The affirmation of the credit rating of New Development Bank (hereinafter, NDB, or the Bank) reflects ACRA’s baseline expectations that over the next 12 to 18 months the Bank will retain its stable standalone financial indicators, including strong capitalization and liquidity metrics and adequate asset quality, and continue to perform important functions for the founding countries. The Agency notes that the historically stable and predictable resource base (including the amount of shareholders’ paid-in capital in the balance sheet structure, which continues to be significant), as well as the conservative liquidity management inherent to the Bank, have made it possible to mitigate some difficulties associated with the geopolitical situation while attracting funding in capital markets. In addition, the Bank has changed its issuance policy to focus Asia, which is less exposed to the impact of geopolitical tensions, and carries out private placements more often.
Five shareholder countries founded NDB in 2015, becoming its equal owners with identical shares. Since then, the structure of founders has expanded due to minority shares of the new shareholder countries. If geopolitical uncertainty does not become a serious constraining factor, then the growth of the number of shareholders will continue and become regular, negotiations with potential shareholders are underway. It is noteworthy that the original five founders intend to retain their controlling stakes.
NDB’s core activities are financing infrastructure projects with a strong emphasis on environmental, social, and governance (ESG) issues in developing economies and transition economies, as well as promoting economic cooperation among the shareholder countries. At the same time, as a one-time event, the active growth (more than doubling) of the loan portfolio last year was the result of NDB’s involvement in the fight against the coronavirus pandemic — for these purposes, the Bank issued long-term loans worth about USD 6 bln (approximately 40% of the loan portfolio as of mid-2022). ACRA expects that NDB, while still a young organization, is likely to continue with a relatively notable annual portfolio growth of 10–15% in 2022 and 20–30% in 2023. In general, forecasting is complicated by uncertainty surrounding investors’ sentiment toward the Bank as the ownership structure includes a country that is experiencing geopolitical pressure.
As of mid-2022, approximately 25–30% of the Bank’s loan portfolio is in China and India each, around 20% in South Africa, and 11–13% each in Russia and Brazil. Amid the current sanctions, Russian exposures may remain a source of additional impairment reserves. Due to this, NDB continues to adhere to its decision to temporarily stop participating in new projects related to the Russian Federation.
key assessment factors
The Bank’s management quality, strategy, and operational transparency are assessed as strong. The Bank’s management and governance boards consist of senior industry experts from the shareholder countries with extensive relevant private and public sector experience, including staff who joined NDB from leading multilateral development institutions such as the IMF and World Bank. ACRA believes that the management team and operational effectiveness of NDB are suitable to meet the needs required to run the Bank successfully in terms of risk mitigation and capital generation. The Bank’s financial statements are published on a quarterly basis and all lending and funding projects are publicly disclosed. The senior management of the Bank are appointed on a rotational basis, with the chairmanship function transitioning from one country to another. ACRA notes the lack of vetoing power by shareholders.
The strong capital position has been maintained, despite the Bank’s historically neutral profitability in line with its mandate as a transnational development institution. The Agency’s assessment continues to be determined by the high capital adequacy ratio (the ratio of total capital to assets and contingent liabilities, excluding highly liquid short-term investments), which was 42% as of mid-2022. ACRA expects this indicator to remain above 30% over the next 12 to 18 months.
ACRA positively assesses the significant, as yet unused, amounts of capital support from the founders and their desire to support the Bank on a regular basis and in case of stress. As of mid-2022, NDB’s subscribed capital stood at around USD 51.5 bln, of which only USD 10.3 bln was paid-in capital.
The losses recorded by the Bank in H1 2022 (approximately 2% on average capital on an annualized basis) are related to the need to create additional impairment reserves for all exposures attributable to the Russian Federation. These losses are not critical for the financial standing of NDB and, according to ACRA’s projections, will be compensated by the end of the year, which will enable the Bank to report a neutral financial result.
