profile: Very Strong In our opinion, IFC has a "very strong" business profile. This opinion is based on our assessment of (i) IFC's policy importance to its shareholders, and (ii) IFC's governance and management expertise. Policy Importance With regard to IFC's policy importance, we note the following strengths: Commencing operations in 1956, IFC is one of the oldest MLIs, and one of the largest, by shareholders. At its fiscal year-end 2013, it had 184 member countries (grown from 56 in 1956), more than twice that of any other MLI except its affiliates within the World Bank Group. We therefore view IFC as having an unusually well-established policy mandate, with a track record that includes a number of credit cycles and capital subscription increases. In July 2010, as a step to increase the contribution that developing and transition countries (DTCs) make to IFC's strategic direction, IFC's board of directors recommended that its board of governors make changes that would result in the voting power of DTCs increasing by 6.07% (of total voting power), bringing DTC voting power to 39.48%. IFC's board of governors adopted this recommendation in March 2012 by raising IFC's authorized share capital by US$130 million (5% of paid-in capital at year-end 2011), and through the issuance of US$200 million of shares (including US$70 million of unallocated shares). Payments of the new subscribed share capital should be made no later than June 27, US$31 million of capital subscription were received during the fiscal year While not a significant capital increase, in our opinion this decision indicates that IFC's shareholders continue to view it as a relevant institution to their development policies. No major shareholder has withdrawn from IFC in the recent past, nor is expected to in the medium term. IFC's shareholders exempt it from all taxation. We view IFC's Articles of Agreement as equivalent to a treaty. In our opinion, IFC has a track record of generally benefitting from "preferential treatment" (as our criteria define the term) by the governments of the countries in which it operates, and we expect this to remain so. However, we also note, that as IFC's mandate restricts its focus to lending and otherwise investing in private-sector entities (with limited exceptions for commercially operated public-sector enterprises, particularly if they are privatizing), IFC cannot benefit from PCT (as our criteria define the term), nor can it directly support its members, in a stress scenario. IFC's Articles of Agreement state that the organization's purpose is to "further economic development by encouraging the growth of productive private enterprise in member countries, particularly in the less developed areas. In carrying out this purpose, the Corporation shall: In association with private investors, assist in financing the establishment, improvement and expansion of productive private enterprises which would contribute to the development of its member countries by making investments without guarantee of repayment by the member government concerned, in cases where sufficient private capital is not available on reasonable terms; Seek to bring together investment opportunities, domestic and foreign private capital, and experienced management; and Seek to stimulate, and to help create conditions conducive to the flow of private capital, domestic and foreign, into DECEMBER 11,

6 productive investment in member countries." In addition, IFC offers its clients derivatives to help them manage interest-rate, currency, or commodity-price exposures. It also provides advisory services to clients and member governments in a number of areas, including: access to finance; investment climate; public-private partnerships; and sustainable business. We believe these ancillary services enhance IFC's policy importance to its members. We also recognize that IFC's policy role may weaken, at some future point, as ongoing capital market development results in increasing lending to and other investments in private-sector entities in the countries in which IFC operates, by other (including, increasingly, private-sector) investors. Indeed, such an outcome would, in at least some sense, mark the success of IFC's development mandate. Nevertheless, continued demand for IFC's services leads us to believe such a point remains well beyond the foreseeable future. Governance And Management Expertise With regard to IFC's governance and management expertise, we note the following strengths: An unusually diverse composition of government shareholders, compared with most MLIs. Of its 184 members, IFC's largest voteholders at fiscal year-end 2013 were the U.S. (22.4% of voting power); Japan (5.6%); the Federal Republic of Germany (5.1%); the Republic of France, and the U.K. (with 4.8% each). No private-sector shareholding. Senior staff that possess considerable aggregate expertise and experience, and are large enough in number that key-person risk is minimal. Under IFC's Articles of Agreement, all its powers are vested in its board of governors, to which each member country may appoint a governor and an alternate and which must meet at least annually. With some specific exceptions, decisions are delegated to the board of directors. Each of the five largest shareholders appoints one of the 25 directors to this board, and the others are elected by the remaining members. However, three of the elected directors--those for China, Russia, and Saudi Arabia--currently represent single-country constituencies. Except as the articles expressly provide, matters before the boards of governors and directors are decided by majority vote. IFC's articles state that the president of IBRD is IFC's chairman ex officio. Although the articles do not require it, the World Bank president traditionally is also IFC's president. Day-to-day administration falls to Executive Vice President Jin-Yong Cai, a Chinese national who assumed office Oct. 1, 2012, succeeding Swedish national Lars H. Thunell. As of June 2013, IFC has more than 4,000 staff members, of whom 43% were based at the organization's headquarters in Washington, D.C., down from 55% in 2005 (when staff numbered 2,433); the rest are in field offices around the world. IFC's staff has been increasing as its business has grown. Superior financial and risk management policies, and conservative investment of liquid assets. IFC has a wide set of limits on the volume of large exposures showing a limited risk appetite. Moreover, IFC manages the market risk associated with investment of liquid assets through a variety of hedging techniques including derivatives, principally currency and interest rate swaps and financial futures. All liquid assets are managed according to an investment authority approved by IFC's board of directors and liquid asset investment guidelines approved by IFC's Corporate Risk Committee, a subcommittee of IFC's management team. IFC's liquidity policy calls for liquid assets plus undrawn borrowing commitments from IBRD of no less than 45% of the next three years' projected net cash needs. Moreover, IFC maintains proceeds from external funding equal to no DECEMBER 11,

