The Barbados-based Caribbean Development Bank (CDB) has said it has been assigned a Long-Term Issuer Default Rating (IDR) of ‘AA+’ with a Stable Outlook and a Short-Term IDR of ‘F1+ by the London-based Fitch Ratings, a leading provider of credit ratings, commentary and research.
The international rating agency, which also operates in New York, said the ratings of the region’s premier financial institution are fully driven by its intrinsic credit quality, most notably its high level of solvency, assessed at ‘aa’, and its excellent liquidity, assessed at ‘aaa’.
It said the “medium-risk” business environment assessment, comprising a low-risk assessment of business profile and medium-risk assessment of the operating environment, adds a single notch to the solvency assessment of ‘aa’, resulting in an overall intrinsic rating of ‘aa+’.
“The ‘aa’ solvency assessment of CDB is driven by ‘excellent’ capitalization and a ‘low’ risk profile. Capitalization is a key strength for the ratings. The equity-to-adjusted assets ratio of 56.6 per cent end-September 2016 . . . is assessed as ‘excellent’ in Fitch’s supranational criteria – far above the 25 per cent threshold for an assessment of ‘excellent’,” it said.
Fitch views CDB’s risk profile as low-risk, chiefly owing to its ‘very low’ loan impairment rate of 0.5 per cent, ‘very low’ equity risk , no equity participations in the portfolio, ‘very low’ market risks and ‘excellent’ risk management policies.
However, there are two key risks for CDB – concentration (the five largest exposures account for 60.1% of the total portfolio) and a weak average rating of loans (B-), although this is slightly offset by the ‘excellent’ quality of preferred creditor status (PCS) from which CDB benefits (as sovereign exposure accounts for 96 per cent of the portfolio), notwithstanding one temporary breach of PCS that occurred in 2012.
Fitch assesses CDB’s liquidity as ‘aaa’ primarily due to the large amount of liquid assets relative to short-term debt, as well as the overall excellent quality of the institution’s treasury portfolio. Based on the agency’s projections, the bank’s liquidity assessment will remain at ‘aaa’, as a consequence of the bank’s conservative financial rules, which will continue to result in excellent coverage of short-term debt by liquid assets.
CDB’s business environment is viewed by Fitch as a rating strength and results in a one-notch uplift to the intrinsic rating. CDB’s ‘low-risk’ business profile assessment is characterized by good governance, the low risk strategy of the bank and a low exposure to the non-sovereign sector.
However, in Fitch’s assessment, CDB operates in a ‘medium-risk’ environment, as characterized by the income per capita in the countries of operations, the political risk and business climate in the countries of operations and the operational support provided by member states, all of which sub-factors are assessed at ‘medium-risk’.
CDB’s overall ratings do not benefit directly from extraordinary support. Fitch assesses the capacity of shareholders to support the bank as ‘A+’, in line with Fitch’s forecast of the coverage of net debt by callable capital.
Fitch believes that member states’ propensity to support CDB is in line with fellow MDB peers.
The CDB said that the stable outlook reflects Fitch’s expectation that CDB’s credit profile will remain commensurate with its ‘AA+’ rating.
The ratings and outlook are sensitive to a number of assumptions: No significant change in the composition of the portfolio of the bank; No major deviation from the current strategy of CDB, in particular regarding lending growth; Risk management policies will remain unchanged and no breach is expected.