Fitch Affirms Islamic Development Bank at ‘AAA'; Outlook Stable
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Fitch Ratings-Paris/London-23 June 2015: Fitch Ratings has affirmed the Islamic Development Bank (IsDB)’s Long-term Issuer Default Rating (IDR)’s at ‘AAA’ with a Stable Outlook. The Short-term IDR has been affirmed at F1+. The trust certificates issued by IDB Trust Services Ltd and guaranteed by IsDB have also been affirmed at ‘AAA’.
The ratings reflect the intrinsic strengths of IsDB; in particular its strong capitalisation, high liquidity and low concentration risk compared with other regional multilateral development banks (MDBs).
KEY RATING DRIVERS
The ratings and Stable Outlook reflect the following key rating drivers:
IsDB’s capitalisation is among the strongest in the universe of MDBs, with an equity-to-assets ratio of 50% as of end-1435H (November 2014 in the Gregorian calendar). Sustained growth in financing operations (portfolio grew 8% in 1435H) has led to a sharp increase in debt-to- equity ratio to 96% at end-1435H, from 49% at end-1432H, which nonetheless remains lower than peers’.
According to the bank’s 10-year strategic plan, financing operations are expected to grow at a moderate pace in the next three years. In 1435H, the bank increased its subscribed capital to (Islamic dinars, equivalent to IMF’s Special Drawing Rights) ID50bn from ID18bn; a large part of this increase (ID32bn) is callable capital, and hence, will have only a limited impact on shareholders’ equity. The Board also approved ID3.25bn of uncalled subscribed capital to be called and disbursed over 20 years starting in 1437H, which will help to offset a decline in capitalisation measures. The capital increase also provides scope to substantially extend the financing capacity of the bank, which is statutorily capped by subscribed capital and reserves.
IsDB is extending financing predominantly to sovereign entities, and benefits from preferred-creditor status. Its credit exposure is significant: the average rating of the portfolio was estimated at ‘B+’ at end-1435H.
IsDB’s portfolio is well-diversified compared with peers’, with the five-largest exposures representing 30% of total financing operations at end-1435H. Some of IsDB borrowers have experienced deep political troubles (Libya, Sudan, Yemen); loans to Syria (2.9% of portfolio) are around two years overdue and have been treated as impaired by Fitch, leading to a marked increase in the NPL ratio (3.7% at end-1435H, up from 0.98% in 1433H).
Even though some limits, such as leverage, have been relaxed, the risk framework remains stringent, and IsDB is progressively aligning it with that of other highly rated MDBs, for example through its liquidity policy. However, compared with other ‘AAA’-rated MDBs, provisioning is fairly low given the bank’s exposure to countries experiencing deep political troubles.
Liquidity is adequate, with treasury assets covering 370% of short-term liabilities at end-1435H, in line with ‘AAA’-rated MDBs. However, the credit quality of treasury investments is lower than peers’, with only 13.5% of treasury assets invested in instruments (mostly bank deposits) rated ‘AA-‘ and above at end-1435H. This risk is, however, mitigated by the significant use of short-term maturities at a diversified range of banks. Foreign-exchange risk is tightly hedged.
IsDB’s capital is owned by 56 member countries belonging to the Organisation of the Islamic Cooperation. Capacity to support is not as strong as some other regional MDBs: the average rating of key shareholders – Saudi Arabia (AA), Libya, Iran and Nigeria (BB-) – is lower than other ‘AAA’-rated MDBs and there is no capital subscribed by countries rated ‘AAA’/’AA+’. Shareholders have consistently demonstrated their propensity to support the bank through regular inflows of fresh capital although a small number of member countries (owning a low share of capital) had been late in subscribing to the 1435H capital increase.

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