Fitch Affirms Inter-American Development Bank at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Inter-American Development Bank's (IaDB) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook. In addition, Fitch has affirmed IaDB's senior unsecured notes and senior unsecured term loan at 'AAA' and Short-Term Foreign Currency IDR at 'F1+'.

KEY RATING DRIVERS

IaDB's ratings reflect its achievement of the maximum possible assessment in both intrinsic and support factors. The bank's ratio of equity to assets net of derivative instruments was 23.5% at June 2016, in line with 'AAA' rated peers. IaDB's capitalization benefits from a conservative capital adequacy policy and a USD1.70 billion increase in paid-in capital since 2012. Fitch expects solvency levels to improve moderately in the near term, subsequent to a 2016 resolution to transfer the assets and liabilities of the Fund for Special Operations (FSO) to the IaDB's ordinary capital, resulting in an approximate equity increase of USD5.0 billion.

Lending has continued to decelerate in 2016, with loan approvals of USD2.47 billion for the six months ending June 2016 (compared to USD2.95 billion as of June 2015), due to slower growth and lower demand in key member countries. Sovereign-guaranteed loans remained the vast majority of total operations (92.1% of total exposure at June 2016) and will likely increase, as the IaDB reduces non-sovereign guaranteed loan transactions and its existing private sector portfolio amortizes.

As of January 2016, IaDB initiated the transfer of operational and administrative functions related to private sector activities to a separate international organization, the Inter-American Investment Corp (IIC; 'AAA'/Outlook Stable). Outstanding private sector loans on IaDB's balance sheet will run down over a period of time. However, IIC is responsible for new private sector originations and monitoring of the outstanding private sector portfolio. In return, IIC will receive capital contributions drawn on IaDB's net income beginning in 2018 for an amount not to exceed $725 million over seven years. In Fitch's view, the operation will have no impact on IaDB's risk profile.

The average rating of IaDB's loan portfolio remains at 'BB', notwithstanding the downgrade of its largest borrower, Brazil (17.1% of gross loans) to 'BB' in May 2016. All other factors remaining equal, a further Brazilian downgrade by one notch would leave IaDB's average portfolio rating unchanged. Non-performing loans (0.69% of gross loans at June 2016 compared to 0.59% at December 2015) are comprised primarily of five private sector projects. Specific and general allowances cover non-performing loans by 108.2%. Loan concentration remains high, even by industry standards, and is IaDB's main rating weakness. The largest five exposures (Brazil, Mexico, Argentina Colombia and Ecuador) represented 63.5% of loans at June 2016.

The bank recently tightened its liquidity policy and strengthened its liquidity buffers. At December 2015, treasury assets covered 205.5% of short-term liabilities (189.7% at year-end 2014), and liquid assets accounted for 31.6% of total assets at June 2016 (29.7% at June 2015) in the mid-range of peers.

Support from IaDB's 48 government shareholders achieves Fitch's maximum possible assessment. The strength of shareholder support is evidenced by the timely disbursement of paid-in capital as well as a USD64.3 billion increase in callable capital since 2012. As of June 2016, callable capital provided by 'AAA' rated shareholders fully covered the IaDB's outstanding debt stock (net of highly rated treasury assets). Due to Argentina's upgrade in May 2016, the weighted average rating of IaDB's key shareholders improved to 'A' at June 2016 from 'A-'.

RATING SENSITIVITIES

IaDB has received the maximum assessment for intrinsic credit quality and support. Therefore, a downgrade of IaDB's ratings would require a decline in the assessment of both intrinsic and support factors. The triggers that could collectively result in a downgrade of IaDB's ratings are the following:

- A prolonged and significant decline in capitalisation resulting from unexpected losses or higher than expected asset growth; and

- Less than full coverage of IaDB's net debt by callable capital from 'AAA' rated shareholders, due either to the downgrade of such shareholders or a rapid increase in IaDB's debt.

KEY ASSUMPTIONS

Fitch assumes that IaDB will continue maintaining a cautious prudential framework on leverage, liquidity and credit risk.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Supranationals Rating Criteria (pub. 27 Jul 2016)
https://www.fitchratings.com/site/re/881783

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Contacts

Fitch Ratings
Primary Analyst:
Mark Narron, +1-212-612-7898
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Vincent Martin, +33 1 44 29 92 73
Director
or
Committee Chairperson:
Eric Paget-Blanc, +33 144 299 133
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Mark Narron, +1-212-612-7898
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Vincent Martin, +33 1 44 29 92 73
Director
or
Committee Chairperson:
Eric Paget-Blanc, +33 144 299 133
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com