S&P affirmed Eurasian Development Bank ratings, outlook “Stable”

November 15. KASE

S&P affirmed Eurasian Development Bank ratings, outlook "Stable"Standard & Poor’s Ratings Services said today that it has affirmed its ‘BBB’ long-term and ‘A-3’ short-term foreign currency issuer credit ratings on the Eurasian Development Bank (EDB). At the same time, we affirmed the   national scale rating at ‘kzAA+’ and the   national scale rating at ‘ruAAA’. The outlook is stable.

The ratings on the EDB are supported by the bank’s strong shareholder support. This is demonstrated by its high capitalization levels and its clearly defined role as a regional multilateral development finance institute (MDFI).

The ratings are constrained by EDB’s loan portfolio concentration in what we consider to be an economically volatile region. The ratings on EDB remain supported by its key shareholder, Russia, which accounts for almost two-thirds of EDB’s capital.

Established in 2006, the EDB is a subregional development bank, whose strategic objective is to promote integration between its six member states. These are the Russian Federation, the Republic of Kazakhstan, the Republic of Tajikistan, the Republic of Armenia, the Republic of Belarus, and the Republic of Kyrgyzstan,the newest member. The EDB expects to receive preferred creditor treatment from its member states.

The strong support of EDB’s main shareholders is reflected in their provision of capital to levels set out under the bank’s charter. Russia and Kazakhstan completed capital payment in accordance with the bank’s charter in mid-2008. Russia holds capital of $1 billion and Kazakhstan $500 million. In 2009, Armenia paid in $100,000 and Tajikistan $500,000. In June 2010, Belarus paid in $15 million and became the fifth member, and in August 2011, Kyrgyzstan paid in $100,000 and became the sixth member. Each of the new member states paid in full, which we view as a strong sign of commitment.

However, given that voting rights are proportional to capital contributions, the EDB will remain dominated by Russia and Kazakhstan. The rating on EDB is effectively capped by the rating on Russia, its largest shareholder, because the bank owes its existence to the continued mandate afforded to it by Russia, and to a lesser extent by Kazakhstan.

We consider EDB’s capital position to be strong, which mitigates the risks we see in the difficult operating environments in its countries of operation. Russia and Kazakhstan paid in $695 million of a scheduled capital increase in 2008, which raised paid-in capital to $1.5 billion. At the end of July 2011, Russia owned just under two-thirds of EDB’s share capital, and Kazakhstan, where the bank is headquartered, just under one-third.

The bank’s current strategic regional focus is on the countries of the Eurasian Economic Community (EurAsEC). This comprises Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan as members, and Armenia, Moldova, and Ukraine as observers. Russia is the dominant force behind the creation of the EDB, and Moscow continues to have a strong political interest in strengthening economic ties among the countries of the EurAsEc. The EDB also serves as manager of the EurAsEc Anti-Crisis Fund (ACF), created by the Interstate Council of EurAsEc. A department within the EDB manages the ACF, but the EDB’s balance sheet is separate from that of the ACF. Moreover, there is no competition between the EDB’s and the ACF’s activities because the ACF can act only as lender of last resort.

Due to its mandate, the EDB operates with high concentration risk, and most of its loans are to entities that are either not rated by Standard & Poor’s or are speculative-grade companies and banks. The majority of EDB’s investment portfolio is concentrated in Russia and Kazakhstan; at the end of August 2011, the concentration of EDB’s portfolio in Russia was 59%, and in Kazakhstan 26%. The bank has increased its exposure to Belarus since it joined the EDB in 2010, to 6% at the end of August 2011. The majority of EDB’s exposure is concentrated in the energy and transportation sectors.

Despite the difficult environment in which the EDB operates, the bank at present does not have any problematic loans reported as of June 30, 2011. The rest of the loan portfolio is classified as standard loans. Almost 40% of total loans to customers are collateralized by guarantees.

The stable outlook reflects that on EDB’s main shareholder, the Russian Federation. The ratings could therefore improve or deteriorate as a result of changes to the sovereign ratings on Russia. However, if EDB were to significantly increase its balance sheet leverage from currently low levels, and if asset quality were to deteriorate, we could consider lowering the ratings.