Research Update: International Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook Remains Stable Primary Credit Analyst: Lisa M Schineller, PhD, New York (1) 212-438-7352; lisa.schineller@spglobal.com Secondary Contacts: Alexander Petrov, London (44) 20-7176-7115; alexander.petrov@spglobal.com Alexander Ekbom, Stockholm (46) 8-440-5911; alexander.ekbom@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2017 1
Research Update: International Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook Remains Stable Overview IBRD's S&P Global Ratings risk-adjusted capital (RAC) ratio, after adjustments, was 21% as of June 2016, continuing a downward trend. We assess the financial profile as very strong as we expect the bank to bolster its capital and lower transfers to the International Development Association (IDA). The RAC ratio declined as IBRD incurred a $2.4 billion comprehensive loss during fiscal 2016, after losses of $0.9 and $1.1 billion in 2015 and 2014, respectively. Despite these accounting losses, IBRD's board of governors approved $0.7 billion of transfers, mostly to IDA. We are affirming our 'AAA/A-1+' long- and short-term issuer credit ratings on IBRD. The stable outlook reflects our view that IBRD's credit strengths, notably its extremely strong business profile and very strong financial profile, will remain in place. Rating Action On Jan. 30, 2017, S&P Global Ratings affirmed its 'AAA/A-1+' long- and short-term issuer credit ratings on the International Bank for Reconstruction and Development (IBRD). The outlook remains stable. Rationale The ratings on IBRD reflect its extremely strong business profile and very strong financial profile. We therefore consider IBRD to have a 'aaa' stand-alone credit profile (SACP). Our extremely strong business profile assessment is based on IBRD's governance, role, and public-policy mandate. IBRD's unrivaled franchise value, countercyclical lending, and the continuous commitment of its shareholders support our expectations that the bank will continue to benefit from preferred creditor treatment (PCT). IBRD is the keystone of the World Bank Group, which includes the International Development Association (IDA; foreign currency rating: AAA/Stable/A-1+), International Finance Corp. (IFC), Multilateral Investment Guarantee Agency, and International Centre for Settlement of Investment Disputes. IBRD, which commenced operations in 1946, is the world's oldest and largest multilateral lending institution (MLI). As of June 30, 2016 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2017 2
Research Update: International Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook Remains Stable (fiscal year-end 2016), it had 189 member countries, more than twice that of any other rated MLI, except its affiliates, IDA (173 members) and IFC (184 members). IBRD had US$371 billion in total assets at fiscal year-end 2016 (compared with $343 billion at fiscal year-end June 2015), of which 45% was loans--the bank's main activity. In fiscal 2016, IBRD committed $29.7 billion of new purpose-related exposures, an increase of 26% from 2015 though still only 53% of the $44.2 billion countercyclical peak in 2010. Peru and India received 10% and 9%, respectively, of the new commitments in fiscal 2016. IBRD's exposures continue to be diversified globally. The top five exposures were unchanged from the prior fiscal year: Brazil, China, India, Indonesia, and Mexico. The bank has only one borrowing country in nonaccrual status as of June 2016; Zimbabwe has been in nonaccrual since October 2000. The bank continues to be in discussions with the government of Zimbabwe to clear these arrears (currently $0.4 billion in principal). The country cleared its arrears with the International Monetary Fund in October 2016. Our assessment of IBRD's financial profile as very strong reflects our calculation of its risk-adjusted capital (RAC) ratio of 23% before, and 21% after, adjustments for concentration risk and PCT, as well as the bank's funding and liquidity profiles. The main adjustment is its single-name exposure to borrowing member countries, partially offset by our expectation for PCT and geographic diversification. In March 2011, IBRD's board of governors approved a 44% increase in both subscribed capital (US$87 billion) and paid-in capital ($5.1 billion). At fiscal year-end 2016, $73.1 billion in additional capital had been subscribed and $4.3 billion had been paid in. Comprehensive income was again negative in fiscal 2016--the third consecutive year--with a $2.4 billion loss (6.5% of adjusted common equity [ACE]) after losses of $0.9 billion and $1.1 billion in fiscal 2015 and 2014, respectively. This negative comprehensive income was partly due to the asymmetric accounting treatment of derivatives hedges, which