Research Update: European Bank For Reconstruction And Development 'AAA/A-1+' Ratings Affirmed; Outlook Primary Credit Analyst: Alexander Ekbom, Stockholm (46) 8-440-5911; alexander.ekbom@spglobal.com Secondary Contact: Abril A Canizares, London (44) 20-7176-0161; abril.canizares@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 1
Research Update: European Bank For Reconstruction And Development 'AAA/A-1+' Ratings Affirmed; Outlook Overview Although the European Bank for Reconstruction and Development (EBRD) operates in some markets undergoing economic stress, such as Ukraine, Turkey, and Russia, its asset quality and capital have continued to strengthen. EBRD's stand-alone credit profile remains at 'aaa', reflecting our assessment of its very strong business profile and extremely strong financial profile. We are therefore affirming our 'AAA/A-1+' ratings on the bank. The stable outlook reflects our view that EBRD's capital position and liquidity would withstand a period of financial stress in countries where EBRD operates, including the significant stock of 'AAA' callable capital that could prevent deterioration of the financial profile. Rating Action On June 20, 2018, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' short-term issuer credit ratings on European Bank for Reconstruction and Development (EBRD). The outlook is stable. Rationale The ratings are based on EBRD's very strong business profile and extremely strong financial profile, and our 'aaa' assessment of EBRD's stand-alone credit profile (SACP). EBRD started operating in 1991 with a mandate to help the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) transition to market economies, principally through lending to the public and private sectors, making equity investments, and providing guarantees. EBRD has been up against a challenging operating environment among certain member countries that are also some of its major borrowers. Ukraine, Russia, and Turkey have been or are going through various stages of economic or sanctions-related difficulties, but despite this situation, EBRD's asset quality has improved slightly, with low provisions, and nonperforming loans WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 2
reducing to 4.2% of the loan book as of first-quarter 2018 from 5.5% at year-end 2016. This was partly due to previous efforts to set aside significant provisions and write off debt, but also attests to EBRD's sound risk management. However, this situation could worsen, notably in Turkey, among a few others, where we believe asset quality could deteriorate in the near future. In addition, EBRD has grown substantially in the Southern and Eastern Mediterranean (SEMED) region, including Egypt, Jordan, Morocco, and Tunisia. Because of EBRD's robust risk management principals, though, we believe that lending will be conducted cautiously. Nevertheless, some of these regions are new markets for EBRD where sovereign ratings are generally low and risks in both private and public sectors are high. Still, we think EBRD is well equipped to overcome these obstacles, with its robust capitalization and healthy earnings capacity, as well as strong liquidity. In case of a significantly worse scenario than expected, we also consider that the bank's substantial buffer of callable capital from shareholders rated 'AAA' would underpin its financial profile and the current ratings. Following the EU's sanctions on Russia, notably the European Council's decision to suspend the financing of new projects in the country, EBRD's board of directors, including all EU member states and several non-eu shareholders, indicated that it would not approve any new investment projects in Russia, the bank's largest country of exposure at that time. EBRD will continue to manage its 2.2 billion of operating assets (as of March 31, 2018; 65% equity exposure) in Russia, but accelerated prepayments of loans could continue. We still expect that Russia will remain a shareholder in EBRD despite the sanctions, but that, as mentioned, EBRD will not engage in new lending there and shareholder relations will remain tense. Despite the situation in Russia, the bank has benefitted from substantial support from shareholders since its establishment. EBRD has gradually increased its number of shareholders and its geographic scope of operations during the past 20 years; the original 40 shareholders have grown to 68 (predominantly European) countries, the latest to join being Lebanon, which also became a country of operation in September 2017, in July 2017. The shareholder group also includes two supranational institutions: the European Union and the European Investment Bank. As of year-end 2017, 99.5% of the callable capital increase approved in 2010 had been subscribed. During the fourth capital-resources review in May 2010, EBRD's shareholders decided to increase the bank's authorized capital to 30 billion from 20 billion through a 1 billion transfer from reserves to paid-in capital, plus a 9 billion increase in callable capital. The increase in paid-in capital became effective immediately, while the increase in callable capital became effective in April 2011 on receipt of more than 50% of the necessary subscriptions. These operations did not affect EBRD's cash equity position, only the equity composition. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 3
