Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) affirms International Investment Bank’s (hereinafter referred to as “IIB”) long-term issuer credit rating (“ICR”) at A with stable outlook. Irrespective of IIB’s slightly declining profitability, both capital and liquidity remain sufficient with asset concentration risk decreasing, and member country support remaining stable. To summarize, IIB maintains relatively strong solvency.
The rationale for Dagong’s affirmed rating is as follows:
1. IIB’s major borrowing countries maintain essential political stability, and credit conditions have improved, although asset quality risk will challenge the stability of member countries’ financial systems through different levels.
The political environment in Bulgaria, Mongolia, Russia, Vietnam, Romania, the Czech Republic and others amongst IIB’s major borrowing countries remains stable, however the prevailing dispersion of political forces and internal constraints in Bulgaria, Romania, and the Czech Republic threaten government stability and policy continuity to a certain extent. In term of credit environment, considering both international commodity prices and exchange rates have been stabilized gradually, Russia and Mongolia will be prudent in monetary easing in the short term while other borrowing countries continue to adhere to monetary easing to stimulate the domestic economy, and therefore, the overall credit environment is improving. However, non-performing loan rates in certain major borrowing countries such as Bulgaria, Romania and Mongolia remain high, which is indicative of apparent vulnerability within their financial systems.
2. IIB’s profitability is facing downward pressure in the short term, but macro-economic risk tends towards decline, and improvement in both income structure and operating efficiency will help stabilize wealth creation capability.
As IIB adheres to its new strategy, both asset scale and balance of developmental financing will increase rapidly with enhanced risk management skills and improved internal control structure, however, both IIB’s net interest margin and net interest spread continue to be narrowing and thereby weigh on return of average assets (ROAA) in the short term. To summarize, considering declining macro-economic risk with the stabilization of the Russian economy, alongside continuously improving income structure and operating efficiency, IIB’s wealth creation capability in the medium term remains stable.
3. Both IIB’s capital and liquidity continue to be sufficient, and therefore repayment sources are able to fully guarantee debt repayment.
IIB’s capital adequacy ratio declined, but still reaching 51.16% in the first half of 2016, a rate noticeably higher than its own internal risk control standard (25%) and the average of peers. Meanwhile, the improved quality of realizable assets, stable financing channels, and a prudent risk appetite will altogether mitigate the increasing pressure of short term liquidity demand, and thus ensure high overall liquidity. Besides, although the continuing slumping economy in certain member countries will deteriorate asset quality in the future, IIB’s credit risk is under control due to decreasing regional concentration. On the whole, its relatively adequate capital and liquidity contribute to the low deviation of debt repayment sources from wealth creation capability.
4. Implementation of new statute reforms and new strategy will help consolidate member country support, and thereby provide strong support to IIB’s repayment capability.
The sovereign ratings of IIB’s major member countries remain stable, and Hungary, as a new member, subscribed its capital on time. With the landing of new statute reform, IIB’s paid-in capital is expected to increase from €1.3 billion to €2.0 billion while callable capital increases from €821 million to €1,521 million, and the coverage of callable capital to total liabilities increases from 2.0 to 3.7, comparing preferably with other peers. Furthermore, following the implementation of the “double majority” voting mechanism, IIB will be able to fully protect the interests of various member countries and its regional influences will continue to increase, all these abovementioned factors are expected to facilitate IIB to obtain solid and lasting support from member countries.
To sum up, in the short term, both IIB’s capital and liquidity will remain sufficient, and asset concentration risk will continue to decrease. Moreover, its prudent risk appetite, extensive and in-depth cooperation with international financial institutions, as well as strong and stable member country support will altogether facilitate IIB to cope with the downward pressure upon profitability in terms of risk management, loan offering, debt financing and many other aspects, and thereby IIB is expected to maintain relatively strong solvency. Incorporating all these factors, Dagong’s outlook for IIB’s international credit rating is stable for the next 1-2 years.
 In Dagong’s credit ratings, for governments and international institutions, there are no domestic or international ratings. The ratings of international institutions can be compared with that of non-sovereigns. Also, there is no local currency rating or foreign currency rating for the ratings of international institutions.