ACRA assesses NDB’s risk profile as adequate. Besides high underwriting standards and advanced risk management practices, the Agency’s assessment takes into account the absence of impaired positions in the Bank’s portfolio as of mid-2022. It cannot be ruled out that pressure on the quality of assets may grow as loans mature and the volume of operations increases, especially in jurisdictions with speculative ratings. Increasing global economic and geopolitical risks may add to this. At the same time, expansion into new markets will help NDB to achieve higher diversity of operations.
As of mid-2022, ACRA highlights the growing volume of Stage 2 loans as per IFRS, which may remain a source of additional impairment reserves. Due to this, NDB continues to adhere to its decision to temporarily stop participating in new projects, which are exposed to similar risks.
The presence of high concentrations on the balance sheet continues to constrain the risk profile assessment — the 20 largest borrowers accounted for about 81% of the loan portfolio midway through the year, while the 10 largest credit exposures (including treasury assets) accounted for about 144% of the Bank’s equity as of the same date. In addition, NDB’s mandate involves financing long-term projects with lengthy investment periods (according to the Agency’s assessment, the weighted average maturity of the loan portfolio is around 24 years). Risks continue to be mitigated by the large volume of loans guaranteed by sovereigns (more than 80% of issued loans and undrawn contingent liabilities) and NDB’s privileged lender status, which is in line with the international practices of interaction with similar organizations.
NDB’s liquidity and funding position is assessed as strong. Since 2021, equity, although having given way to debt securities in the Bank’s resource base structure, continues to be an important source of core business financing, contributing to the stability of operations. As of mid-2022, equity amounted to 42% of NDB’s balance sheet, and in 2023 its share may decline to a still-high 30–40% (depending on the development of the difficult-to-predict geopolitical situation and its impact on the Bank).
The high share of equity in the resource base and conservative approach to managing the maturities of assets and liabilities made it easier for the Bank to get through the difficulties of placing new bond issues, which intensified in 2022 amid strengthening geopolitical tensions and are directly related to the ownership structure of NDB. Restrictions in the debt market are about the higher price of financing and greater control of investors over the distribution of attracted funds. Additional mitigating factors for the Bank include the switch in focus of issuance policy to Asian capital markets, that are less exposed to geopolitical turbulence, as well as to organizing issuances among a closed group of investors.
Liquid assets continue to account for approximately a third of the Bank’s balance sheet, with a substantial margin covering short-term liabilities. ACRA expects the Bank to maintain its comfortable liquidity indicators over the next 12–18 months, taking into account the stability of NDB’s resource base.
ACRA assesses support from the shareholder countries as moderately high, which is supported by two elements — the Agency’s view that the importance of NDB’s operations for the main member countries is at the highest possible level and their adequate average creditworthiness assessment.
NDB’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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Systemic importance to most shareholder countries;
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Maintaining robust credit underwriting standards and as a result, maintaining strong asset quality;
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Very high capitalization within the 12 to 18-month horizon despite an increase in operations;
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Maintaining a high level of liquidity.
Potential outlook or rating change factors under the international scale
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:
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ACRA’s opinion regarding a substantial deterioration in the creditworthiness of the member countries resulting in a weaker credit profile for NDB;
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Decrease of systemic importance for the key shareholder countries;
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Disagreements between the shareholder countries amid tense geopolitical situation in the world;
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Substantial deterioration of capital adequacy;
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Substantial deterioration of liquidity and funding;
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Heightened concentration of assets for a long period of time.
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:
- Multi-notch downgrade of NDB’s credit rating under the international scale.
Rating components under the international scale
Standalone creditworthiness assessment (SCA): aaa.
Adjustments: none.
regulatory disclosure
The credit rating has been assigned to New Development Bank 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 New Development Bank 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 credit ratings under the international scale and the national scale for the Russian Federation were published by ACRA for the first time on January 23, 2020. The credit ratings and their outlooks 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 were assigned based on data provided by New Development Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of New Development Bank. The credit ratings are solicited and New Development Bank participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to New Development Bank. No conflicts of interest were discovered in the course of the credit rating assignment.
