Fitch Affirms AfDB at ‘AAA’ With Stable Outlook
Fitch Ratings has affirmed African Development Bank (AfDB)’s Long-Term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.
AfDB’s ‘AAA’ rating is driven by the extraordinary support the bank receives from its non-regional shareholders, Fitch said which the rating agency assessed at ‘aaa’.
The rating note stated that the shareholders’ ‘strong’ propensity to support the bank translates into a zero-notch adjustment to its assessment of the capacity to support (aaa).
The rating is also supported by the bank’s Standalone Credit Profile (SCP), which Fitch analysts have revised to ‘aa+’ from ‘aa’, primarily reflecting expectation that the bank will operate with stronger capital ratios over the medium term.
AfDB’s liquidity is assessed at ‘aaa, according to the rating note. Fitch Ratings said in August 2023, it downgraded the US’s Long-Term IDR to ‘AA+’/Stable.
The US is AfDB’s second-largest shareholder, accounting for 6.5% of total capital at the end of financial year 2023 and for 38% of ‘AAA’-rated callable capital before the downgrade.
The downgrade led to a reduction of the coverage of net debt by ‘AAA’ rated callable capital, the key metric to assess support under Fitch’s criteria, to 127% in 2023 from 217% in 2022, the rating note stated.
Fitch expects that the bank’s net debt will remain fully covered by callable capital from ‘AAA’ rated member states over the forecast period.
This expectation according to Fitch is supported by AfDB’s board of governors approving a UA88.1 billion increase in callable capital at the end of May 2024, of which UA9 billion will come from ‘AAA’ rated shareholders.
Fitch also said the AfDB may also curb its projected lending growth to ease pressure on the coverage ratio. In 2023, AfDB’s capitalisation metrics markedly improved owing to capital payments under the seventh general capital increase (GCI).
This contributed to the improved equity to assets (E/A) ratio of 28% at the end of 2023 from 26% in 2022 and 24% in 2021.
Fitch’s usable capital-to-risk-weighted assets (FRA) ratio was stable at 55% at the end of 2023, as the marked increase in paid-in capital to UA7.0 billion from UA6.4 billion in 2022 was offset by growth in lending operations.
Following the recent record of operations with stronger capital ratios, Fitch now expects the bank to continue to operate with an E/A ratio in excess of 25% and a FRA ratio in excess of 35%, the thresholds for ‘Excellent’, over the medium term, which supports the revision of capital assessment to ‘Excellent’ from ‘Strong’.
“Our expectation is supported by the bank’s strategy, which plans to maintain the two ratios above 25% and 45%, respectively. AfDB’s capital ratios will benefit from the bank’s USD750 million hybrid capital issuance in February 2024, to which Fitch assigns 100% equity credit, and plans for additional hybrid capital issuances over the medium term”.
Fitch explained that the weighted average rating of loans and guarantees before any adjustments for preferred credit status (PCS) was ‘B+’ at the end of 2023, unchanged from previous years.
It noted that AfDB has implemented a number of schemes to reduce credit risk, including a risk transfer mechanism (“Room2Run”) to cover UA1.5 billion of sovereign loans in 2022.
The transaction improved the average credit quality of AfDB’s loan portfolio by around one notch, but this has been offset by the sovereign downgrades of some of AfDB’s countries of operation, including Egypt, Kenya, Nigeria and Tunisia.
AfDB’s PCS assessment reflects a strong record of sovereign loan performance, as evidenced by the full repayments of arrears by Somalia in 2020 and Sudan in 2021.
Zimbabwe remains the only sovereign (accounting for 1.0% of total sovereign loans) in default with the bank, out of 29 active sovereign borrowers.
Fitch said the PCS assessment is also underpinned by the high share of sovereign exposures in the total loan book at 83% in 2023. The strong PCS enhances the weighted average credit quality of the bank’s portfolio by two notches to ‘BB’.
The rating note stated that AfDB’s non-performing loans (NPL) ratio improved to 2.9% of total loans in 2023 from 3.4% in 2022.
This reflects a stable NPL ratio of 1.0% for the bank’s sovereign exposures, an improved NPL ratio for non-sovereign exposures (15.1%, down from 16.9% at end-2022) and the growth of the sovereign portfolio.
“We expect the overall NPL ratio to be in the ‘moderate’ category (3%-6%), due to an expected increase in non-sovereign NPLs. The food crisis caused by the Russia-Ukraine war and rising yields are downside risks to our NPL forecast. Zimbabwe clearing its arrears would lead to a significant improvement of the NPL ratio”. Fitch said.
The ratings agency believes the bank’s risk management policies are conservative and assesses them as ‘excellent’, in line with peers.
It noted that concentration risk is ‘low’ and benefits from exchange exposure agreements (EEAs) with other multilateral development banks.
The five largest exposures accounted for 27% of total banking exposures after EEAs (and 40% before EEAs) in 2023. Fitch expects equity participations to remain below 5% of the banking portfolio.
AfDB’s ‘aaa’ liquidity assessment reflects the bank’s ‘excellent’ liquidity buffers, the high quality of liquid assets and its reliable access to capital markets. In 2023, liquid assets were 3.6x short-term debt, according to Fitch.
It stated that around 90% of treasury assets were rated ‘AA-‘ and above. The bank is a regular issuer in international capital markets.
Fitch assesses AfDB’s business environment as ‘medium risk’, balancing the ‘low risk’ business profile against the bank’s ‘high risk’ operating environment.
The former primarily reflects the large size of the bank’s portfolio, the bank’s governance and the importance of its public mandate. AfDB’s ‘high risk’ operating environment is consistent with the low ratings, low income per capita and high political risk in the countries where it operates. N2bn Pension Fraud: Court Orders Final Forfeiture of Maina’s Property
