October 20, 2017 / 11:32 AM / a year ago

Correction: Fitch Affirms International Bank for Reconstruction and Development at 'AAA'

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) This is a correction of a rating action commentary (RAC) dated 08 February 2017 for a data error associated with ratable ID US29874QCW24. This ratable ID was incorrectly included in the Rating Information Disclosure Form (RIDF) associated with this RAC and has now been removed. Fitch Ratings has affirmed the International Bank for Reconstruction and Development's (IBRD) Long-Term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and its Short-term IDR and unsecured debt at 'F1+'. IBRD's senior unsecured debt and market-linked securities long-term ratings have also been affirmed at 'AAA'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following key rating factors: IBRD's 'AAA' rating is driven by intrinsic credit quality. Its low-risk business environment translates into a substantial upward adjustment over other intrinsic factors, such as solvency (assessed at 'aa' in accordance with Fitch's criteria), which is composed of capitalisation and risks; and liquidity (assessed at 'aaa'). In Fitch's view, IBRD's business profile presents low risk, given the large size of its banking portfolio, concentrated in sovereign-lending, and its prudent strategy. IBRD's governance standards, which are supported by a highly experienced and credible management team, are in line with 'AAA' peers. Fitch assesses IBRD's operating environment as medium risk, reflecting the overall medium-to-low credit quality of borrowing member states, and the low-to-intermediate national income level of a large number of countries of operations. Fitch's perception is, however, mitigated by the low political risk in its country of head office (the U.S.) as well as the high level of operational support provided by member states authorities. Although on a declining trend, IBRD's capitalization is considered as strong, in accordance with Fitch's criteria. IBRD's net profit amounted to 1.3% of average equity at FY2016 (compared to a loss equivalent to 2% of equity a year earlier). This performance excludes an USD2.8 billion actuarial loss on its pension plan, which Fitch deemed a volatile and non-recurrent item. Although IBRD's shareholders could increase capital by more than USD700 million by 2018, high loan disbursements and low internal capital generation could weaken capitalization in the coming years, which would have implications for Fitch's capitalization assessment. Fitch assesses IBRD's overall risk profile as low. Within the risk analysis, we assess credit risk as low. At June 2016, Zimbabwe was the only borrower in arrears, with an outstanding exposure of USD444 million, yet the bank has been slowly receiving payments, totalling about USD9 million, since 2015. Non-performing loans are very low at 0.3% of total exposures. That performance reflects the bank's preferred-creditor status, which relates to its entire sovereign-related portfolio, and which has been tested successfully. Based on Fitch's estimates, IBRD's average rating of loans and guarantees is stable at 'BBB-' as of June 16, 2016. Nonetheless, IBRD's portfolio is more vulnerable to the downgrades of its largest countries of operations, which include Brazil ('BB'/Negative), Mexico ('BBB+'/Negative) and Turkey ('BB+'/Stable), following Fitch's successive downgrades of Brazil since 2015. Concentration risk is assessed as medium. The share of the five largest exposures as a proportion of IBRD's total exposure was 42.5% at end-June 2016, before taking into account guarantees received under the Exposure Exchange Agreement (EEA). We expect this ratio to improve marginally over the medium term, as IBRD will benefit from its participation in the EEA with African Development Bank ('AAA'/Stable) and Inter-American Development Bank ('AAA'/Stable). Under this initiative, IBRD expects to reduce concentration through loan exposure swaps with its peers. IBRD's risk management framework is excellent, as the bank abides by strict, self-imposed liquidity, capitalisation, underwriting and market risk management criteria. IBRD has limited exposure to market risk due to its extensive use of derivatives to hedge its interest rate and foreign currency risks. Interest rate risk is limited as almost all borrowings and loans are transformed into variable-rate instruments using derivatives in order to minimize interest rate mismatches. Liquidity is assessed at 'aaa'. IBRD's liquidity cushion is in line with 'AAA' rated multilateral development banks (MDBs), as is evidenced by the excellent coverage of short-term liabilities by liquid assets (1.5x as of end-June 2016), which Fitch expects to remain at similar levels in the coming years. The bank's sound liquidity profile is also supported by its excellent access to capital markets. Consistent with Fitch's Supranationals criteria, support from shareholders is not taken into consideration in the overall rating, as the net debt is not fully covered by highly-rated callable capital. However, no credit uplift from support is needed to achieve an overall rating of 'AAA' given the excellent intrinsic strength of the bank. RATING SENSITIVITIES The Outlook on International Bank for Reconstruction and Development's Issuer Default Rating (IDR) is Stable. The factors that could, individually or collectively affect IBRD's ratings are: A deterioration in capitalization due to a rapid increase in lending or substantial credit or market losses would negatively affect the ratings. A significant deterioration in the ratings of the IBRD's large borrowers, potentially leading to a rise in non-performing assets, would likely put downward pressure on its ratings. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: --Fitch assumes that most borrowing member states, even if experiencing severe difficulties, will preserve the bank's preferred creditor status should they decide to default selectively on their debt. --Fitch assumes that IBRD will maintain its cautious stance on risk management and governance. Contact: Primary Analyst Vincent Martin Director +44 203 530 1828 Fitch Ratings 30 North Colonnade, London E14 5GN Secondary Analyst Theresa Paiz-Fredel Senior Director +1 212 908 0534 Committee Chairperson Gordon Scott Managing Director +44 203 530 1075 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. - Sources of information - The sources of information used to assess these ratings were the International Bank for Reconstruction and Development annual report, and other information provided by the IBRD. Additional information is available on www.fitchratings.com Applicable Criteria Supranationals Rating Criteria - Effective from 27 July 2016 to 18 May 2017 (pub. 27 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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