The credit rating of International Bank for Economic Co-operation (hereinafter, IBEC, or the Bank) has been downgraded under the international scale due to a lower assessment of its business profile on the back of increased uncertainty regarding the strategic prospects of the Bank’s future development (previously a Negative outlook was assigned to the rating). The international scale downgrade did not impact the national scale credit ratings of IBEC and its bond issue.
The credit rating of IBEC is based on assessments of rating factors, including a vulnerable business profile, strong capital adequacy, weak risk profile assessment, and an adequate assessment of funding and liquidity. At the same time, the factor of support from the Bank’s shareholder countries does not influence the final rating of IBEC.
Headquartered in Moscow, IBEC is an international financial Institution with a mandate to facilitate international trade, economic development, and collaboration among its member states and the rest of the world.
At the end of January 2023, the requests made by three of five EU countries that previously announced their intent to exit IBEC were satisfied. Later, requests were received from the two remaining EU countries and it is expected that they will be acted upon in 2023. According to IBEC’s charter documents, the withdrawal of less than two-thirds of the shareholders does not lead to initiating the Bank’s liquidation. ACRA currently believes that IBEC’s liquidation is unlikely.
key assessment factors
The Bank’s business profile is assessed as vulnerable. As per its mandate, IBEC focuses on developing the economies and foreign trade links of its member states. Previously, the Bank’s business was mainly focused on counterparties from the European Union. The exit of EU countries from IBEC’s pool of shareholders resulted in the need to find new markets for the Bank’s operations. In many ways, the development strategy is now out of date and needs to be revised. Strategic uncertainty puts pressure on the business profile assessment and IBEC’s credit rating under the international scale.
Strong capital adequacy position. Following the withdrawal of the ratings previously assigned to the Bank by international rating agencies in H1 2022, IBEC 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. In addition, after international agencies withdrew their ratings from all of IBEC’s Russian counterparties, additional provisions were formed for their obligations to the Bank. These factors resulted in a significant reduction of the Bank’s capital. Nevertheless, IBEC’s capital adequacy remains high, which still allows it to withstand the potential risks of a significant deterioration of asset quality and a reduction of funding volumes. The decline of the size of assets and contingent liabilities, as well as the amount of risk-weighted assets due to the reduction of the share of active operations, had a positive impact on the capital adequacy assessment. The adequacy of paid-in capital calculated according to ACRA’s methodology stood at around 50% as of December 31, 2022.
Taking into account the process according to which shareholders exit the capital of the Bank, a gradual return of the initial contributions of the member states is expected, which will take place over 20 years. The reduction of IBEC’s capital will take a long time and may be offset by future profits. In this regard, ACRA does not IBEC’s capital adequacy ratios to decline sharply in the near future.
The losses incurred in H1 2022 put significant pressure on return on paid-in capital, which as of the end of last year amounted to -43%. At the same time, ACRA assumes that this loss, which was related to sanctions and other restrictions imposed on Russia, is a one-off event and will not impact the Bank’s ability to deliver positive financial results in the future. Therefore, the Agency has not applied a negative adjustment to the assessment of IBEC’s capital position.
The Bank’s risk profile assessment is weak. In 2022, the total volume of the Bank’s assets decreased significantly, as in the current political and economic crisis, IBEC pursued a policy of limiting credit risks, and it practically stopped issuing new loans. The amount of assets decreased significantly, and there was a curtailment of repurchase and interbank lending transactions due to a number of the Bank’s counterparties refusing to perform transactions with the Bank. The average quality of assets remains quite high, while the share of NPL90+ is low. The Agency notes that the main amount of overdue debt is of a technical nature associated with the difficulties of making payments via European banks.
The high territorial concentration of IBEC’s assets has a serious negative impact on its risk profile assessment. The 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 as a result. As of December 31, 2022, the maximum share of IBEC’s assets in a single country exceeded 30%, which serves as grounds for the weak assessment of the Bank’s risk profile.
The Bank’s funding and liquidity position remains adequate. The overall diversification of liabilities remains moderate, while the share of funds raised from other banks amounted to just over a quarter of IBEC’s total liabilities as of December 31, 2022. At the same time, the Agency notes that the Bank had rather strong liquidity indicators as of the aforementioned date — highly liquid assets significantly exceeded short-term liabilities, while the share of highly liquid assets in the balance sheet amounted to more than 20%. The exit of one of the EU shareholder countries may lead to the Bank having to redeem, ahead of schedule, an issue of debt securities placed in the corresponding jurisdiction. The Agency assumes that this will not result in the assessment of IBEC’s funding and liquidity position being lowered.
The assessment of the Bank’s importance to the shareholder countries remains unchanged. For countries that announced plans to quit IBEC, its importance is still low, while for the Bank’s majority shareholder, it remains high. The level of support from shareholder countries does not limit the Bank’s standalone creditworthiness assessment (SCA), which determines 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 taking into account the new conditions;
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Maintaining the capital adequacy ratio above 25%;
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Profitability of operations;
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Maintaining a comfortable liquidity position.
Potential outlook or rating change factors under the international scale
The Stable outlook assumes that the credit rating will highly likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Adaptation to changing circumstances followed by a sustainable improvement of the assessments of rating factors;
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Lower territorial concentration of the Bank’s assets.
A negative rating action may be prompted by:
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Deterioration of capital adequacy;
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Higher credit asset concentration;
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Growth of impaired assets;
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Deterioration of funding and liquidity 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: bbb+.
Adjustments: none.
issue ratings
Exchange-traded bonds of International Bank for Economic Co-operation, series 001P-02 (RU000A101RJ7), maturity date: June 3, 2030, issue volume: RUB 5 bln — AAA(RU).
Rationale. The credit rating of the issue of series 001P-02 bonds (RU000A101RJ7) 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 to 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. The credit ratings have been assigned to International Bank for Economic Co-operation and the bond issue of 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The 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 issue of International Bank for Economic Co-operation (RU000A101RJ7) was published by ACRA for the first time on June 15, 2020. The credit ratings and their outlooks, 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 were assigned 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 were, 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 credit rating assignment.