7 less than 65% of the sum of: 100% of committed-but-undisbursed straight senior loans; 30% of committed guarantees; and 30% of committed client risk-management products. We also note that IFC's organizational structure includes a vice-president (VP) in charge of risk management, distinct and of equal seniority to IFC's VPs in charge of funding, investing, and other risk-taking. We consider IFC's business profile to be very strong despite shareholders' track record of requiring IFC to redistribute its earnings to the benefit of another World Bank Group member (such as IDA), or other causes (such as small and midsize enterprises (SME) in IDA countries). Since fiscal 2007, IFC grants to IDA have never been less than US$150 million (per year) and in fiscal 2013, those grants amounted to US$340 million. In the same year, income before grants to IDA (of US$1,350 million) comfortably exceeded this value. Financial Profile: Extremely Strong In our opinion, IFC has an "extremely strong" financial profile. This opinion is based on our assessment of (i) IFC's capital adequacy, and (ii) IFC's funding and liquidity profile. IFC prepares its financial statements according to U.S. generally accepted accounting principles (GAAP). Table 1 IFC Summary Balance Sheet --Year ended June 30-- (Mil. US$) Assets Cash, due from banks, and time deposits 6,505 7,047 5,467 5,963 4,257 Trading securities 30,349 28,868 24,761 23,428 20,243 Securities purchased under resale agreements , Loans 22,459 20,877 19,762 18,009 16,566 Reserve against losses on loans (1,628) (1,381) (1,307) (1,349) (1,238) Debt securities classified as investments 2,151 2,168 2,166 1,815 1,542 Equity investments 11,695 9,774 9,313 7,469 5,344 Derivative assets 3,376 4,615 4,177 2,688 2,195 Receivables and other assets 2,281 2,829 2,602 2,513 2,030 Total assets 77,525 75,761 68,490 61,075 51,483 Liabilities Securities sold under repurchase agreements and payable for cash collateral received 5,736 6,397 5,787 8,393 6,388 Borrowings from market sources 44,639 44,623 38,161 31,056 25,660 Borrowings from International Bank for Reconstruction and Development Derivative liabilities 2,310 1,261 1,757 1,140 1,553 Payables and other liabilities 2,335 2,858 2,456 2,077 1,709 DECEMBER 11,

