Overview
— Inter-American Development Bank maintains a robust financial profile,
bolstered by generally prudent financial management and policies.
— The bank has strong membership support, and we expect it to continue
to receive preferred creditor treatment.
— We are affirming our ‘AAA’ long-term issuer credit rating and ‘A-1+’
short-term rating on the bank.
— The outlook remains stable, reflecting the bank’s solid capitalization
and liquidity ratios and our expectation that these ratios will remain so.
Rating Action
On July 23, 2012, Standard & Poor’s Ratings Services affirmed its ‘AAA’
long-term issuer credit rating and ‘A-1+’ short-term credit rating on the
Inter-American Development Bank (IADB). The outlook on the long-term rating
remains stable.
Rationale
The ratings on IADB reflect the bank’s robust financial profile, bolstered by
generally prudent financial management and policies and strong membership
support, including expected continued treatment as a preferred creditor. We
see the high geographic concentration in the bank’s portfolio of loans and
guarantees as a credit weakness.
Founded in 1959, IADB is the oldest regional multilateral development finance
institution (MDFI). It has 48 country members–26 borrowing member countries
in Latin America and the Caribbean and 22 nonborrowing members–the U.S.,
Canada, and 20 nonregional countries. The bank lends mostly to central
governments in Latin America and the Caribbean to promote economic development
and to expand opportunities for the poor. IADB’s loan portfolio growth
moderated to 4.9% in 2011 after increasing 8.5% and 13.4% in 2010 and 2009,
respectively. The largest credit exposures by country of obligor were Brazil
(23% of total loans and guarantees at year-end 2011), Argentina (16%), and
Mexico (15%).
The bank has strong membership support. The capital increase approved in 2010
officially went into effect in February 2012. The capital increase includes
US$1.7 billion of paid-in capital to be contributed over five years. As of
July 2012, the bank has received instruments of subscription from member
countries of approximately 94% of the first installment of the ninth
replenishment (including both paid-in and callable capital). Because of
charter restrictions over the voting power distribution, the bank allocated
about 88% of both paid-in and callable capital. Collections of the allocated
paid-in shares have been approximately 80%.
IADB’s capitalization ratios remain comparable to those of other ‘AAA’ rated
multilateral institutions, though they have been declining steadily since
2006. Shareholders’ equity declined by 5.6% in 2011, mainly because of lower
net operating income, net fair value adjustments on nontrading portfolios,
Board of Governors’ approved transfers, and other comprehensive losses
(stemming from a change in the funded status of the bank’s retirement plans).
As a result, IADB’s narrow risk-bearing capacity (adjusted shareholders’
equity plus allowances for loan and guarantee losses) declined to 29% of its
loans plus guarantees (development-related exposure) at year-end 2011 from 32%
the previous year. Overall, we believe that IADB remains adequately
capitalized in terms of paid-in capital, loan and guarantees loss reserves,
and retained earnings (US$20 billion in total in 2011), especially relative to
the credit risk on its balance sheet. In our view, despite ongoing market
turbulence affecting its trading portfolio, the additional paid-in capital
starting in 2012 should support the capital base.
The revision of a number of policy initiatives over the past few years
strengthened the bank’s financial and risk management capabilities. The new
policies include the capital adequacy framework, liquidity policy, asset and
liability management framework, and an income management model.
IADB’s liquidity remains lower than some other ‘AAA’ rated MDFIs’. Liquid
assets (including cash due from banks, deposits, and investment securities
minus restricted currencies) to gross debt declined to 23% in 2011 from 26% in
2010. Liquid assets to estimated one-year debt service plus undisbursed
development-related commitments worsened to 41% in 2011 from 53% one year
earlier.
The performance of IADB’s sovereign and sovereign-guaranteed loan portfolios
remains excellent. Total impaired loans, all of which are attributable to the
nonsovereign-guaranteed portfolio, were 0.2% of total loans and 3.9% of
nonsovereign-guaranteed loans at year-end 2011.
IADB’s net operating profit was US$836 million in 2011, down from US$1.3
billion in both 2009 and 2010. The decrease was due to lower net investment
gains and higher net noninterest expenses, which higher net interest income
and a decrease in loan and guarantee loss provision partially offset. The
bank’s return on assets was 0.9%, and its return on equity was 4.2% in 2011.
Outlook
The stable outlook reflects IADB’s capitalization and liquidity ratios, which
are broadly comparable with those of other ‘AAA’ rated MDFIs as well as our
expectation that these ratios will remain solid. This is based on the new
financial commitments IADB received as part of the ninth general capital
increase, the expectation of timely contribution of associated paid-in
capital, and the bank’s strengthened financial and risk policy framework. On
the credit front, the nonsovereign-guaranteed loan portfolio’s good asset
quality during the recent economic downturn, as well as the excellent
performance of IADB’s sovereign and sovereign-guaranteed loans, further
supports the ratings.
We could consider lowering the rating based on a weaker financial (including
due to lower profitability) or risk management profile, a material
deterioration in the bank’s sovereign lending book (including, due to rising
economic risks in the region), or a loss of preferred creditor treatment. In
addition, our new criteria for multilateral lending institutions, which we
expect to adopt later this year, could affect our ratings on IADB.
Related Criteria And Research
Criteria For Multilateral Lending Institutions, Oct. 19, 2007
Ratings List
Ratings Affirmed
Inter-American Development Bank
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+
Senior Unsecured AAA
