Training on Forecasting, April 7–8

ACRA assigns AAA to New Development Bank, outlook Stable, under the international scale and AAA(RU), outlook Stable, under the national scale for the Russian Federation

The credit rating assigned to New Development Bank (hereinafter, NDB, or the Bank) is primarily based on its very strong intrinsic financial strengths that stem from strong capital adequacy, a strong risk profile, strong liquidity and funding, as well as its systemic importance to the shareholder founding members that enhances the quality of commitments.

The agreement establishing NDB was signed by the BRICS leaders (Brazil, Russia, India, China, and South Africa) in 2014 during the 6th BRICS Summit in Fortaleza, Brazil. NDB is an International Financial Institution (IFI). The Bank has a mandate to finance infrastructure projects with a strong emphasis on sustainability as well as economic governance and cooperation among the shareholder countries. Additional focus is placed on emerging markets and developing countries (EMDCs). At the inception, each founding member committed one-fifth of the Bank’s capital.

Key rating assessment factors

The Bank’s management quality, strategy, and operational transparency are strong. The Bank’s management and governance boards consist of senior industry experts from the shareholder countries with extensive experience, including staff who joined NDB from leading multilateral development institutions such as the IMF and World Bank. ACRA believes that the management team and operational effectiveness of NDB are suitable to meet the needs required to run the institution successfully in terms of risk mitigation and capital generation. The Bank’s financial statements are published on a quarterly basis and all lending and funding projects are publicly disclosed. The Bank plans to expand both at its headquarters in Shanghai as well as via regional offices in the shareholder countries in 2020. Over time, NDB’s shareholder structure will likely evolve. However, control will remain with EMDCs as per the Bank’s founding mandate. ACRA notes the lack of vetoing power by shareholders.

NDB’s capital adequacy is strong. As of end-June 2019, NDB’s subscribed capital stood at USD 50 bln, of which USD 10 bln was paid-in capital. In comparison, the total assets of the Bank stood at USD 11.5 bln as of the same period, resulting in a very high capital adequacy ratio of 84.6%. However, the Bank expects to utilize a substantial portion of this capital to finance key infrastructure projects within the jurisdictions of the shareholder countries and throughout other developing countries.

ACRA assesses NDB’s risk profile as strong. The Bank’s risk governance and management systems are in line with best practices of leading financial institutions. This includes dedicated committees for credit and non-credit risk assessment thorough know your client (KYC), anti-money laundering (AML), and anti-terrorism funding (ATF) control practices. The Bank continuously reviews its risk management structure and upgrades it by adding new internal regulations phase by phase.

India is the largest recipient of credits so far at USD 1.7 bln. This is very close to NDB’s exposure to China at USD 1.5 bln as of end-June 2019. Russia is the third largest recipient of financing at USD 1.2 bln.

NDB’s investment portfolio consists mostly of time deposits in US dollars and Chinese Renminbi placed with investment-grade financial institutions. However, ACRA expects that as the Bank builds its track record and investments in different jurisdiction grow, the structure of the investment portfolio will change significantly.

As of end-June 2019, the Bank did not have any impaired assets. However, ACRA believes that the quality of the Bank’s loan book will be tested when it expands its operations, including in countries with higher credit risk than in BRICS countries. The Bank sets aside reserves for eventual credit deterioration based on its expected credit loss assessment practice.

NDB’s liquidity and funding position is strong. Capital is still the main source of funding due to the recent launch of the Bank’s operations. Currently, the majority of NDB’s funding is in USD as the Bank’s capital was provided in that currency. In order to finance projects within the shareholder countries, the Bank aims to raise funds in local markets in local currencies.

The initial debt issuances of the Bank were oversubscribed and already demonstrate competitive funding cost compared to its shareholder countries. The Bank has registered debt programs in different markets and currencies, including RMB 10 bln in China, ZAR 10 bln in South Africa, RUB 100 bln in Russia, USD 50 bln EMTN (Euro Medium-term Note), as well as USD 2 bln ECP, of which USD 0.85 bln in tranches was already outstanding as of end-November 2019.

ACRA assesses support from shareholder countries as moderately high. This assessment is supported by two elements: ACRA’s view that the importance of NDB operations for shareholder countries is at the highest possible level and the adequate average creditworthiness assessment of shareholder countries.

NDB’s credit rating is AAA(RU), outlook Stable, under the national scale for the Russian Federation as per the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation.

Key assumptions

  • Maintaining systemic importance to the shareholder countries;
  • Maintaining robust credit underwriting standards and as a result maintaining strong asset quality;
  • Maintaining very high capitalization levels within the 12 to 18-month horizon despite some usage for credit disbursement;
  • Continued refinement of governance and risk management policies.

Potential outlook or rating change factors under the international scale

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Rating upgrade not possible as the current rating is the highest possible on ACRA’s international rating scale;

A negative rating action may be prompted by:

  • Substantial deterioration in the creditworthiness of shareholder countries resulting in a weaker credit profile for NDB;
  • Decrease in systemic importance for key shareholder countries;
  • Substantial deterioration in capital adequacy;
  • Substantial deterioration in liquidity and funding.

Potential outlook or rating change factors under the national scale for the Russian Federation

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Multi-notch downgrade of NDB’s credit rating under the international scale

Rating components under the international scale

SCA: aaa

Adjustments: none.

Regulatory disclosure

The credit rating was assigned to New Development Bank under the international scale based on the Methodology for Assigning Credit Ratings on the International Scale to International Financial Institutions and Other Supranational Development Institutions. The credit rating was assigned to New Development Bank under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

Credit ratings under the international scale and the national scale for the Russian Federation have been assigned to New Development Bank for the first time. The credit rating and credit rating outlook for New Development Bank are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings are based on the data provided by New Development Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was conducted using the IFRS reporting of New Development Bank. The credit ratings are solicited, and New Development Bank participated in their assignment.

No material discrepancies between the provided information and the data officially disclosed by New Development Bank in its financial statements have been discovered.

ACRA provided no additional services to New Development Bank. No conflicts of interest were discovered in the course of the credit rating assignment.

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