8 Table 1 IFC Summary Balance Sheet (cont.) Total liabilities 55,250 55,181 48,211 42,716 35,361 Capital Paid-in capital* 2,403 2,372 2,369 2,369 2,369 Accumulated other comprehensive income 1, ,543 1, Retained earnings, of which: 18,713 17,695 16,367 14,788 13,042 Designated for unremunerated technical services and grants Shareholders' equity 22,275 20,580 20,279 18,359 16,122 Memo Items: Guarantees outstanding 3,565 3,420 2,932 1,889 1,365 DRE 39,870 36,239 34,173 29,182 24,817 *Includes payments received on account of pending subscriptions. The maximum size of undiscounted future payments that the corporation could be required to make under these guarantees. Capital Adequacy Table 2 IFC RACF [Risk-Adjusted Capital Framework] Data (Mil. US$) Exposure Standard & Poor's RWA Average Standard & Poor's RW (%) Credit Risk Government and central banks 15, Institutions 27,107 11, Corporate 18,419 26, Securitization 9,216 5, Other assets 2,281 3, Total credit risk 72,519 47, Market Risk Equity in the banking book 12,955 87, Trading book market risk Total market risk -- 87, Operational Risk Total operational risk -- 6, RWA before MLI adjustments 141, MLI Adjustments Industry and geographic diversification (17,184) (12) Preferred creditor treatment (431) (0) Single-name concentration 9,316 7 High-risk exposure cap (57,074) (40) Total MLI adjustments (65,373) (46) RWA after MLI adjustments 76, DECEMBER 11,

9 Table 2 IFC RACF [Risk-Adjusted Capital Framework] Data (cont.) Adjusted common equity Standard & Poor's RAC ratio (%) Capital ratio before adjustments 22, Capital ratio after adjustments 29 MLI-- Multilateral lending institutions. RW-- Risk weighting. RWA-- Risk-weighted assets. Table 3 IFC Risk-Bearing Capacity And Capital Adequacy --Year ended June 30-- Risk-bearing capacity (Mil. US$) Reserves against losses on loans, equity investments, and guarantees 1, , , , ,252.0 Shareholders' equity 22, , , , ,122.0 Retained earnings designated for unremunerated technical services and grants (278.0) (322.0) (335.0) (481.0) (791.0) Total adjusted capital 23, , , , ,583.0 Capital adequacy (%) Total adjusted capital/total assets + guarantees Total adjusted capital/development-related exposure Capital And Earnings As of fiscal 2013 year-end, our RAC ratio for IFC was 16% a very high ratio with regard to other commercial banks. After our standard MLI-adjustments, this ratio critically increases to 29%. The improved MLI-adjusted RAC partly reflects IFC's high level of geographic and sectorial diversification, but primarily the cap we apply to high-risk exposures (so that capital allocated does not exceed the exposure amount). IFC organizes its exposure generating operations into two distinct business segments: Its treasury activities, which include its borrowing, liquid asset management, and asset/liability management; and which generate holdings of deposits, securities, and derivatives as well as borrowings; and Its purpose-related activities, which generate its loans, holdings of clients' debt securities, equity investments, guarantees, and risk-management exposure. Treasury activities Consistent with its more commercial orientation than that of most MLIs, IFC seeks to bolster its income through its treasury activities, capitalizing on the 'AAA' credit rating and resulting low funding costs. However, it does so in a manner that appears to contain the associated credit and market risk. Credit risk IFC invests its liquid assets in instruments issued--or unconditionally guaranteed--by governments and government agencies and instrumentalities (38% at fiscal year-end 2013); corporate securities (17%); asset-backed securities (ABS; 24%); cash, time deposits, and other unconditional obligations of banks and financial institutions (17%); money market funds (2%); and securities it purchased under resale agreements (1%). In addition to the market, credit, and liquidity DECEMBER 11,