The bank's intentions to extend its operations within SEMED started some seven years ago, and the first investment took place in 2012 through a special fund established by shareholders. In November 2013, EBRD granted Jordan, Morocco, and Tunisia the status of countries of operation. More recently, Egypt received recipient country status in October 2015, and the SEMED region is now an important area of growth, representing approximately 8.4% of outstanding operating assets. This has been increasingly important as loan growth in Russia has been negative and Turkey, EBRDs biggest exposure, is not expected to grow materially. India's membership application was approved by the Governors in March 2018 and the membership will be effective certain conditions being met. India will not be a recipient country of EBRD investments. As voiced by the president during the IMF spring meeting in April 2018, EBRD is starting to consider an eventual expansion into Sub-Saharan Africa where the need to develop the private sector is high. However, this is still in its infancy and would require significant analysis and multiple internal and shareholder approvals before eventually becoming a reality a couple of years from now. Our assessment of EBRD's extremely strong financial profile factors in the bank's robust capitalization, leading to a risk-adjusted capital (RAC) ratio of 16.4% before adjustments (based on current ratings), despite having riskier assets than most other multilateral lending institutions (MLIs). Most of EBRD's loans and all its equity investments are in the private sector, while for many other MLIs the majority of loans are to sovereigns or sovereign-guaranteed entities. EBRD's RAC ratio improves to 26% when taking into account our MLI-specific adjustments, including a cap on the risk weight of high-risk exposures, the geographic diversification of EBRD's exposures, and our expectation of EBRD receiving preferred creditor treatment from sovereign borrowers. The criteria correction explained in "Criteria For Assessing Bank Capital Corrected," published July 11, 2017, is not factored into the RAC ratio after diversification. The impact of the correction on the ratio is not material to the rating. EBRD's important preferred creditor treatment was demonstrated most recently when EBRD, along with other MLIs, was excluded from the bond restructuring of the Export-Import Bank of Ukraine, Ukreximbank. We also note that EBRD benefited from preferential treatment in 1998, when Russia excluded private-sector obligations to EBRD from restrictions on access to foreign exchange needed for debt service. Our funding and liquidity ratios for EBRD indicate that the bank would be able to fulfil its mandate for at least one year, even under extremely stressed market conditions, without access to the capital markets. Moreover, we estimate that EBRD 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. EBRD's funding benefits from strong access to capital markets, including through its global benchmark bond issuance, its 35 billion global medium-term note program, and its 8 billion commercial paper program. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 4
EBRD's 'aaa' SACP is buttressed by 6.1 billion (38% of adjusted common equity) in subscribed callable capital from members rated 'AAA', down from 7.4 billion after the lowering of our long-term ratings on the U.K. in June 2016. A downward revision of our assessment of EBRD's SACP to 'aa+' or 'aa' because of a weakening of its cash capital position would probably not affect the issuer credit rating on the bank, because we could then factor in shareholder support from callable capital, all other things being equal. Outlook The outlook is stable. In the next 24 months, even with increased exposure to financing in countries that are at an intermediary stage of development, EBRD's capital position and liquidity appear solid enough to withstand financial stress. In addition, EBRD has ample 'AAA' callable capital that could mitigate a significant weakening of its financial profile while supporting the ratings at the current level. We could consider lowering the ratings if EBRD's asset quality were to deteriorate beyond our current expectations, or if the bank were no longer afforded preferred creditor treatment. We could also lower the ratings if relations among shareholders worsened, affecting the bank's role. However, this is not our base-case scenario. Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Governments - General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Criteria - Financial Institutions - Banks: Multilateral Lending Institutions Capital Methodology And Assumptions, Dec. 6, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Introduction To Supranationals Special Edition 2017, Oct. 20, 2017 Supranationals Special Edition 2017: Comparative Data For Multilateral Lending Institutions, Oct. 20, 2017 European Bank for Reconstruction and Development 'AAA/A-1+' Ratings Affirmed; Outlook, June 30, 2017 Credit FAQ: Key Considerations For Supranationals' Lending Capacity And Their Current Capital Endowment, May 18, 2017 How Brexit Could Impact Ratings On Supranational Institutions, April 10, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 5
2017 Ratings List Ratings Affirmed European Bank for Reconstruction and Development Issuer Credit Rating AAA//A-1+ Senior Unsecured AAA Senior Unsecured AAAp Commercial Paper 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.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 20, 2018 6
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