The credit rating of International Bank for Economic Co-operation (hereinafter, IBEC, or the Bank) is driven by its strong intrinsic financial strengths that stem fr om strong capital adequacy, a satisfactory risk profile, adequate liquidity and funding, as well as a moderately strong assessment of the shareholder structure and the degree of support from its member states.
The outlook on the Bank’s credit rating under the international scale has been changed from Stable to Negative due to the risks associated with a possibility of five EU countries withdrawing their stakes in IBEC. However, a moderate downgrade of IBEC’s rating under the international scale will not lead to a downgrade of the Bank’s rating under the national scale, which defines the Stable outlook on the credit rating under the national scale as per the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation.
Headquartered in Moscow, IBEC is an International Financial Institution (IFI)/supranational development bank founded in 1963 with a mandate to facilitate international trade, economic development, and collaboration among its member states and the rest of the world. As of the end of 2021, the member states of IBEC were the Russian Federation (51.6%), the Czech Republic (13.3%), the Republic of Poland (12%), the Republic of Bulgaria (7.6%), Romania (7.1%), the Slovak Republic (6.7%), Mongolia (1.3%), and the Socialist Republic of Vietnam (0.4%).
Historically, the Bank has taken part in key multilateral initiatives aimed at fulfilling its mandate, including the implementation of a collective currency and payment platform among the member states, then known as COMECON/CEMA (Council for Mutual Economic Assistance), which included its current and former member states — GDR (East Germany, now defunct), Hungary, and Cuba. The member states of the Bank reaffirmed their commitment and decided to reform and relaunch the Bank in 2018, reinforcing its original mandate.
On March 2, 2022, the finance ministers of the five EU countries, namely the Czech Republic, the Republic of Poland, the Republic of Bulgaria, Romania, and the Slovak Republic, released a joint statement about their plans to exit IBEC. According to the Bank’s charter documents, the withdrawal of less than two-thirds of the shareholders (i. e. less than six member states) does not lead to a procedure of the Bank’s liquidation. For now, ACRA believes that IBEC’s liquidation is unlikely.
Key assessment factors
The Bank’s management quality, strategy, and operational transparency are adequate. A key aspect of the Bank’s relaunch in 2018 was the introduction of an experienced international management team and a general HR overhaul aimed at attracting top talent to the Bank. Since its relaunch, IBEC has made significant changes to its governance framework and personnel, which introduced new key mechanisms such as a transition from a country quota-based employment system to international competition, as well as a set of other management and governance practices.
ACRA believes that in case of the EU countries’ withdrawal from the Bank’s shareholders its management team and strategy will change significantly. The risks associated with these changes are taken into account in the Negative outlook on the Bank’s credit rating under the international scale.
IBEC’s capital adequacy position is strong. IBEC’s capital levels remain substantial and enable the Bank to withstand potential material deterioration in asset quality that may be caused by systemic events. Paid-in capital stood at EUR 200 mln of as of the end of 2021, while authorized capital stood at EUR 400 mln. However, the Bank has yet to implement a callable capital mechanism. By Basel terms, the Tier 1 capital ratio stood at 39% as of the end of 2021. Return on equity stood at 1.7% as of the same period, as calculated by ACRA.
Under IBEC’s charter documents, in case of a shareholder’s exit from the Bank the former should be repaid its contribution in the Bank’s charter capital. However, the size of the member state’s debt to the Bank should be deducted from that amount. According to ACRA calculations, if the above-mentioned EU countries quit IBEC, the Bank’s capital ratios could decline substantially, but will remain within the range corresponding to the strong capital adequacy assessment. At the same time, a build-up of reserves for the loan portfolio, which is currently undetermined, could put a negative pressure on the Bank’s capital. The influence of these two factors together could lead to a downgrade of IBEC’s capital adequacy position, which is taken into account in the Negative outlook on the Bank’s credit rating under the international scale.
ACRA assesses IBEC’s asset risk profile as satisfactory. IBEC’s total assets decreased by 4.7% to EUR 776 mln in 2021, from EUR 815 mln, primarily due to a decline in securities investment. The credit portfolio amounted to around 50% of total assets as of the end of 2021; the portfolio is mostly formed by loans, with a substantial part of it being either secured by corporate, state or other guarantees. The Bank has been maintaining its focus on trade financing which is considered as one of its main activities, which stood at EUR 103 mln as of the end of 2021 (37% more compared to a year ago). A portion of the Bank’s current outstanding credit is exposed to assets with low creditworthiness — as of the end of 2021, the Bank reported EUR 8.3 mln of Stage 3 assets. However, ACRA notes the full sovereign guarantee from a major shareholder, specifically covering this set of assets.