10 risks arising from these investments, IFC also incurs credit risk from its use of swaps. IFC manages these risks via, among other means, credit quality limits (varying by counterparty and transaction type), individual counterparty limits, and credit support annexes. Exchange-rate risk IFC's reporting currency is the U.S. dollar. At fiscal year-end 2013, 56% of its liquid assets and 74% of its net loans were U.S. dollar-denominated. At the same time, 41% of its borrowings outstanding were in currencies other than the U.S. dollar, particularly the Japanese yen (6%). IFC's nondollar borrowings are generally swapped into floating-rate U.S. dollar obligations. Interest-rate risk Most of IFC's loans (79% at fiscal year-end 2013) are floating-rate and generally reprice in no more than one year. On the other hand, IFC's borrowings are predominantly fixed-rate. IFC employs swaps to transform its fixed-rate borrowings into variable-rate ones and to transform its fixed-rate loans and liquid assets into variable-rate ones. Other risks Residual market risk remains from asset write-offs, prepayments, reschedulings, and different LIBOR reset dates. IFC monitors these sources of risk and periodically addresses them through market operations. Although there have been some unforeseen losses from its treasury operations, the risks appear to be well contained. Purpose-related activities The corporation's development priorities have evolved, and in recent years it has focused more on activities deemed to have a high developmental content: finance and insurance continues to have a broad share of the disbursed portfolio at fiscal year-end 2013 (40.9%), along with utilities (11.3%) and collective investment vehicles (7.4%). Although IFC does not engage in emergency lending to governments (unlike the IBRD), it nevertheless can respond to financial crises that affect the private sector. In addition to being consistent with its developmental role, such countercyclical behavior has often proven highly profitable for the corporation. Client eligibility In earlier years, the corporation did much of its business with larger and stronger companies in its developing member countries. This partially reflected the paucity of medium- and long-term financing from commercial sources, even for these entities. However, in recent years, IFC has sought to support SMEs more than previously, either directly or--increasingly--through financial intermediaries, and also to focus more on "frontier" (less-developed) countries. Composition of financing provided IFC's articles state that "the corporation may make investments of its funds in such form or forms as it may deem appropriate under the circumstances". Its main financing activities remain loans and equity investments, but in more recent years it began providing risk-management products (such as interest-rate and currency hedges) and actively using its ability to provide guarantees. New commitments rose by 19% during fiscal 2013, to US$18.3 billion, while IFC increased its disbursements by 25% to US$10.0 billion for its own account; 69.3% of which were loans, 25.5% were equity investments and 5.2% were debt securities. We expect those proportions to remain stable in the coming years, as they have been since DECEMBER 11,

11 Table 4 IFC Outstanding DRE, By Type Of Product --Year ended June 30-- (% total) Loans Debt securities Equity investments Guarantees Total development-related exposure Table 5 IFC Outstandings Of DRE By Industry --Outstandings at end-june-- (% total) Finance and insurance Utilities Oil, gas, and mining Transportation and warehousing Industrial and consumer products Nonmetallic mineral product manufacturing Food and beverages Information Chemicals N.A. Agriculture and forestry Other Total Memo item: Total* (Mil. US$) 37, , , , , , , , , , ,390.0 *Includes risk management products. N.A.--Not available. Loans Loans, typically variable-rate, remain IFC's most important financing instrument, accounting for 56% of PRE at fiscal year-end Unlike MLIs lending to sovereigns or sovereign-guaranteed borrowers (which typically charge each borrower the same spread over their cost of funding), IFC is free to vary the terms of its financings by client. However, to the extent that it follows the directive in its articles to provide financing "in cases where sufficient private capital is not available on reasonable terms," accurate pricing benchmarks often are not available and appropriate pricing can be difficult to determine. IFC has developed an internal methodology to price its loans and guarantees. DECEMBER 11,

