Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable - ADB, 25 February 2021
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Research Update:
Asian Development Bank 'AAA' Rating Affirmed;
Outlook Stable
February 25, 2021
Overview
PRIMARY CREDIT ANALYST
In our view, the Asian Development Bank (AsDB) has responded strongly to its borrowing members' YeeFarn Phua
financing needs stemming from the COVID-19 pandemic. Singapore
+ 65 6239 6341
We believe that the bank will continue to deliver on its enhanced lending capacity after the merger
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of the Asian Development Fund (ADF) and Ordinary Capital Resource (OCR), thus solidifying its @spglobal.com
policy importance while preserving its extremely strong capital position.
SECONDARY CONTACT
We are affirming our 'AAA' long-term and 'A-1+' short-term issuer credit ratings on AsDB. Rain Yin
Singapore
The stable outlook reflects our expectation that the bank's enterprise and financial risk profiles
+ (65) 6239 6342
will remain anchored by a robust capital position and borrowers continuing to treat AsDB as a
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preferred creditor over the next 24 months. @spglobal.com
Rating Action
On Feb. 25, 2021, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' short-term issuer
credit ratings on AsDB. The outlook remains stable.
Rationale
The ratings on AsDB reflect our assessment of the bank's extremely strong enterprise and
financial risk profiles, according to our criteria. We assess the bank's stand-alone credit profile
(SACP) at 'aaa'. The ratings do not incorporate extraordinary shareholder support from AsDB's
callable capital because we assess the bank's capital adequacy to be in our highest category
without this support.
The COVID-19 pandemic has strengthened AsDB's role as a countercyclical lender. In response to
the pandemic, the bank announced a US$20 billion financing package in April 2020 which includes
a US$13 billion COVID-19 Pandemic Response Option under its Countercyclical Support Facility. In
addition, AsDB unveiled a new US$9 billion vaccine facility in December 2020 to support the
purchase and delivery of vaccines in the Asia-Pacific region.
www.spglobal.com/ratingsdirect February 25, 2021 1Research Update: Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable Although most multilateral institutions developed COVID-19 response packages last year, many did not represent a meaningful increase in financing commitments compared with pre-pandemic deployment levels. However, AsDB's commitments nearly tripled compared with pre-crisis lending expectations. Of the bank's US$20 billion package, US$13.8 billion are new resources with rearranged existing programs constituting the rest. In our view, this enhanced ability to respond quickly with larger lending is a result of the successful merger of AsDB's OCR window with the ADF in 2017. The transfer of ADF assets to the bank's OCR window has drastically boosted AsDB's total lending capacity due to the addition of nonleveraged ADF equity to the OCR. The combined account's equity has nearly tripled to approximately US$52.7 billion as of Sept. 30, 2020. We believe the merger will help the bank achieve its Strategy 2030 operational priorities, in particular the key targets of eradicating extreme poverty, achieving gender equality, and tackling climate change. When the ADF was established four decades ago, the economic gap between OCR and ADF countries were bigger. The improvement of many countries from lower- to middle-income status has also blurred the scope between the two lending windows. In our view, the multifold increase in capital allows AsDB to further catalyze sovereign and private sector lending without imperiling its credit metrics. The merger will assist with private-sector economic development by gradually increasing leverage on the fully equity-financed concessional lending. Potential risks we anticipate include the lesser preferred treatment from the increased private-sector loan book, and competition from burgeoning regional multilateral lending institutions (MLIs). Lending activity has increased following the merger. The OCR's loan commitments for sovereign and nonsovereign lending in 2019 amounted to US$20.1 billion (of which US$3.6 billion was provided on concessional terms), an increase of 63% compared with before the merger. We believe that the increasing disbursements following the augmented capacity is positive and underpins AsDB's role in fulfilling its mandate in the region. In addition, the bank's loan commitments for nonsovereign sector operations in 2019 