Fitch Ratings, the global credit rating agency on Tuesday 21 July 2020, affirmed the African Development Bank’s (AfDB) Long-Term Issuer Default Rating (IDR) at ‘AAA’, with stable outlook. According to the publication by Fitch, this rating action replaces the version published on Monday, 20 July 2020.
According to the rating agency, “AfDB’s ‘AAA’ rating is driven by the extraordinary support it receives from its shareholders, which Fitch assesses at ‘aaa’.”
Fitch Ratings assessed “the Bank’s liquidity profile at ‘aaa’, reflecting an ‘excellent’ liquidity buffer and quality of liquid assets”, while “the bank’s capitalization is judged strong reflecting strong equity-to-assets ratio”.
Fitch’s projection assumed that the bank’s subscribed capital will increase by 125% from 2021 as per AfDB’s 7th General Capital Increase (GCI) plan approved in October 2019. Fitch expects “that all non-regional shareholders will make their first payments before October 2021, as otherwise they would face the risk of their shares being forfeited.”
In addition, Fitch’s projections assumed growth in lending operations by 8% yoy on average for AfDB. This factors in a significant increase in loan disbursement, especially in 2020, as the bank provides emergency support to its borrowers facing the COVID 19 crisis.
In April 2020, the Bank’s Board of Directors approved a group-wide up to $10 billion COVID-19 Response Facility to be made available to current borrowers (USD5.50 billion for the bank’s sovereign borrowers, USD1.35 billion for private sector borrowers, and the remaining USD3.10 billion for operations in countries under African Development Fund) to ease the economic impact of the COVID-19 crisis.
Following Covid-19 pandemic, Eight countries which accounts for 29% of AfDB loan portfolio has been downgraded by Fitch since March while, Negative Outlooks were assigned to seven sovereign ratings, which account for a further 27% of the bank’s loans.
Thus, due to the deteriorating credit facility of the bank, the rating agency revised its solvency assessment to ‘aa-‘ from ‘aa’ previously assigned.
However, Fitch “assesses AfDB’s overall risks as ‘low’, balancing the ‘moderate’ credit risk profile against ‘low’ concentration risk, ‘very low’ equity and market risks and an ‘excellent’ risk management framework.”
AfDB Non-performing loans (NPL) has been on the increase. The bank’s NPL was 2.6% of gross loans in 2018, however it rose to 3% in 2019 and 3.2% as of May 2020, with the increase driven by non-sovereign NPLs. Fitch expects the NPL to remain within a ‘moderate’ range (3%-6%), the rating agency also expects no new sovereign borrowers in default with the bank.
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Commenting on the development, Dr. Akinwumi Adesina, President of the African Development Bank said, “We are delighted with the affirmation of the ‘AAA’ rating of the Bank, with a stable outlook, by Fitch Ratings, despite the global and regional economic challenges from the COVID-19 pandemic. We will continue to strengthen our policy relevance to support regional member countries, especially during and after the period of COVID-19, while ensuring that we maintain our prudential ratios with adequate buffers”.
“The Bank will continue to apply strong risk management. We are positive that African countries’ economies will recover as the pandemic subsides and Africa returns to a positive GDP growth trajectory,” Adesina added.
Written by;
Ifunanya Ikueze