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 continues to assume 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 increased its focus on raising funding in regions such as Asia and the Middle East in the short term, which are less exposed to the impact of geopolitical tensions, and carries out private placements more often.
Five shareholder countries that are part of the BRICS intergovernmental organization 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. A significant share of the Bank’s disbursed portfolio (USD 8 bln, or approximately 55%) comprises of loans issued by NDB to assist in members’ fight against the COVID-19 pandemic and subsequent economic recovery.
ACRA expects that the Bank, while still a young organization, is likely to continue with a relatively notable annual portfolio growth starting from H2 2023. In general, forecasting is complicated by uncertainty surrounding investors’ sentiment toward the Bank, as one of the member states is experiencing geopolitical pressure. In ACRA’s opinion, the situation is partly mitigated by signs of growing attention paid by the BRICS countries to the importance of further strengthening intercountry cooperation. The Agency believes that NDB could be one of the platforms for the implementation of these goals, thereby increasing its value for the founding countries.
As of the start of 2023, approximately 25–30% of the Bank’s loan portfolio is in China and India each, around 20% in South Africa, around 12% in Russia, and approximately 10% in Brazil. Amid the current sanctions and unpredictable changes to the external environment, 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
Strong business profile assessment. 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 paid-in capital to assets and contingent liabilities, excluding highly liquid short-term investments), which was 45% as of the start of 2023. 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 the start of 2023, NDB’s subscribed capital stood at around USD 51.5 bln, of which only USD 10.3 bln was paid-in capital.
The Bank’s financial result last year remained at levels comparable to earlier periods. The need to create additional impairment reserves for all exposures attributable to the Russian Federation and negative revaluation from a sharp change in market conditions were offset by strong net interest income amid rising rates in many economies around the world.
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 the start of 2023. 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 the start of 2023, ACRA highlights the heightened 14% share 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 at the start of the year, while the 10 largest credit exposures (including treasury assets) accounted for about 158% of the Bank’s paid-in capital 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 20 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 funding and liquidity position is assessed as strong. Since 2021, equity, has given way to debt securities in the Bank’s resource base structure, however it continues to be an important source of core business financing and contributes to the stability of operations. As of the start of the year, equity amounted to 41% of NDB’s balance sheet, and in 2023 its share may decline to a still-high 30–40% (depending on the development of difficult-to-predict factors in the evolving 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 greater focus on Asian and Middle Eastern 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 40–45% 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.
The assessment of support from the shareholder countries is unchanged. ACRA assesses the degree of support from most of the key shareholder countries as medium as per the approaches reflected in the updated Methodology for Assigning Credit Ratings under the International Scale to International Financial Institutions.
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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Continued 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 of the creditworthiness of the member countries resulting in a weaker credit profile for NDB;
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Decrease of importance to the key shareholder countries;
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Disagreements between the shareholder countries amid a tense geopolitical situation in the world;
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Substantial deterioration of capital adequacy;
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Substantial deterioration of funding and liquidity.
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. 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 of New Development Bank 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.