increased to US$2.3 billion from US$1.9 billion in 2017. Private-sector operations also attracted US$7 billion in co-financing, driven by the robust growth in AsDB's Trade Finance Program, a key strategic initiative of the bank. The increased focus on the private sector is more on the mobilization aspect than increasing AsDB's own lending extensively. For the overall MLI asset class, private-sector mobilization will become an integral part of the strategy of many MLIs, including the bank, and we expect shareholders to closely monitor the progress in this area. AsDB has been progressing toward its Strategy 2030 goals. In 2019, it committed US$6.5 billion to climate change mitigation and adaptation, an important step toward the Strategy 2030 cumulative targets of US$35 billion by 2024 and US$80 billion by 2030. Since the launch of the new strategy, the bank has increased its commitment toward operations that promote gender equality and is outpacing its target of 75%. Supporting AsDB's enterprise risk profile are its very strong policy importance as well as strong governance and management, which remain among the highest compared with supranational institutions globally. With the bank's Strategy 2030 now fully in place, we believe AsDB will continue to promote the economic and social development of its members in Asia-Pacific through loans, technical assistance, equity investments, grants, and guarantees. In terms of the size of purpose-related exposures, the bank is the fourth-largest MLI that we rate globally, after the European Investment Bank, the International Bank for Reconstruction and Development, and the International Development Association. In our view, AsDB's important role and unwavering public policy mandate, along with strong membership support, anchor our assessment of its extremely strong enterprise risk profile. We believe that the merger of the www.spglobal.com/ratingsdirect February 25, 2021 2
Research Update: Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable concessional window also underpins this assessment. The bank benefits from the support of its members and a diverse shareholder base; 49 members from Asia-Pacific own 63.4% of AsDB and 19 nonregional members own the remainder. Niue became the latest member of the bank effective March 2019. While Japan and the U.S. have always been AsDB's largest shareholders (both own 15.6%), the bank's shareholder base is diversified with eight governments owning more than 5% of capital each. These include China (6.4%), India (6.3%), Indonesia (5.4%), Canada (5.2 %), and Korea (5.0%). Nonborrowing members have about 62% of AsDB voting rights, outnumbering borrowing members by two to one. We believe this helps the bank adopt prudent lending and investment policies. Although the Chinese government's initiative to spur infrastructure investment in Asia via the Asian Infrastructure Investment Bank (AIIB) could lead its lending volume to eventually catch up with AsDB's, we do not expect that to hamper AsDB's policy importance. This is because the region's infrastructure needs are immense and larger than any single institution can handle. While we are expecting some overlap, we believe AIIB will cooperate, more than compete, with AsDB and other MLIs to boost the level of infrastructure and developmental growth in Asia. In our view, AsDB will continue to receive robust preferred creditor treatment, even with the higher credit risk exposure from loans transferred from the ADF. This is demonstrated by the payment record of its borrowing members. In our view, the payment record of ADF clients has been strong. Despite instances of arrears by Myanmar, Nauru, and the Marshall Islands, the amounts were small and were eventually repaid with interest. AsDB has no sovereign loans in non-accrual status. Our calculated arrears ratio for the bank is 0.13%, reflecting Myanmar's nonaccrual status over the past 10 years (cleared in 2012). On the nonsovereign loans front, we view AsDB's loan performance as comparable to MLIs' globally. The track record of repayment is strong. As of Sept. 30, 2020, there were four nonsovereign loans in non-accrual status with principal outstanding of US$166 million. These have been adequately provided for by the bank. The provisions during the first nine months of 2020 increased to US$247 million mainly because of the adoption of the new accounting standard on Jan. 1, 2020, which requires the provision for credit losses to be based on an expected losses model. This also incorporates the expected pressure from the COVID-19 pandemic. In our view, the addition of significant capital resources outweighs the increase