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SOVEREIGN AND SUPRANATIONAL
CREDIT OPINION4 November 2020
Update
Analyst Contacts
Michael S. Higgins
[email protected]
Claire Long +65 6398 8323Associate
[email protected]
Gene Fang +65.6398.8311Associate Managing
[email protected]
Marie Diron +44.20.7772.1968MD-Sovereign/Sub
[email protected]
Asian Development Bank – Aaa stableRegular update
SummaryThe Asian Development Bank's (ADB, Aaa stable) credit
profile incorporates the bank’s amplecapital adequacy and robust
asset performance, supported by preferred creditor status. ADBhas
very strong access to funding markets and sufficiently large
liquidity buffers that assurethe prompt repayment of ADB’s growing
financial obligations from the ongoing expansionof its development
activities. More specifically, we expect ADB's deployment of
additionalresources to finance countercyclical spending for
borrowing countries in response to thecoronavirus pandemic to
further increase the size of ADB's balance sheet. The bank
alsobenefits from a large buffer of callable capital and a very
strong willingness and ability ofglobal members to provide
extraordinary support.
Exhibit 1
ADB’s credit profile is determined by three factors
Capital adequacy Liquidity and funding
aa3 aa1
Qualitative adjustments
+1
Strength of member support
Very High
Preliminary intrinsic financial strength
aa2
Adjusted intrinsic financial strength
aa1
Rating range
Aaa-Aa2
Source: Moody's Investors Service
Credit strengths
» Large capital base relative to assets and strong access to
funding markets
» Demonstrated preferred creditor status and robust asset
performance
Credit challenges
» A concentrated loan portfolio, especially among top ten
borrowers
» Larger exposures to riskier borrowers given recently enlarged
mandate encompassingconcessional lending
This document has been prepared for the use of Leika Ramirez and
is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Rating outlook
The stable outlook reflects our view that ADB's ample capital
adequacy, strong liquidity and funding, and solid shareholder
support,augmented by its preferred creditor status and conservative
risk management policies, will continue to support its Aaa
rating.
ADB's credit profile also benefits from comprehensive risk
management policies and a generally stable operating environment
amongits borrowing member countries. Relatively stable development
asset credit quality over the last few years reflects a combination
ofoffsetting trends among a number of the bank's largest borrowers.
While the coronavirus pandemic has precipitated a large
globaleconomic shock, we expect Asia-Pacific to experience a faster
economic recovery compared with other regions represented by
otherlarge, regional multilateral development banks (MDBs), such as
Latin America and Sub-Saharan Africa, which generally have
moreconcentrated drivers of economic growth, including a greater
reliance on commodities.
In the context of its concentrated loan portfolio, the linkages
between ADB's top borrowing countries are not very strong, implying
thatthe likelihood of a sustained economic shock precipitating a
significant reduction in asset quality across many borrowing
countries islow. Credit stress in the lowest rated borrowers in
recent years has not impacted asset quality, reflecting in part
ADB’s preferred creditorstatus.
Factors that could lead to a downgrade
Downward pressure on ADB’s rating could occur in the event of a
substantial deterioration in capital adequacy. This could result
from arapid expansion in leverage combined with a decline in asset
quality in the event of sovereign credit stress among its largest
borrowingcountries. In view of ADB's intrinsic financial strength
derived from its prudent risk management, a deterioration in
governance thatleads to a decline in financial performance or
threatens its access to funding markets would be credit
negative.
Key indicators
Asian Development Bank 2014 2015 2016 2017 2018 2019
Total Assets (USD million) 115,660.0 117,697.0 125,854.0
182,381.0 191,860.0 221,866.0
Development-related Assets (DRA) / Usable Equity [1] 335.3 360.2
397.1 203.5 211.7 223.9
Non-Performing Assets / DRA 0.0 0.0 0.0 0.0 0.1 0.1
Return on Average Assets 0.3 0.5 0.0 0.5 0.4 0.8
Liquid Assets / ST Debt + CMLTD 175.8 169.9 144.4 196.8 286.4
201.5
Liquid Assets / Total Assets 21.4 20.6 21.3 20.8 19.2 18.5
Callable Capital / Gross Debt 231.7 211.5 182.0 163.8 155.3
132.9
[1] Usable equity is total shareholder's equity and excludes
callable capitalSources: Asian Development Bank and Moody's
Investors Service
Detailed credit considerations
Our rating of ADB is concerned solely with its ordinary capital
resources (OCR) because ADB's borrowings, together with equity,
canonly be used to fund OCR lending and investment activities, and
the bank's general operations. The borrowings are restricted
fromfinancing activities related to ADB's Special Funds or trust
funds under the bank's administration.
