Fitch Ratings has today affirmed the African Development Bank’s (AfDB) ratings at Long-term Issuer Default (IDR) ‘AAA’ with a Stable Outlook and Short-term IDR ‘F1+’. The ratings are primarily based on the support from the bank’s member countries, its high level of capitalisation and conservative risk management policies, which largely offset its substantial credit risk exposure.
Like other multilateral development banks (AfDB benefits from strong support from member countries. Support is provided through a mechanism common to all such banks where paid-in capital only accounts for a fraction (10.6% at end-2007) of subscribed capital. Capital subscribed but not paid in, or callable capital, may be called upon in the event of the bank being unable to honour its debt and guaranteed obligations. The average credit quality of African member countries is weak overall. Hence, support from shareholders is heavily dependent upon the significant share of callable capital (37.6% at end-2007) owned by non-African countries, most of which are highly-rated OECD countries. Fitch Ratings believes these countries would provide additional support to AfDB if necessary.
As with other regional multilateral development banks that lend to developing countries, AfDB’s loan book is highly concentrated, with the five largest borrowers accounting for 83.7% of equity at end-2007. Exposure to credit risk is significant: speculative-grade counterparties accounted for 52.8% of the bank’s loan portfolio, and impaired loans (10.9% of the bank’s loan book at end-2007) stand at a relatively high level for a multilateral development bank. Côte d’Ivoire and Zimbabwe together accounted for 81.9% of arrears at end-2007. However, AfDB’s asset quality is showing signs of improvement, with two countries clearing their arrears in 2007. This is mainly the result of debt relief initiatives, such as the Heavily Indebted Poor Countries (HIPC) Initiative, and of arrears reduction schemes funded by the donor community and contributions from the AfDB. The bank expects C?te d’Ivoire to clear its arrears in 2008, which will lead to a marked decrease in impaired loans.
Over the long term, Fitch expects the asset quality of the bank to be affected by the growth in private-sector lending. Faced with a decline in loan demand from public borrowers, AfDB is rapidly developing its private-sector operations. According to the bank’s forecast, private sector loans should account for half of annual approvals by 2012, though they amounted to only 6.3% of the loan portfolio at end-2007. Despite the resources and capabilities of the bank, these objectives appear very ambitious given the risks associated with private-sector lending in Africa and the scarcity of bankable projects relative to the number of financial institutions present in this market.
Fitch considers the bank’s prudential framework to be suitable at the current stage of its lending shift: AfDB’s policies regarding risk management, gearing and liquidity are conservative and capitalisation is very strong: At end-2007, Fitch Ratings’ ratio of usable capital to required capital was 16.6x (2006: 18.3x), a level which compares very favourably with those of similar banks at end-2007. However, if the bank meets its lending volume objectives, it will reach its statutory limit by 2012 and need fresh capital.
The AfDB is a supranational financial institution established in 1964 to provide financing to African countries. It raises funds on the financial market at highly favourable conditions – thanks to its ‘AAA’ rating – and provides financing to African states and, increasingly, to private institutions at the lowest possible cost. The bank is headquartered in Abidjan (Cote d’Ivoire), though in 2003 growing political instability in the country forced AfDB’s board of governors to relocate operations temporarily to back-up facilities in Tunis (Tunisia). It employed 1,142 staff at end-2007.