in risk, as evident in AsDB's extremely strong risk-adjusted capital (RAC) ratio of 35.8% after adjustments for concentration risk and Preferred Creditor Treatment. The RAC incorporates all new parameters as of Feb. 3, 2021, based on financial data as of end-June 2020. The RAC ratio decreased from 40% the year before due to an increase in overall exposure partly driven by accelerated lending and recent downgrades in some of its member countries due to the pandemic. AsDB has been ramping up its funding and raised about US$24.6 billion in 2019 and US$35.1 billion in the first 10 months of 2020. The significantly larger funding in 2020 reflects the bank's accelerated lending in relation to COVID-19. AsDB is a frequent issuer across global markets with a diversified investor base and raised new borrowings in 22 currencies in 2020. We consider AsDB's market access to be strong and its investor base to be well-diversified. However, our static funding gap analysis for its next 12-month results is 1.06x, which is slightly lower than its 'AAA'-rated peers. The bank maintains a strong liquidity buffer, increasing its investment portfolio to US$43 billion as of Sept. 30, 2020, from US$40 billion as of end-2019. As of June 30, 2020, incorporating our updated liquidity haircuts, our 12-month liquidity ratio for AsDB was 1.20x with scheduled loans while the six-month ratio was 2.53x. However, when considering undisbursed loans in a stress scenario (beyond those planned for the next 12 months), we believe the bank may need to spread www.spglobal.com/ratingsdirect February 25, 2021 3
Research Update: Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable out potential disbursements. Given AsDB's 'aaa' SACP, the ratings on the bank do not rely on callable capital. However, should AsDB's SACP weaken, we believe the bank could call on 10 'AAA'-rated shareholders to provide up to US$26 billion of callable capital to support its debt servicing requirements. Outlook The stable outlook on AsDB reflects our expectation that the bank will maintain its extremely strong enterprise risk profile with borrowers treating AsDB as a preferred creditor. In addition, we view the extensive capital buffers as anchoring the extremely strong financial risk profile. Our base case indicates a low probability that we would lower our issuer credit ratings on the bank over the next 24 months. Downside scenario We may lower the ratings on AsDB if either of the bank's enterprise or financial risk profiles substantially deteriorates. For example, the ratings will come under pressure if, contrary to our expectations, AsDB's management adopts more aggressive financial policies that could affect the bank's liquidity coverage or if poor-quality loan growth increases substantially. We may also downgrade AsDB should its other strengths deteriorate, such as its preferential creditor treatment weakening on the diversified portfolio. Ratings Score Snapshot Issuer Credit Rating AAA SACP aaa Enterprise Risk Profile Extremely strong Policy Importance Very strong Governance and management Strong Financial Risk Profile Extremely strong Capital Adequacy Extremely strong Funding and Liquidity Strong Extraordinary Support 0 Callable capital 0 Group Support 0 Holistic Approach 0 Related Criteria - Criteria | Governments | General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Dec. 14, 2018 www.spglobal.com/ratingsdirect February 25, 2021 4
Research Update: Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable
- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July
20, 2017
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Supranationals Edition 2020: Comparative Data For Multilateral Lending Institutions, Oct. 21,
2020
- Supranationals Special Edition 2020 Says Multilateral Lenders Are Addressing Challenges
From COVID-19, Oct. 20, 2020
- Introduction To Supranationals Special Edition 2020, Oct. 20, 2020
- How Multilateral Lending Institutions Are Responding To The COVID-19 Pandemic, June 9, 2020
- Can Multilateral Lenders' Capital Bases Hold Up Against COVID-19?, June 9, 2020
- ESG Industry Report Card: Supranationals, Feb. 11, 2020
Ratings List
Ratings Affirmed
Asian Development Bank
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+
Analytical Factors
Local Currency aaa
Asian Development Bank
Senior Unsecured AAA
Short-Term Debt A-1+
Commercial Paper A-1+
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search
box located in the left column.
www.spglobal.com/ratingsdirect February 25, 2021 5Research Update: Asian Development Bank 'AAA' Rating Affirmed; Outlook Stable
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