African Development Bank’s AAA Rating With a Stable Outlook, Reaffirmed by Japan Credit Rating Agency
The agency commended the African Development Bank for its strong member-country support, as evidenced by the seven general capital increases it has carried out to date. The report reflected on the institution’s financial structure, risk management and funding, noting that JCR monitors whether multilateral development banks are financially viable enough to sustain their business in terms of financial structure, profitability and risk management.
Although the Bank’s equity investment remained limited in volume, its risks have been growing due to the impact of the Covid-19 pandemic. The Bank responded rapidly to cushion the impact of the pandemic on its member countries by establishing a Covid-19 Response Facility.
The report notes that the Bank’s “treasury investment is aimed to ensure ample liquidity and efficient management of assets, the Bank manages it in a conservative manner, limiting its investment to counterparties that have high credit standings.”
Benefiting from its high credit standing, JCR said the Bank has been raising funds from international capital markets on favorable terms.
“The Bank met almost all of its conservative internal regulations with respect to lending, equity participation, risk capital utilization, borrowing and liquidity at the end of 2020. The Bank’s risk capital utilization ratio has been close to the upper limit defined by its internal regulations due mainly to the increased risks related to its loan and investment exposures.”
However, JCR holds that the Bank will continue to comply with the regulations “as it has taken remedy measures including the special temporary callable capital increase in March 2021, the optimization of its asset portfolio, and as progress is being made in the payment of the capital increase.”
While noting that the continued impact of the Covid-19 pandemic could weaken the quality of the Bank’s assets mainly with its non-sovereign loans, JCR said that “any increased credit cost can be mostly absorbed by earnings and that its impact on the Bank’s financial base will be limited.”
The agency also discounted the possibility of the current ratings coming under downward pressure if the majority of the member countries fail to pay for the latest capital increase, or when the Bank’s non-sovereign loans expand in volume and their asset quality deteriorates significantly in the long term.
“JCR holds that such possibility is slim,” the report noted.
Bajabulile “Swazi” Tshabalala, Vice President for Finance and Chief Finance Officer of the African Development Bank, said: “Japan Credit Rating Agency’s ratings is proof of our prudent risk management policies, our solid financial performance and the robust support we enjoy from our members.”