Fitch Affirms European Investment Bank at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following key rating factors:
The 'AAA' IDR is underpinned by EIB's low risk business environment, which translates into a substantial upward adjustment over other intrinsic factors, solvency (assessed at 'aa-' under Fitch's methodology) and liquidity (assessed at 'aa'). Extraordinary support from shareholders is not a rating driver, as net debt is not fully covered by callable capital subscribed by shareholders, but provides a backstop against a material weakening of the intrinsic assessment.
With a banking portfolio (loans, equity participations and guarantees) of EUR470bn, EIB is the largest multilateral development bank (MDB) in the world by size of operations. Although it predominantly finances the non-sovereign sector, we deem EIB's business profile risk as low, given the institution's large size, its strategic importance in the financing of the integration of EU countries and the high quality of governance.
The bank's operating environment also presents low risk: 94% of lending operations was concentrated in the EU at end-2015, and the average rating of members states, pro-rated by their share of EIB's capital, was 'AA-' at end-June 2016. Political risk in countries of operations is minimal. Operational support provided by countries of operations is very strong. This has been evidenced not only by the bank's preferred creditor status, but also by the capital injection from all member states to support increased lending.
The bank's strong solvency assessment is driven by the EIB's very low risk profile, which has not been affected, in Fitch's view, by the implementation of the European Fund for Strategic Investments (EFSI; the "Juncker Plan") or the decision of the UK - 8% of total loans - to exit the EU. Credit risk is very low, with an average rating of loans of 'BBB+' and an impaired loan ratio of 0.3% at end-2015. The overall credit quality of EU public and private borrowers has improved in the last three years, and the default of Greece (CCC) has been temporarily resolved. Loans outside the EU are guaranteed by the EU.
Overall, sovereign and sovereign guaranteed loans accounted for 29% of the portfolio at end-2015. Sovereign loans are protected by the bank's preferred creditor status, which ensures that EIB will be repaid in priority in the event of a sovereign defaulting on its obligation. This was successfully tested with EIB not suffering any losses from its exposure to the Greek state.
Fitch assesses EIB's capitalisation relative to other MDB peers as moderate. The bank is one of the least capitalised institutions among MDBs. Its equity to adjusted asset ratio was 11.0% at end-2015, although its capital adequacy ratio, as computed by the bank under the Basel III approach, neared 24% due to the low risk weight of its assets. We expect capitalisation and leverage to remain stable in the medium term. No capital increase is scheduled, but profits are not distributed, and as the EIB is not subject to taxation, they result in internal capital generation that helps support balance sheet growth. Fitch assesses EIB's liquidity at 'aa'. Liquidity is sound overall; but EIB's metrics are not commensurate with 'aaa' standards, due to its narrower liquidity buffer (76.5% of short-term debt at end-2015), although it is enhanced by access to the European Central Bank's (ECB) refinancing window.
EIB enjoys strong support from the 28 EU member states. Support takes the form of EUR221.6bn callable capital subscribed by member states on top of their capital contributions. The average rating of key shareholders (France, Germany, Italy and the UK) has decreased to 'AA-' in July 2016, from 'AA', as a result of Fitch's downgrade of the UK's IDR to 'AA' from 'AA+'. Given EIB's balance sheet size, and as illustrated by its statute and its prominence as an EU institution, Fitch believes that member states' propensity to support is strong and provides a backstop to material downward pressure on the rating. However, callable capital does not fully cover net debt at EIB and consequently, we discount potential extraordinary support from member state.
The Stable Outlook reflects Fitch's expectation that EIB's credit profile will remain commensurate with the bank's 'AAA' IDR. Downward pressure on the ratings would arise from the following factors:
- A material deterioration in capitalisation over the coming years, related to higher than expected lending (especially due to the European Fund for Strategic Investments) or a steady deterioration in the loan book portfolio would be detrimental to the ratings.
- A deterioration of the operating environment of the bank, potentially caused by marked weakening of European economies or weakening of political support for EU institutions.
The ratings and Outlooks are sensitive to a number of assumptions:
- Growth in lending will be in line with the corporate plan.
- Brexit will not cause a major disruption in EIB's operations.
The full list of rating actions is as follows:
Long-Term IDRs affirmed at 'AAA'; Stable Outlook
Short-Term IDR affirmed at 'F1+'
Senior unsecured debt affirmed at 'AAA'/'F1+'
Market linked securities affirmed at AAAemr
Commercial paper affirmed at 'F1+'