ADB's aa3 Capital adequacy score reflects its ample capital
coverage to buffer potential shocks to its assets – as represented
by itsmodest leverage ratio, stable development asset credit
quality (DACQ), and strong asset performance. The bank's capital
position wasfortified by the 2017 merger of its OCR with the
lending operations of the Asian Development Fund (ADF), which
nearly tripled ADB'susable equity and consequently lowered its
leverage ratio. Prevailing limitations on the amount of lending and
borrowing will lead tomoderate increases.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page onwww.moodys.com for the most
updated credit rating action information and rating history.
2 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
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is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
DACQ has been on par with the median for Aaa-rated MDBs on
account of conservative underwriting practices. ADB's stable
weightedaverage borrower rating reflects improving credit profiles
of a number of its largest borrowers over the last two years,
offsetting thelarger exposures to smaller, lower-rated countries
following the 2017 merger. However, as compared to other
highly-rated MDBs, ADBhas a disproportionately large, albeit
declining, exposure to its top ten borrowers.
Demonstrated preferred creditor status supports robust asset
performance despite the ongoing increase in development activity
andshifts in the underlying creditworthiness of its borrowing
members. We expect ADB’s strong risk management culture to maintain
non-performing loans at very low levels, even compared with other
Aaa-rated MDBs. ADB has never experienced a loss of principal on
itsregular sovereign loan operations, and has a long track record
of sustaining operating income surpluses.
ADB's aa1 Liquidity and funding score incorporates its strong
and lengthy track record of access to market funding, as well
assufficiently large amount of liquidity available for debt
servicing and operational requirements.
The bank fulfills most of its borrowing needs through frequent
bond issuance in the international capital markets in major
tradingcurrencies. Moreover, the bank issues in other, less liquid
currencies, as well as in different thematic formats such as green
andgender bonds, to help deepen and develop capital markets. ADB’s
investor base is diversified by both geography and investor
type,demonstrating global support for its development mandate and
the Basel Committee’s classification of ADB’s securities as a
highquality liquid asset with zero risk weight.
We expect ADB to adhere to its liquidity policy which calls for
maintaining a prudential minimum amount of liquidity to cover its
netcash requirements over the subsequent 12-month period.
Consequently, ADB’s availability of liquid resources over a longer
18-monthperiod is mostly below the corresponding Aaa-rated median,
although consistent with that for other large regional MDBs, such
as theInter-American Development Bank (IADB, Aaa stable) and the
African Development Bank (AfDB, Aaa stable).
ADB’s liquidity profile also reflects conservative
asset/liability management policies, aided by the use of
derivatives to manage itsexposure to interest and currency risks,
as well as its maturity profile. The bank does not enter into
derivatives contracts for speculativepurposes.
We have applied an upward adjustment to ADB's intrinsic
financial strength on account of its strong Quality of
management,consistent with assessments for other large,
well-established MDBs, including the European Bank for
Reconstruction and Development(EBRD, Aaa stable), IADB and the
International Bank for Reconstruction and Development (IBRD, Aaa
stable).
The adjustment reflects ADB's comprehensive policy framework and
strong risk management culture, including its adoption of
globalbest practices and adherence to its internal policy
requirements. ADB's periodic review of its organizational
effectiveness, culminatingmost recently in the implementation of
its new long-term strategy through 2030, demonstrates its
adaptability to the changingregional landscape and the consequent
evolution of its members' financing needs.
Our assessment of ADB's aa1 intrinsic financial strength is
complemented by “Very High” Strength of member support. At a3,
theability of the bank’s membership to provide support—as proxied
by the weighted average shareholder rating—is solid and unlikely
tochange, reflecting the stable outlooks on the ratings of its
largest shareholders.
ADB also benefits from the presence of a substantial callable
capital buffer and the high likelihood of non-contractual support
frommembers. Given the borrowing limitations articulated within
ADB’s risk management framework, the amount of callable capital
farexceeds outstanding debt; the corresponding ratio for callable
capital coverage of debt is higher than the Aaa median.
At the same time, ADB’s track record of general capital
increases and periodic replenishment of its special funds imply a
strongwillingness of support that has not been negatively affected
by the emergence of new MDBs in the Asia Pacific region. ADB has
co-financed projects with both the Asian Infrastructure Investment
Bank (AIIB, Aaa stable) and the New Development Bank (NDB),and
expect continued cooperation given complementary aspects of each
MDB’s strategy and capabilities. ADB’s role in facilitatingeconomic
development continues to be an important part of shareholders'
overarching foreign policy goals, especially for its
largestshareholders, Japan (A1 stable) and the US (Aaa stable).
