OREANDA-NEWS. Fitch Ratings has affirmed African Development Bank's (AfDB) Long-Term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook. The Short-Term IDR has been affirmed at 'F1+'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

The ratings and Stable Outlook reflect the following key rating drivers:

AfDB's ratings are underpinned by the strength of its intrinsic credit profile supplemented by extraordinary shareholders' support. This support is key in maintaining the bank's 'AAA' rating, given the increasing pressure on its intrinsic profile, notably on capitalisation and asset quality, and the challenging environment in which it operates.

AfDB enjoys strong extraordinary support from its 80 member states, which include 26 non-African countries with high average ratings. Callable capital from 'AAA' rated member states continued to fully cover the bank's net debt at end-2015. We deem the propensity of member states to support the bank in case of need as high, reflecting the importance of AfDB in the financing of African countries and the commitment of member states to ongoing capital increases.

AfDB's capitalisation is strong but on a declining trend. The bank had an equity-to-adjusted assets ratio of 26.7% at end-2015, down from 29.1% at end-2013. AfDB is still receiving annual instalments from its 2010 capital increase (spread over eight years, or 12 for low-income countries), but this ratio is expected to continue to decline over the medium term due to the rapid growth in lending operations. Leverage is below peers at 253.9% at end-2015 and is expected to increase in the coming years.

We deem AfDB's overall exposure to risk as low. This reflects the strong preferred creditor status that the bank enjoys on its sovereign exposures and the low and improved concentration assessment. The five largest exposures accounted for 38.1% of total exposure at end-2105, compared with 59.1% at end-2014. This considerable improvement was driven by the introduction of Exposure Exchange Agreements with the International Bank for Reconstruction and Development (AAA/Stable) and the Inter-American Development Bank (AAA/Stable). However, there are risks, most notably the high credit risk exposure.

Total banking exposure grew 6% in 2015 and looks set to continue growing. Growth will be particularly focused on private sector lending, which will account for over one-third of operations in 2019, compared with 26.9% in 2015. The bank's rapid growth in private sector lending is clearly affecting its asset quality, as private sector loans are not covered by preferred creditor status and have a high impairment rate (6.2% at end-2015). The bank's decision to extend new loans to certain lowly rated countries, such as Zambia (B/Negative) and Kenya (B+/Negative), and to increase its existing exposure to other sub-investment grade countries, such as Nigeria (B+/Stable) and Angola (B+/Negative), exerts pressure on asset quality. In Fitch's opinion, the expected deterioration in the risk profile of borrowers may lead to a decrease in the average rating of loans (currently BB) and an increase in the impaired loans ratio (4.1% of gross loans at end-2015) over the medium term.

This increase in credit risk became evident in 2015, as the increase in provisions for impaired loans was the main driver of the UA30.8m loss recorded in 2015 (accounts are denominated in Units of Accounts (XUA), a currency basket equivalent to the IMF's Special Drawing Rights). The relocation of the bank's headquarters, which is now complete, also meant AfDB's administrative expenses remained high at UA122m.

AfDB's liquidity is strong but has fallen considerably from 2014. At end-2015, treasury assets covered short-term debt by 261.2% (465% end-2014). The bank also maintains a very high share (88%) of 'AAA'-'AA' rated paper in liquid assets.

RATING SENSITIVITIES

The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in negative rating action include:

- An excessively rapid increase in lending to the private sector, negatively affecting AfDB's strong preferred creditor status, would have a negative impact on the bank's intrinsic risk profile, unless offset by capital injections.

- An excessively rapid increase in lending to sovereign borrowers with low credit quality (rated in the 'B' category or below) would also have a negative impact on the bank's intrinsic risk profile, unless offset by capital injections.

- A combined downgrade of the ratings of AfDB's largest shareholders - the US (6.6% of capital) and Germany (4.1%) or Canada (3.8%) - would materially affect support from its shareholders.

- Any further decrease in the intrinsic assessment will lead to negative rating action as support is currently capped at three notches (the maximum possible under our criteria).

KEY ASSUMPTIONS

Fitch assumes that highly rated shareholders will honour their commitment to pay callable capital if required.

The rating actions are as follows:

Long-Term IDR affirmed at 'AAA'; Outlook Stable

Short-Term IDR affirmed at 'F1+'

Senior unsecured long - and short-term debt affirmed at 'AAA'/'F1+'

Market-linked securities affirmed at 'AAAemr'

Subordinated debt affirmed at 'AA+'