Fitch Ratings – London – 9 March 2017: Fitch Ratings has assigned Caribbean Development Bank (CDB) a Long-Term Issuer Default Rating (IDR) of ‘AA+’ with a Stable Outlook and a Short-Term IDR of ‘F1+’.
KEY RATING DRIVERS
The ratings and Stable Outlook reflect the following key rating drivers:
The ratings of CDB are fully driven by its intrinsic credit quality, most notably its high level of solvency (assessed at aa) and its excellent liquidity (assessed at aaa). The ‘medium-risk’ business environment assessment (comprising a low-risk assessment of business profile and medium-risk assessment of the operating environment) adds a single notch to the solvency assessment of ‘aa’, resulting in an overall intrinsic rating of ‘aa+’.
The ‘aa’ solvency assessment of CDB is driven by ‘excellent’ capitalisation and a ‘low’ risk profile. Capitalisation is a key strength for the ratings. The equity-to-adjusted assets ratio of 56.6% at end-September 2016 (62% at end-2015) is assessed as ‘excellent’ in Fitch’s supranational criteria – far above the 25% threshold for an assessment of ‘excellent’.
Fitch views CDB’s risk profile as low-risk, chiefly owing to its ‘very low’ loan impairment rate (0.5%), ‘very low’ equity risk (no equity participations in the portfolio), ‘very low’ market risks and ‘excellent’ risk management policies. However, there are two key risks for CDB – concentration (the five largest exposures account for 60.1% of the total portfolio) and a weak average rating of loans (B-), although this is slightly offset by the ‘excellent’ quality of preferred creditor status (PCS) from which CDB benefits (as sovereign exposure accounts for 96% of the portfolio), notwithstanding one temporary breach of PCS that occurred in 2012.
Fitch assesses CDB’s liquidity as ‘aaa’ primarily due to the large amount of liquid assets relative to short-term debt, as well as the overall excellent quality of the institution’s treasury portfolio. Based on the agency’s projections, the bank’s liquidity assessment will remain at ‘aaa’, as a consequence of the bank’s conservative financial rules, which will continue to result in excellent coverage of short-term debt by liquid assets.
CDB’s business environment is viewed by Fitch as a rating strength and results in a one-notch uplift to the intrinsic rating. CDB’s ‘low-risk’ business profile assessment is characterised by good governance, the low risk strategy of the bank and a low exposure to the non-sovereign sector. However, in Fitch’s assessment, CDB operates in a ‘medium-risk’ environment, as characterised by the income per capita in the countries of operations, the political risk and business climate in the countries of operations and the operational support provided by member states, all of which sub-factors are assessed at ‘medium-risk’.
CDB’s overall ratings do not benefit directly from extraordinary support. Fitch assesses the capacity of shareholders to support the bank as ‘A+’, in line with Fitch’s forecast of the coverage of net debt by callable capital. Fitch believes that member states’ propensity to support CDB is in line with fellow MDB peers.
The Stable Outlook reflects Fitch’s expectation that CDB’s credit profile will remain commensurate with its ‘AA+’ rating. The following risk factors which, could individually or collectively, trigger a rating action are:
A material improvement in asset quality, concentration risk or the credit quality of the countries of operations would put upward pressure on the ratings;
The weakening of the solvency assessment, either as a result of weaker capitalisation metrics or an increase in the overall assessment of risks, would put downward pressure on the ratings.
The ratings and Outlook are sensitive to a number of assumptions:
No significant change in the composition of the portfolio of the bank;
No major deviation from the current strategy of CDB, in particular regarding lending growth;
Risk management policies will remain unchanged and no breach is expected.