The credit rating of International Bank for Economic Co-operation (hereinafter, IBEC, or the Bank) 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 IBEC’s final rating.
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.
In 2023, the requests made by all five EU countries that previously announced their intent to exit IBEC were satisfied. 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 continues to believe 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. Due to significant changes to operating conditions in 2022, IBEC considerably reduced volumes of operations, and focused mainly on regulating liabilities amid temporary restrictions imposed on part of its assets. In view of the successful completion of this phase, the Bank began gradually recovering its volumes of business and carrying out new transactions in 2023. In many ways, the previous development strategy lost its relevance. The Bank is currently putting together a new strategy, which will enable it to continue carrying out the objectives as per its mandate. Uncertainty stemming from the change in strategy puts pressure on the business profile assessment and IBEC’s credit rating under the international scale.
Strong capital adequacy position. IBEC’s capital adequacy remains high, which allows it to withstand the potential risks of a significant deterioration of asset quality. The historically low size of assets and contingent liabilities of the Bank due to the reduction of the share of active operations last year has a positive impact on the capital adequacy assessment. This indicator, calculated according to ACRA’s methodology, was around 64.0% as of June 30, 2023. Gradual recovery of the volumes of the Bank’s business will lead to a significant decline in capital adequacy, although the Agency expects this indicator to remain strong in the medium term.
The process according to which shareholders exit the capital of the Bank involves a gradual return of the initial contributions of the member states, 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 as a result of the shareholders’ exit.
The loss incurred by the Bank in 2022 put tangible 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. The profit received by IBEC in H1 2023 confirms the validity of this assumption. 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 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 June 30, 2023, 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 less than 20% of IBEC’s total liabilities as of June 30, 2023. 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 is expected to 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 support from shareholder countries does not influence the Bank’s credit rating, which is determined based on its standalone creditworthiness assessment (SCA). 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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Lower assessment of capital adequacy that results in a stable decline of the Bank’s return on equity;
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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 as equal 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 of International Bank for Economic Co-operation and its bond issue (RU000A101RJ7) have been disclosed prior to the dates specified in the Calendar of sovereign credit rating revisions and publications due to prompt performance of rating revision and liaison procedures. The planned revision date was August 22, 2023, the actual revision date is August 22, 2023. The planned publication date was August 25, 2023, the actual publication date is August 24, 2023.
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.