12 Equity investments IFC's equity portfolio is the largest among MLIs. The corporation's equity investments: Consist primarily of common and preferred stock and are usually denominated in the currency of the country in which the investment is made; Include a small amount of quasiequity; Are concentrated in finance/insurance and collective investment vehicles (43% and 25%, respectively, of the total equity portfolio at fiscal year-end 2013), with the remainder widely diversified by industry; and Are intended to be sold when the developmental role has been completed and they have reached certain holding-period and pricing thresholds. IFC's equity portfolio has been a very important contributor to the corporation's overall profitability. Guarantees At fiscal year-end 2013, issued guarantees (including trade-finance facilities)--those that IFC has committed itself to providing--were US$4.9 billion, up from US$4.5 billion one year earlier. Guarantees outstanding--those for which a client's underlying financial obligation has been incurred--were US$3.6 billion, up from US$3.4 billion the previous year. In addition to helping clients obtain local currency financing on terms otherwise unavailable, partial guarantees can also foster the development of domestic capital markets, which IFC views as part of its developmental role. IFC Asset Management Company LLC In 2009, for the first time, IFC established a wholly-owned subsidiary to manage both IFC and third-party capital mobilized under various purpose-related initiatives. As of year-end June 2013, the subsidiary, IFC Asset Management Company LLC (IFC AMC) managed US$5.5 billion, in seven funds: The Global Capitalization Fund (US$3 billion, comprising US$1,275 million in the Equity Capitalization Fund; US$1,725 in the Sub-Debt Capitalization Fund), designed to strengthen systemically important emerging market banks, funded with US$1 billion from IFC and US$2 billion from Japan Bank for International Cooperation; The ALAC Fund (US$1 billion), designed to allow sovereign wealth funds and similar investors to participate in IFC equity transactions in sub-saharan Africa, Latin America, and the Caribbean, funded with US$200 million from IFC and US$800 million from other investors; The Africa Capitalization Fund (US$182 million), to capitalize systemically important commercial banking institutions across Africa, funded entirely by investors other than IFC (including the European Investment Bank, the African Development Bank, and the OPEC Fund for International Development); and The Russian Capitalization Fund (US$550 million assets under management, up from US$275 million in FY2012), designed to invest in midsize, commercial banks in Russia that are either privately owned and controlled, or state-owned and controlled but on a clear path to privatization, funded primarily by IFC. The Catalyst Fund (US$282 million), established in fiscal year 2013, designed to invest in selected private equity funds focusing on climate and resource efficiency. The Global Infrastructure Fund (US$500 million), established in 2013, to make equity and equity-related investments in infrastructure in global emerging markets. Earnings As an MLI, IFC does not seek to maximize income. Rather, it seeks to balance its development goals against maintaining its financial strength and increasing its risk-bearing capacity. This is reflected in its making grants for various purposes, which are treated for accounting purposes as expenses in the income statement and therefore DECEMBER 11,

13 reduce both its operating and net income. Nevertheless, IFC's income is important because barring a paid-in capital increase, its income is the principal source of increases in its risk-bearing capacity. Table 6 IFC Summary Income Statement --Year ended June 30-- (Mil. US$) Interest income and financial fees from loans and guarantees 1, Income from liquid asset trading activities Charges on borrowings (220) (181) (140) (163) (488) Income (loss) from debt securities Net interest income 1,344 1,151 1,312 1, Release of (provision for) losses on loans and guarantees (243) (117) 40 (155) (438) Net interest income after provisions for losses on loans and guarantees 1,101 1,034 1,352 1, Total income from equity investments, of which: 752 1,457 1,464 1,638 (42) Realized capital gains on equity sales 921 2, , Dividends and profit participations Unrealized gains (losses) on equity investments 26 (128) (299) Equity investment impairment write-downs (441) (692) (218) (203) (1,058) Other, net (2) Administrative expenses (845) (798) (700) (664) (582) Net other income (115) 39 (59) (13) 106 Foreign currency transaction gains (losses) on non-trading activities (33) (82) 10 Income before expenditures for TAAS, PBG, and net (losses) gains on non-trading financial instruments* 928 1,877 2,024 2,285 (18) Grants to IDA (340) (330) (600) (200) (450) Income after expenditures for TAAS and PBG (operating income) 588 1,547 1,424 2,085 (603) Net gains (losses) on non-trading financial instruments 422 (219) 155 (339) 452 Net income 1,010 1,328 1,579 1,746 (151) Memo items: Operating return on average assets and guarantees (1.2) Operating return on average shareholders' equity (3.5) *TAAS--Technical assistance and advisory services. PBG--Performance based grants. IFC's operating income decreased to US$588 million in fiscal 2013, from US$1.5 billion last year. Although this was still much stronger than the dip into negative territory in fiscal 2009 (negative US$603 million), performance in fiscal 2013 compared with the previous year was much lower with an operating return on average assets plus guarantees of 0.7% (2.1% in 2012) and a return on average shareholders' equity of 2.7% (7.6% in 2013); performance by both measures in 2013 was weaker than in any other year since fiscal 2002, save fiscal Net income (operating income plus net gains or losses on non-trading financial instruments accounted for at fair value) was also lower in fiscal 2013 at US$1.0 billion, though net gains on non-trading financial instruments reached US$422 million compared to a US$219 million loss in Fiscal 2013 net income stands then beneath the range of recent years. This weaker performance was primarily a result of sharply lower realized gains on equity investments and higher loan provisions, DECEMBER 11,

