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RPT-Fitch affirms Council of Europe Development Bank at 'AA+'; outlook stable
September 11, 2013 / 4:42 PM / 4 years ago

RPT-Fitch affirms Council of Europe Development Bank at 'AA+'; outlook stable

LONDON/PARIS, September 11 (Fitch) Fitch Ratings has affirmed the Council of 
Europe Development Bank's (CEB) Long-term Issuer Default Rating (IDR) at 'AA+' 
with a Stable Outlook and Short-term IDR at 'F1+'. 

KEY RATING DRIVERS

The affirmation and Stable Outlook reflect the following key rating factors:

- The CEB's rating is based on the intrinsic strength of the bank, and is 
supported by the solid performance of the loan book, strong liquidity, as well 
as a conservative and prudent risk management and lending strategy. 

- The CEB's loan portfolio continues to have an excellent record with no 
impaired loans at end-2012, and with no loans written off in its history. 
However, asset quality continued to worsen in 2012 with investment grade 
counterparties accounting for 76% of the loans portfolio, down from 83% at 
end-2011 and 85% at end-2009. This was primarily driven by rating downgrades of 
several borrowers in 2012, and also due to the bank's strategy of meeting its 
60% of loans lending target to Eastern European 'target countries'. 

- Concentration risk also continued to increase as CEB's five largest loan 
exposures increased as a proportion of total loans to 35% at end-2012 from 28% 
in 2009. This was largely due to the increase in lending to Hungary, Romania and
Turkey, consistent with its strategy to increase lending to 'target countries'. 

- The bank's exposure to peripheral eurozone sovereigns has decreased 
significantly to 20% of total sovereign exposure at end-2012, from 24% at 
end-2011 (including loans and treasury assets). The bank's preferred creditor 
status was successfully tested through the Greek and Cypriot crises, with the 
CEB not participating in the restructuring of Greek and Cypriot sovereign debt 
which respectively represented 0.7% and 5.0% of total loan exposure at end-2012.


- The worsening asset quality resulted in a deterioration of the ratio of usable
to required capital falling to 5.86x, from 6.69x. However, CEB's capitalisation 
was supported by robust internal capital generation, owed to CEB's improved 
profitability, with a return on equity of 5.5% in 2012, compared with 5.1% in 
2011. 

- Compared to other European Multinational Development Banks (MDBs), CEB's 
capitalisation is low with an equity-to-assets ratio of 8.4% (2011:8.1%). 
Leverage is also high with a debt to equity ratio of 953% at end-2012. The 
capital increase launched in 2011 resulted in an increase in callable capital, 
but did not affect paid-in equity. However, the CEB has one of the strongest 
liquidity profiles across Fitch-rated MDBs, with a treasury assets portfolio 
representing 43.8% of total assets at end-2012. 

- The CEB has a conservative strategy to grow its loan book modestly in 2013 and
beyond. Risk management is also a key strength for the CEB rating. The bank 
regulates its own operations by monitoring prudential ratios and limits for 
capital adequacy, liquidity and credit risk. However, these limits serve more as
a guideline, as evidenced by the breaching of its risk asset coverage ratio in 
2011, following several downgrades of borrowers. The bank is currently reviewing
its prudential framework. 

- Although support remains strong, the ability of member states to support the 
CEB is weakening, with the proportion of 'AAA' and 'AA' callable capital 
declining to 48.5% of total callable capital (2011: 51.1%). This largely 
reflects the rating downgrades for several of CEB's key shareholders in 2012, 
notably Italy ('BBB+'/Negative) and Spain ('BBB'/Negative).

RATING SENSITIVITIES

- The Stable Outlook reflects Fitch's expectation that CEB's credit profile will
remain consistent with a 'AA+' rating. CEB's rating is driven more by intrinsic 
factors than by support, and is hence sensitive to the ratings of its key 
borrowers which directly affect its asset quality. A material deterioration 
(improvement) of key borrowers' ratings is likely to lead to downward (upward) 
pressure on CEB's rating. 

- A material increase in the equity base either by continued internal capital 
generation and/or paid-in capital would provide a notably stronger capital 
cushion against potential losses, potentially creating upward pressure on the 
rating. 

- Conversely, a loosening of its conservative approach to growth and risk 
management would result in downward pressure on the rating.

KEY ASSUMPTIONS 

The ratings and Outlooks are sensitive to a number of assumptions:

- The ratings are based upon the assumption of CEB maintaining its existing 
strategy of modest growth in its loan book.

- Fitch assumes that the risk of fragmentation of the eurozone remains low. 

- Fitch assumes that highly rated member states will remain committed to 
responding to any capital call.

Contact: 

Primary Analyst

Eugene Chiam

Research Analyst

+44 20 3530 1512

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst 

Eric Paget-Blanc

Senior Director

+33 1 44 29 91 33

Committee Chairperson

Gordon Scott

Managing Director

+44 20 3530 1075

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com. 

Applicable criteria, 'Rating Multilateral Development Banks', dated 23 May 2012,
are available at www.fitchratings.com.

Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
here. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE 
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS 
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED 
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH 
WEBSITE.

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