December 4, 2017 / 10:49 AM / a year ago

Fitch Revises International Investment Bank's Outlook to Positive; Affirms at 'BBB'

(The following statement was released by the rating agency) LONDON/PARIS, December 04 (Fitch) Fitch Ratings has revised International Investment Bank's (IIB) Outlook to Positive from Stable, while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'BBB'. The issue ratings on IIB's senior unsecured long term bonds are also affirmed at 'BBB'. The Short-Term IDR is affirmed at 'F2'. The revision of the Outlook reflects the continuing diversification of the bank's operations in central and eastern Europe (CEE), the further strengthening of the bank's risk management policies and the improvement of the bank's business environment, reflected partly in the revision of the Outlook on Russia's sovereign IDR (BBB-) to Positive from Stable in September 2017. KEY RATING DRIVERS The affirmation of the ratings and revision of IIB's rating Outlook also reflect the following key rating drivers: The rapid growth and geographical diversification of lending operations are in line with the objectives outlined in IIB's business plan in 2013, which reinforces the credibility of management and helps to reduce geographical concentration risk. Notwithstanding these improvements, Fitch assesses IIB's business profile as high-risk, given the bank's focus on the private sector (85% of total banking exposure at end-June 2017) and the bank's small size. Although it is based in Moscow and has assets in Russia, the bank has been exempted from EU sanctions against Russia, demonstrating evidence of the privileges derived from its supranational status. Despite the rapid growth in lending, capitalisation should remain 'excellent' in the medium-term. The equity-to-adjusted assets ratio, which stood at 39.7% at end-June 2017, is expected by Fitch to remain above 25%, which is the threshold within Fitch's criteria consistent with an excellent capitalisation assessment. It is also supported by strong internal capital generation. Profitability is low, as for other multilateral development banks (MDBs), but profits are retained entirely in reserves. IIB's overall risk profile improved in 2017 and is now assessed as 'medium-risk'. The overall quality of the loan portfolio, while still weak, improved in 2017, with the average rating of loans increasing to 'B-' from an estimated 'CCC'. Impaired loans have fallen again (3% of total at end-June 2017 vs. 3.5% at end-June 2016). Fitch expects the impaired loan ratio to remain low over the medium term. IIB further improved its internal risk management policies in 2017, with the implementation of new internal policies and tightening of limits to monitor key risks (credit, market, operational). Risk concentration is assessed by Fitch as low, with the five largest exposures accounting for 33% of the portfolio at end-June 2017 (38% at end-June 2016). Market risk is well-controlled and foreign exchange exposure is minimal. Risks to the bank's operating environment have continued to reduce in 2017 as a result of economic improvement in Russia, illustrated by the revision of the Outlook on the sovereign rating to Positive from Stable. More broadly though, the Outlook for six of eight of IIB's shareholders rated by Fitch has been revised to Positive from Stable in the past 12 months. Those six are the aforementioned Russia, Czech Republic (A+), Hungary (BBB-), Bulgaria (BBB-), Vietnam (BB-) and Mongolia (B-). IIB enjoys a strong liquidity buffer, which has improved over the past 12 months, comprising bank deposits and securities covering 2x short-term debt at end-June 2017, which is in the upper range compared with other MDBs. The greatest improvement, however, has been in the quality of treasury assets, with 8.6% now rated in the 'AA-AAA' range as of June-2017 (0.7% in June-2016). This is a considerable improvement in a short period of time and has caused our assessment of quality of treasury assets to improve to 'moderate' from 'weak'. The bank also enjoys access to international financial markets, as shown by recent debt issues in Russia, Romania, Hungary, Germany and Austria. No credit uplift is assigned for shareholders' support, assessed at 'BB+'. Support rests on a callable capital mechanism; such callable capital was 53%-owned by Russia at end-June 2017. The capacity to support, measured by the rating ensuring coverage of net debt, is currently 'BBB-', although in light of the bank's rapid growth forecasts we do not expect net debt to be fully covered by callable capital from 2019 onwards. Propensity to support is assessed as weak, given the small size of the bank in relation to the funding requirements of its member states, and translates into a negative adjustment of -1 notch. RATING SENSITIVITIES The factors that could, individually or collectively, lead to a positive rating action are: - Continued build-up of IIB's operational track record, adherence with the bank's 2018-2022 strategy, and evidence that the bank's improved risk management framework continues to be effective; - Capitalisation levels and asset quality remain robust and broadly in line with Fitch's forecasts, notwithstanding the expected rapid growth of the bank's lending activities; and - Further improvement in the bank's operating environment, which could be evidenced by upgrades to the sovereign ratings of the main countries of operations. Conversely, the factors that could, individually or collectively, lead to a negative rating action are: - A more rapid-than-projected decline in capitalisation; - Deterioration in asset quality associated with losses on loans or the treasury portfolio; and - A loosening of the bank's prudential framework. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: - IIB will remain compliant with its internal prudential limits. - The equity-to-assets ratio will remain above 25% by 2020. Contact: Primary Analyst Nicholas Perry Analyst +44 203 530 1795 Fitch Ratings Limited 30 North Colonnade Canary Wharf London E14 5GN Secondary Analyst Eric Paget-Blanc Senior Director +33 144 299 133 Committee Chairperson Tony Stringer Managing Director +44 203 530 1219 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Sources of information: IIB's financial statements and other information provided by IIB Additional information is available on Applicable Criteria Supranationals Rating Criteria (pub. 18 May 2017) 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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