Moody’s maintains ‘stable’ outlook on EBRD

Moody's Investors Service maintains a stable outlook on its Aaa issuer rating for the European Bank for Reconstruction and Development (EBRD), according to its newly-published credit analysis. The rating reflects EBRD's prudent capital and liquidity policies; its low leverage; and the strong support it receives from highly-rated member countries. Although the bank's asset quality and capital cushion have weakened over the past 12 months against the background of the global economic crisis, the deterioration is occurring from a strong initial position.
"The Aaa rating of the EBRD is firmly underpinned by strong support from member states (comprising 61 countries, including most of the world's largest economies). Members rated Aaa and Aa represent 84% of subscribed capital. Moody's observes that a relatively large proportion (one quarter) of the bank's EUR 20 bln in authorised capital is 'paid in', reflecting strong shareholder support plus the higher risk levels associated with private sector lending in the CEE-CIS region," said Kenneth Orchard, author of the report.
Moody's notes that the bank recorded heavy losses in 2008, and losses continued in the first half of 2009 due to further write downs of share investments and rising provisions against nonperforming loans.
"The loss for the full year 2009 is expected to exceed what was registered in 2008," opined Orchard. "Provisions will continue to increase over the next two years as the financial crisis winds down, since the full impact of the crisis on the bank's borrowers will likely take some time to materialise."
Orchard said, however, that the bank should continue to generate healthy net interest income from its loan portfolio, which is likely to grow quickly in the context of the regional credit crisis, given the renewed demand for its services.
Prior to the global financial crisis, some of the major non-borrowing countries believed the EBRD should be merged or wound down, asserting that its policy objectives had been achieved. Indeed, the bank was scaling back its activities in the more developed Central European countries, which the bank expected to become non-borrowing members because of their ready access to alternative sources of capital (e.g. foreign direct investment, foreign bank lending, EU funds). However, these countries are now expected to continue borrowing from the EBRD for the foreseeable future.
"In the wake of the crisis, the EBRD is considering boosting its capital to allow it to expand lending growth at a more rapid rate than previously planned," said Orchard. "In September 2009, the bank proposed a EUR 10 bln (50%) capital increase — scheduled for approval in 2010 — which aims to also replenish reserve losses related to the economic crisis."
However, Moody's notes that shareholders' response to this request is not yet clear.