3 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
This document has been prepared for the use of Leika Ramirez and
is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
https://www.moodys.com/credit-ratings/Inter-American-Development-Bank-credit-rating-417100https://www.moodys.com/credit-ratings/African-Development-Bank-credit-rating-14050https://www.moodys.com/credit-ratings/EUROPEAN-BANK-FOR-RECONSTRUCTION-AND-DEVELOPMENT-credit-rating-19620https://www.moodys.com/credit-ratings/IBRD-World-Bank-credit-rating-410525https://www.moodys.com/credit-ratings/Asian-Infrastructure-Investment-Bank-AIIB-credit-rating-825099745https://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746/summaryhttps://www.moodys.com/credit-ratings/United-States-of-America-Government-of-credit-rating-790575/summary
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
ESG considerationsHow environmental, social and governance risks
inform our credit analysis of the Asian Development Bank
Moody's takes account of the impact of environmental (E), social
(S) and governance (G) factors when assessing supranational
issuers’credit profile. In the case of the Asian Development Bank,
the materiality of ESG to the credit profile is as follows:
Environmental risks are not significant for ADB's rating. The
ADB's operations are increasingly focusing on environmental
objectives, asADB has set “climate change, disaster resilience and
environmental sustainability” as one of the seven operational
priorities of Strategy2030. ADB aims to achieve 75% of the number
of its committed operations to support climate change mitigation
and adaptation by2030, with its own resources for climate financing
reaching $80 billion cumulatively from 2019-30.
In 2019, ADB more than doubled its annual climate investments to
$6.55 billion in climate-related financing from $3.0 billion in
2014,one year ahead of schedule. However, ADB's credit profile is
unlikely to be affected despite generally high environmental risks
in theregion. Moreover, considering ADB's high target for its
operations on environmental initiatives, it is unlikely that ADB
will be seen aslacking in environment responsibility.
Social risks are not significant for ADB's rating, amid the
relative social and political stability in the region and the
diversification of itsportfolio. We regard the coronavirus pandemic
as a social risk under our ESG framework because of the substantial
implications forpublic health and safety. We expect that the
outbreak of the coronavirus will lead to a temporary weakening of
economic and fiscalstrength across Asia-Pacific, which could lead
to a temporary deterioration in asset quality and performance.
However, we do not seethe impact as significant to the ADB's credit
profile for now.
ADB's sound governance framework is illustrated by its prudent
risk-management policies, and high standard governance
principles
All of these considerations are further discussed in the
“Detailed credit considerations” section above. Our approach to ESG
isexplained in our cross-sector methodology General Principles for
Assessing ESG Risks. Additional information about our
ratingapproach is provided in our Supranational Rating
Methodology.
Recent developments
Profitability affected by lower interest rate environment,
higher provision for credit losses
During the first half of 2020, ADB's operating income decreased
36.6% over the same period last year to $355 million, primarily
drivenby higher provisioning for credit losses, while the drop in
borrowing expenses offset the reduction in revenues from loans and
liquidinvestments due to the declining interest rate
environment.
Revenue from sovereign regular OCR loans decreased to $878
million, compared to $1.2 billion over the same period last year,
dueto lower US dollar Libor, the rate used for ADB's primary
lending facility. The return on sovereign regular OCR Libor-based
dollar-denominated loans declined to 2.1% in the first half of
2020, compared with 3.2% for the same period of 2019.
However, lower interest rates also led to a reduction in
borrowing expenses, which declined to $948 million in the first
half of 2020from $1.3 billion over the same period of 2019, despite
a 14% increase in average outstanding borrowings from the first
half of 2019.
Net provisions for credit losses increased substantially to $191
million in the first half of 2020, compared with $19 million in the
sameperiod of 2019, given the adoption of provisioning based on
expected losses, which utilizes forward-looking macroeconomic
projectionsincorporating the impact of the coronavirus pandemic and
its effects on borrowing countries.1
Overall, net income declined to $584 million over the first half
of 2020 from $699 million in the same period of 2019 due to
loweroperating income, which was partially offset by favorable fair
value changes of certain derivatives. Net unrealized gains
increased inthe first half of 2020 ($243 million) versus 2019 ($119
million), mainly driven by a $459 million fair value gain on loan
related swapsresulted from declining interest rates.
4 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
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is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
COVID-19 response package accelerates loan commitments and
disbursements, increase in borrowings
In March 2020, ADB announced an initial $6.5 billion response
package to the pandemic, which was subsequently tripled to $20
billionas the severity and impact of the coronavirus pandemic on
Asia-Pacific economies worsened in the second quarter of 2020.
The bank also streamlined administrative measures to enable
quicker and more flexible delivery of assistance to developing
membercountries (DMCs). Most of the response entails mobilizing
additional resources through regular OCR lending, as well as
reprogrammingand reallocation of existing and ongoing projects.
Within the response package, ADB also established a “COVID-19
Pandemic Response Option” under its Countercyclical Support
Facilityto support DMCs countercyclical spending efforts to
mitigate the effects of the pandemic, about $2.5 billion in
concessional and grantresources, and $2 billion for private sector
operations.