are fair valued, unlike the underlying instruments being hedged. Despite the reported comprehensive losses, which led to a decrease in ACE, the numerator of our capital ratio, the bank's board of governors continued to approve large transfers ($0.7 billion in 2016, mostly to IDA). We expect transfers to IDA to fall over the coming three years as the bank aims to strengthen its capital. IDA recently acquired capacity to leverage its own balance sheet to support its lending capacity. The World Bank's management expects to achieve important cost savings for the World Bank Group by fiscal year-end 2018. In 2016, the gross administrative expenses of IBRD increased by 5.3%, down from 7% during fiscal 2015, which reflected some one-off restructuring costs. The president, Jim Yong Kim, has committed to deliver cost-saving reforms. Our funding ratios for 2016 indicate that, similar to 2015, IBRD does not have a funding gap below the one-year horizon: IBRD's assets exceed its liabilities WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2017 3
Research Update: International Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook Remains Stable at all horizons up to two years. Furthermore, we view IBRD's funding as broadly diversified by both geographic market and type of investor, given its frequent issuance in many markets and currencies, which includes its inaugural Mulan issue in August 2016, an SDR (special drawing rights)-denominated bond issued in the Chinese local market. Investors also perceive IBRD as a safe haven. IBRD would be able to fulfill its obligations for at least one year under extremely stressed market conditions. As of fiscal year-end 2016, our liquidity ratios, IBRD's potential sources of cash under our extreme stress scenario over its liabilities, were 2.1x at the six-month horizon and 1.5x at one year. However, when taking into account undisbursed loans, we estimate IBRD may need to spread out its scheduled disbursements. IBRD increased the size of its liquid asset portfolio (our definition) during the fiscal year to $54.8 billion as of June 30, 2016, up 8% from fiscal 2015, resulting in improved liquidity ratios. Even without accounting for extraordinary shareholder support, we assess IBRD's SACP at 'aaa', our highest level. Should IBRD's stand-alone capital adequacy weaken, the issuer credit rating would benefit from uplift. We would expect 'AAA' rated shareholders to answer one or more calls on their subscribed callable capital. Ten 'AAA' rated shareholders subscribed $36.9 billion of callable capital (20% of total gross debt in fiscal 2016). If IBRD's stand-alone capital ratios were to decline, the effect on its SACP could be counterbalanced by up to two notches, all else being equal. This would reflect the (currently latent) benefit of IBRD's 'AAA' callable capital. Outlook The stable outlook reflects our view that IBRD's business profile, capital levels including callable capital, funding, and liquidity are sufficiently robust that there is a less than one-in-three probability that we would lower our issuer credit rating on IBRD in the next two years. That said, if IBRD's business profile weakens or the financial profile deteriorates, the ratings would come under pressure. This could happen if management--contrary to our expectations--adopted more aggressive financial policies, if IBRD's derivative activities generated significant losses as a result of mismanagement, or if several members ceased treating IBRD as a preferred creditor. Related Criteria Criteria - Governments - General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Criteria - Financial Institutions - Banks: Bank Capital Methodology And Assumptions, Dec. 6, 2010 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2017 4
Research Update: International Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook Remains Stable General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research International Finance Corp. 'AAA/A-1+' Ratings Affirmed; Outlook Stable, Dec. 22, 2016 The International Development Association, Nov. 24, 2016 Supranationals Special Edition, Sept. 30, 2016 Supranationals Special Edition 2016: Five-Year Comparative Data For Multilateral Lending Institutions, Sept. 29, 2016 Introduction To Supranationals Special Edition 2016, Sept. 29, 2016 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower Ratings On Multilateral Lending Institutions, Aug. 26, 2013 Ratings List Ratings Affirmed International Bank for Reconstruction and Development Issuer Credit Rating Foreign Currency AAA/Stable/A-1+ Senior Unsecured Foreign Currency AAA Foreign Currency AAAp Greater China Regional Scale cnaaa Short-Term Debt A-1+ Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2017 5
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