Fitch Affirms North American Development Bank's Ratings at 'AA'; Outlook Stable

PARIS & NEW YORK & LONDON--()--Fitch Ratings has affirmed the North American Development Bank's (NADB) Long-term Issuer Default Rating (IDR) at 'AA' and its Short-term IDR at 'F1+'; the Outlook is Stable.

KEY RATING DRIVERS

NADB's ratings are underpinned by both support from member states and the bank's intrinsic strengths.

The ratings of the NADB are underpinned by strong support from its two member states, the United States ('AAA'/Stable Outlook) and Mexico ('BBB'/Stable Outlook), which own equal shares in the capital. Support takes the form of callable capital, accounting for 85% of subscribed capital. Fitch deems that their legal commitment and political willingness to support the bank is strong. The revision in the Outlook on the U.S.'s rating to Stable from Negative in March 2014 has, in Fitch's view, reinforced support from shareholders.

The NADB's ratings also rely on the bank's healthy financial condition. It has been endowed with substantial capital: at end-2013, equity accounted for 33.2% of assets (40.1% in 2012). Leverage remains low, with debt representing 192.4% of equity at end-2013. The weakening of NADB's capitalisation and leverage measures in the last two years results from the rapid growth in the bank's operations, a trend that will continue in over the short- to medium-term.

Although it started operations in 1994, lending only began to rise in the late 2000's. According to the bank's projections, loans will increase by about 60% over the next four years, to reach USD1.6 billion, and equity-to-assets will decrease to 26%. Management has indicated it will press for a capital increase in order to maintain the bank's strong financial health. While lending will remain concentrated on energy projects, the share of lending to Mexico (34.3% at end-2013, mostly to subnational entities) will progressively increase.

Despite the large share of private sector lending (two thirds of exposure as of end-2013), which do not enjoy preferred creditor status, impaired loans have remained limited, at 0.7% of loans at end-2013. This is partly due to the support of the Mexican state, which provides a form of guarantees to local authorities. The average rating of the loan portfolio is stable, at 'BB+' in 2013. However, most loans have been issued recently and, as they mature, difficulties in loan servicing may appear, placing pressure on asset quality.

Due to the small size of the portfolio, loan concentration compares unfavourably with peers lending to private sector borrowers, such as IIC ('AAA'/Stable Outlook). However, as the rapid growth in lending has allowed for diversification of the portfolio: the five largest exposures accounted for 45.0% of total loans in 2013, versus 51.5% in 2012.

Credit risk on treasury assets is managed conservatively. Interest rate and foreign exchange risks are kept at a minimum, in line with most other MDBs. Risk management is progressively improving. In 2013, the bank started recording general provisions to complement specific reserves, raising provisioning to 1.3% of total loans outstanding or 183.1% of non-accrual loans, and the single-obligor limit has been tightened.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's expectation that the support from NADB's two member states and its intrinsic situation will remain commensurate with the 'AA' rating category. The current rating incorporates an expected decline in capitalisation, leverage and liquidity, as well as a moderate decrease in asset quality, due to the rapid expansion of the loan book.

More rapid than anticipated growth in lending or a marked deterioration in asset quality would exert downward pressure on the bank's intrinsic strengths but would be unlikely to result in rating action in the absence of a changed view of support. However, an increase in the bank's capital would release pressure on capitalisation while providing evidence of shareholders' commitment.

Over time, the building up of a healthy track record, associated with moderate growth in the loan portfolio, lower asset concentration, and further improvement in risk management policies would be favourable for the ratings.

As NADB's ratings are driven both by shareholder support and by intrinsic strengths, the ratings would be resilient to a limited downgrade in the shareholders' credit quality, provided no material weakening of the bank's fundamentals occurs.

KEY ASSUMPTIONS

The ratings and Outlook are sensitive to a number of assumptions. Particularly, Fitch assumes that shareholders' willingness to support the bank will remain strong and that the economic cooperation agreements between the U.S. and Mexico will remain in place.

Additional information is available on www.fitchratings.com

Applicable criteria, 'Rating Multilateral Development Banks', dated 23 May 2012, are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Rating Multilateral Development Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679775

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826273

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Contacts

Fitch Ratings
Primary Analyst
Eric Paget-Blanc, +33 144 299 133
Senior Director
Fitch France SAS
60 Rue de Monceau
75008 Paris
or
Secondary Analyst
Alejandro Tapi, +52 818 399 9514
Associate Director
or
Committee Chairperson
Gordon Scott, +44 203 530 1075
Managing Director
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103 (London)
peter.fitzpatrick@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric Paget-Blanc, +33 144 299 133
Senior Director
Fitch France SAS
60 Rue de Monceau
75008 Paris
or
Secondary Analyst
Alejandro Tapi, +52 818 399 9514
Associate Director
or
Committee Chairperson
Gordon Scott, +44 203 530 1075
Managing Director
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103 (London)
peter.fitzpatrick@fitchratings.com