The credit rating of International Bank for Economic Co-operation (hereinafter, IBEC, or the Bank) is driven by its financial metrics that stem fr om strong capital adequacy, weak risk profile, and adequate liquidity and funding. A moderately strong assessment of the shareholder structure and the degree of support from the member states do not affect the definitive rating of IBEC.
The outlook on the Bank’s credit rating under the international scale reflects 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.
On March 2, 2022, the finance ministers of the five EU countries 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 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.
In ACRA's opinion, the withdrawal of the EU countries from the Bank’s shareholders will lead to significant changes in its management team and strategy. 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. Following the withdrawal of credit ratings by international agencies in the first half of 2022, the Bank was forced to settle some transactions ahead of schedule, which led to significant losses on securities and derivatives, as well as the inability to fully hedge currency risk. On the background of the ruble becoming stronger against the euro and the US dollar, the Bank reported significant currency revaluation losses as of June 30, 2022. In addition, after international agencies withdrew their ratings from many Russian counterparties of IBEC, additional provisions were made for their obligations to the Bank. These factors resulted in a significant reduction in the Bank's capital. Nevertheless, the capital adequacy of IBEC remains high, which still allows the Bank to withstand the potential risks of a significant deterioration in asset quality and a reduction in funding volumes. Although as of mid–2022, the Tier-1 capital ratio was slightly below 25% (39% at the end of 2021), the subsequent depreciation of the ruble made this ratio strong again, according to ACRA's estimates.
At the same time, the losses reported in the first half of 2022 put significant pressure on the Bank's ROE, which, according to ACRA's projections, is expected to be negative by the end of this year, and they create risks of a negative adjustment in the assessment of IBEC's capital position. Moreover, 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's calculations, if the above-mentioned EU countries quit IBEC, the Bank’s capital ratios could decline substantially. 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 downgrades the Bank's risk profile assessment to weak. In the first half of 2022, the total volume of the Bank's assets decreased significantly, as in the current political and economic crisis, IBEC is pursuing a policy for limiting credit risks, and it almost ceased to issue new loans. The amount of assets also decreased due to the curtailment of repurchase and interbank lending transactions by a number of the Bank's counterparties. At the same time, the average quality of the Bank's assets is still quite high. The share of NPL90+ increased due to a decrease in the volume of the loan portfolio, but remained low. In addition, the Agency notes that this debt is secured by a sovereign guarantee of the Bank's shareholder country.
The reason for revising the risk profile assessment is the growth of the territorial concentration of IBEC's assets. The announced withdrawal of the EU countries and certain difficulties in working with European counterparties forced the Bank to transfer a significant portion of its assets to the jurisdictions of other shareholder countries, whose shares increased accordingly. As of June 30, 2022, the maximum share of IBEC assets in a single country exceeded 30%, which affected the risk profile assessment.
The Bank's liquidity and funding position remains adequate. The shares of individual items in the Bank's funding structure have changed significantly, but the overall diversification of liabilities has remained at a moderate level. Moreover, the reduction in the share of funds raised from other banks to less than 25% of the IBEC's balance sheet currency had a positive impact on the funding factor score. At the same time, the Bank's liquidity metrics are under pressure from the declining ratio of high-liquid assets to short-term liabilities: the amount of high-liquid assets shrank after the early settlement of transactions with some counterparties, while the increase in the amount of short-term liabilities, in turn, was mainly caused by the provision of additional collateral by counterparties under repurchase transactions.
The assessment of the Bank’s importance to the shareholder countries has remained unchanged. For member-countries who announced their plans to quit IBEC, this importance is still low, while for the Bank's majority shareholder, it has remained high. The level of support from shareholder countries does not lim it the SCA of the Bank, which drives the final credit 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 downgrade of 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.