14 partially offset by lower equity write-downs, and higher income from liquid asset trading. Although in the period purpose-related operating income consistently accounted for more than 80% of total operating income, historically there has been huge variability in the relative contributions to operating and net income from IFC's purpose-related and treasury activities. Such swings reappeared since fiscal 2009, with operating income from treasury activities contributing substantially to IFC's operating income in fiscal years 2011 and 2010, and subsidizing negative operating income from purpose-related activities in fiscal The fiscal 2012 and 2013 results appear to indicate a return to the late-2000s balance. Table 7 IFC Income By Business Segment And Product --Year ended June 30-- (Mil. US$, unless otherwise indicated) Income from development-related activities Interest income and financial fees from loans and guarantees 1, Charges on borrowings (109) (92) (109) (117) (303) Income from equity investments ,464 1,638 (42) Release of (provision for) losses on loans and guarantees (243) (117) 40 (155) (438) Income from debt securities Administrative expenses (1,028) (894) (819) (732) (617) Other income (expense) Operating income from ongoing development-related activities 877 1,821 1,713 1,704 (319) Expenditures for TAAS, PBG, and grants to IDA* (691) (620) (753) (308) (585) Foreign currency transaction (losses) gains on nontrading activities (33) (82) 10 Income from development-related activities, TAAS, and PBG, and IDA grants (DRE operating income) 221 1, ,314 (894) DRE operating income/total operating income (%) Net unrealized gains (losses) on non-trading financial instruments 390 (13) 62 (113) 71 Net income from development-related activities, TAAS, and PBG 611 1, ,201 (823) Income from treasury activities Income from liquid asset trading activities Interest income and financial fees from loans and guarantees Charges on borrowings (111) (89) (31) (46) (185) Administative expenses (22) (23) (9) (13) (12) Operating income from treasury activities Operating income from treasury activities/total operating income (%) (48) Net unrealized gains (losses) on nontrading financial instruments 32 (206) 93 (226) 381 Net income from treasury activities 399 (5) Memo items: Total operating income 588 1,547 1,424 2,085 (603) Net income 1,010 1,328 1,579 1,746 (151) *TAAS--Technical assistance and advisory services. PBG--Performance-based grants. DECEMBER 11,

15 We continue to expect the contribution of equity investments to overall financial performance to remain highly variable, and we expect global equity market conditions to continue to heavily influence IFC's overall financial performance. Risk Position Although IFC cannot benefit from PCT (as it does not lend to governments) its MLI-adjusted RAC does benefit from its high level of geographic and sectorial diversification. It also benefits from the cap we apply to high-risk exposures (so that capital allocated does not exceed the exposure amount). Our standard MLI-adjusted ratio for IFC is 29%, which is far higher than that of most MLIs. Our RAC ratio also takes into account our view of the carefulness with which IFC manages its exposures, even compared with the MLI sector. The RAC ratio could come under pressure, if the IFC portfolio was to become less diversified, if its equity investments were to increase significantly or the credit quality of its sovereign exposures were to deteriorate. Exposure concentrations Although IFC had exposure in 128 countries at fiscal year-end 2013, the amounts of these exposures vary widely. In terms of aggregate country level exposures, the Republic of India has been IFC's largest country of exposure since fiscal 2010, with about 10% of its disbursed investment portfolio at fiscal year-end Its five largest country PREs (Brazil, Turkey, Russia, and China, in addition to India) amounted to less than 33% of total exposure (in aggregate), showing IFC's high geographic diversification. Exposure is limited by country and obligor, with limits varying according to such variables as the size of the country's economy and the level of its external debt. Of the US$18.3 billion of new commitments signed during the fiscal year 2013, 25% were concentrated in Latin America and Caribbean, 23% were in Asia, 18% were in Sub-Saharan Africa and 17% were in Europe. Sub-Saharan Africa benefitted from the highest growth in new commitments, while these decreased in the Middle East and North Africa. In addition, IFC's loss experience has been modest. IFC wrote off US$25 million in loan principal during the past two years (less than 0.5% of total loans as of fiscal 2013 year-end, and partially offset by recoveries of US$2 million). Although IFC writes off some loan principal every year, annual principal write-offs have been less than US$50 million, and less than 0.5% of outstanding loans at the previous fiscal year-end, since fiscal Moreover, IFC keeps showing a very good, though slightly deteriorating, portfolio quality with a 95.5% collection rate (down from 97.7% in fiscal year 2012) and principal outstanding on non-performing loans amounting to 5.3% of total disbursed loans as of June-end 2013, up from 3.8% in the previous year. DECEMBER 11,