Grant-based funding will continue to be prioritized for
providing medical and personal protective equipment supplies to
DMCs in need.Among the $2 billion funds for private sector
entities, ADB plans to make loans and guarantees to financial
institutions to support tradeand supply chain movements, as well as
additional loans and guarantee supports for small and medium-sized
enterprises.
During the first half of 2020, ADB’s COVID-19 response totaled
$7.0 billion in commitments and $5.2 billion in disbursements.
The$7.0 billion in commitments included $6.7 billion in sovereign
loans, $59 million in non-sovereign loans, and $266 million in
grants andtechnical assistance under the Special Funds. Meanwhile,
the $5.2 billion disbursements comprised of $5.0 billion for
sovereign loans,$124 million for non-sovereign loans, and $82
million for grants and technical assistance under other non-OCR
funds.
Overall, ADB's total loan commitments increased by 34%
year-on-year to $10 billion through the first half of 2020. The
increase inloan commitments led to the higher disbursements at $9.7
billion in the first half of 2020, which was nearly double the $5.2
billionover the same period in 2019. The total outstanding loan
balance increased by $5.2 billion from $114.4 billion as of 31
December 2019to $119.6 billion as of 30 June 2020.
Amid the large increase in lending activity, ADB's borrowings
increased significantly in the first half of 2020. Through the
first sixmonths of the year, ADB borrowed $19.8 billion in medium-
and long-term notes and $8.2 billion in short-term notes, compared
with$11.1 billion and $5.2 billion, respectively, in the first half
of 2019.
ADB's lending headroom and capital adequacy remained strong. As
of 30 June 2020, ADB's lending headroom was $68.6
billion,comprising 64% utilization of its lending authority, while
ADB's capitalization ratio increased to 66.9% as of 30 June 2020
from 62.1%at the end of 2019.
5 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
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is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Rating methodology and scorecard factors
Initial score Adjusted score Assigned score
Factor 1: Capital adequacy (50%) aa3 aa3
Capital position (20%) a3
Leverage ratio a3
Trend 0
Impact of profit and loss on leverage 0
Development asset credit quality (10%) a
DACQ assessment a
Trend 0
Asset performance (20%) aaa
Non-performing assets aaa
Trend 0
Excessive development asset growth 0
Factor 2: Liquidity and funding (50%) aa1 aa1
Liquid resources (10%) a2
Availability of liquid resources a2
Trend in coverage outflow 0
Access to extraordinary liquidity 0
Quality of funding (40%) aaa
Preliminary intrinsic financial strength aa2
Other adjustments 1
Operating environment 0
Quality of management +1
Adjusted intrinsic financial strength aa1
Factor 3: Strength of member support (+3,+2,+1,0) Very High Very
High
Ability to support - weighted average shareholder rating (50%)
a3
Willingness to support (50%)
Contractual support (25%) aaa aaa
Strong enforcement mechanism 0
Payment enhancements 0
Non-contractual support (25%) Very High
Scorecard-Indicated Outcome Range Aaa-Aa2
Rating Assigned Aaa
Rating factor grid - Asian Development Bank
Note: Our ratings are forward-looking and reflect our
expectations for future financial and operating performance.
However, historical results are helpful in understanding patterns
and trends of an issuer’s performance
as well as for peer comparisons. Additional considerations that
may not be captured when historical metrics are used in the
scorecard may be reflected in differences between the adjusted and
assigned factor scores.
Furthermore, in our ratings we often incorporate directional
views of risks and mitigants in a qualitative way. For more
information please see our Multilateral Development Banks and Other
Supranational Entities
rating methodology.
Source: Moody's Investors Service
6 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
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is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Moody's related publications
Issuer Research
» Asian Development Bank – Aaa stable: Annual credit analysis,
July 2020
Sector Research
» Supranationals – Global: Stress-testing confirms broad
resilience of MDB ratings, September 2020
» Supranationals – Global: Support to trade finance by large
MDBs will benefit their smaller regional peers, July 2020
» Supranational issuers – Global: FAQ on MDB credit quality in
the context of the coronavirus outbreak, May 2020
Methodology
» Multilateral Development Banks and Other Supranational
Entities, October 2020
Endnotes1 Effective 1 January 2020, ADB's newly implemented
accounting standard introduced the expected credit loss model. This
requires the provision for credit
losses to be based on expected losses over the remaining
lifetime of loans and certain debt securities, as well as
off-balance sheet credit exposures such asundisbursed loan
commitments and guarantees.
7 4 November 2020 Asian Development Bank – Aaa stable: Regular
update
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is protected by law. It may not be copied, transferred or
disseminated unlessauthorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
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8 4 November 2020 Asian Development Bank – Aaa stable: Regular
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