Given the current political and economic crisis, the Bank pursues a policy aimed at restraining the credit risk and does not increase the volume of its loan portfolios. The Bank believes that as a result of the reassessment of credit risks for borrowers, it will have to build additional reserves, the amount of which is currently undetermined. Furthermore, in case of the EU countries’ withdrawal from the shareholders, ACRA expects a decrease in IBEC’s lending activity in these countries, which may lead to a significant increase in the concentration of financial assets portfolio. A potential impact of these factors on the risk profile assessment is taken into account in the outlook on the credit rating under the international scale.
IBEC’s liquidity and funding position is adequate. IBEC’s liabilities are moderately diversified in terms of funding sources (the Herfindahl–Hirschman Diversity score by type stands at 28%). IBEC has aggregate long-term financing, which stood at EUR 154 mln (20% of total funding including capital) as of the end of 2021. IBEC’s net stable funding ratio (NSFR) and liquidity coverage ratio (LCR) stood at 115% and 870%, respectively. IBEC issued its first placement in the Russian market in 2019 for a volume of RUB 7 bln with a tenure of ten years which was followed by another ten-year RUB 5 bln placement at the end of H1 2020 and during the same period the Bank also received a long-term tied loan (for infrastructure projects) of EUR 41 mln. In June 2021, IBEC further extended its credit history as it tapped another member state market for the first time by placing BGN 68 mln in Bulgaria.
At the moment, the Bank retains high liquidity ratios, which is, among other things, supported by its decreased credit operations. ACRA believes that in case of the EU countries’ exit from IBEC, the Bank’s funding capabilities will be limited, however, the overall liquidity and funding position will remain adequate.
ACRA downgrades its assessment of the Bank’s importance to the shareholder countries, which announced plans to quit IBEC. Meanwhile, the assessment of the Bank’s importance for the other member states remains the same. However, the level of support from shareholder countries does not lim it the SCA of the Bank, which drives the final rating.
IBEC’s credit rating is AAA(RU), outlook Stable, under the national scale for the Russian Federation as per the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation.
Key assumptions
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Maintaining the Bank’s core functions within its current strategy;
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Maintaining the capital adequacy ratio above 25%;
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Maintaining comfortable liquidity position.
Potential outlook or rating change factors under the international scale
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Adaptation to changing circumstances followed by a sustainable improvement of the rating’s factors assessments.
A negative rating action may be prompted by:
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Deterioration in ACRA’s assessment of the Bank’s strategy and operational transparency;
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Deterioration in capital adequacy, including due to the withdrawal of the current shareholders;
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Increase in credit asset concentration;
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Increase in impaired assets;
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Deterioration in liquidity and funding position.
Potential outlook or rating change factors under the national scale for the Russian Federation
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A negative rating action may be prompted by:
- Significant decrease in IBEC’s credit rating under the international scale.
Rating components under the international scale
SCA: a-.
Adjustments: none.
Issue ratings
International Bank for Economic Co-operation exchange-traded bond Series 001P-02 (RU000A101RJ7), maturity date: June 3, 2030, issue volume: RUB 5 bln — AAA(RU).
Rationale. The credit rating of the issue is equivalent to that of IBEC. The issue represents senior unsecured debt of IBEC. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it pari passu with other existing and future unsecured and unsubordinated debt obligations of IBEC in terms of priority.
Regulatory disclosure
The credit rating has been assigned to International Bank for Economic Co-operation under the international scale based on the Methodology for Assigning Credit Ratings under the International Scale to International Financial Institutions and Other Supranational Development Institutions. The credit rating has been assigned to International Bank for Economic Co-operation and the bond issued by International Bank for Economic Co-operation (RU000A101RJ7) under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
Credit ratings of International Bank for Economic Co-operation under the international scale and the national scale for the Russian Federation were published by ACRA for the first time on May 18, 2020. The credit rating assigned under the national scale for the Russian Federation to the bond issued by International Bank for Economic Co-operation (RU000A101RJ7) was published by ACRA for the first time on June 15, 2020. The credit ratings and credit rating outlooks for International Bank for Economic Co-operation, as well as the credit rating of the bond issue listed above, are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings are based on data provided by International Bank for Economic Co-operation, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of International Bank for Economic Co-operation. The credit ratings are solicited, and International Bank for Economic Co-operation participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to International Bank for Economic Co-operation. No conflicts of interest were discovered in the course of the credit rating assignment.