16 Table 8 IFC Countries And Regions Of Largest DRE Equity Total Equity Total --% Total IFC DRE at end-june -- (Mil. US$ unless otherwise indicated) Loans Investments DRE Loans Investments DRE By country India 2, ,614 2, , Brazil 1, ,432 1, , Turkey 1, ,298 1, , Russia ,769 1, , China , , Other 16,599 6,372 25,443 15,239 5,539 23, Total exposure 24,167 9,718 37,568 22,576 8,124 34,121 37,568 34,121 31,614 27,155 23,745 Five largest exposures (% total) Disbursed exposure by region Europe and Central Asia ,991 1,760 8,519 6,002 1,651 8, Asia 6,001 2,518 9,347 5,399 2,111 8, Latin America and Caribbean 5,132 2,046 8,150 5,212 1,706 7, Sub-Saharan Africa 2,974 1,032 4,686 2, , Middle East and North Africa 2,649 1,368 4,248 2,411 1,192 3, Other 1, ,500 1, , *Long-term foreign currency sovereign credit rating as of Nov. 26, Includes loans, equity investments, and guarantees. Note: Numbers differ slightly from balance sheet numbers, which are on a fair value basis. Funding And Liquidity Our funding and liquidity ratios indicate that IFC would be able to fulfill its mandate for at least one year, even under extremely stressed market conditions, without access to the capital markets. Moreover, we estimate that it would not need to reduce the scheduled disbursements of its loan commitments, even if half of the total commitments were to be drawn in one year. Qualitatively, we view IFC's funding program as broadly diversified by both geographic market and type of investor, given IFC's frequent issuance in many markets and currencies. IFC borrowed US$12.8 billion in fourteen currencies during fiscal year 2013 and has an authorized borrowing programme of US$13.5 billion for Yet, its funding, after the effect of swaps and other derivatives is taken into consideration, is overwhelmingly in U.S. dollars (99% of market borrowings, at fiscal 2013 year-end). In addition, IFC bonds are eligible collateral for transactions with a number of prominent central banks (such as the DECEMBER 11,

17 European Central Bank, the Bank of England, and the Reserve Bank of Australia), which we believe helps to assure access to a number of major lending markets, in a stress scenario. We understand that IFC's market access improved during the financial crisis which began in 2008, on flight-to-quality. We believe it likely that this would again be the case, in a similar scenario. Likelihood Of Extraordinary Shareholder Support We assign no uplift for the likelihood of extraordinary shareholder support, in the form of 'AAA' shareholders answering one or more calls on callable capital allocations in the event of a stress scenario, since (unlike most MLIs) IFC has no callable capital. Related Criteria And Research Related Criteria Supranationals Special Edition 2012 Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Principles Of Credit Ratings, Feb. 16, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Ratings Detail (As Of December 11, 2013) International Finance Corp. Counterparty Credit Rating Foreign Currency Local Currency Senior Unsecured Greater China Regional Scale Senior Unsecured Short-Term Debt AAA/Stable/A-1+ --/--/NR cnaaa AAA A-1+ Counterparty Credit Ratings History 09-Dec-1997 Foreign Currency AAA/Stable/A Apr Jun-1989 AAA/Stable/-- AAA/--/-- 09-Nov-1998 Local Currency --/--/NR 09-Dec /--/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: SovereignEurope; SovereignEurope@standardandpoors.com DECEMBER 11,

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