Overview

• We expect that the current challenging and volatile operating environment will pose risks to Eurasian Development Bank's (EDB) loan portfolio growth and therefore its policy relevance. We also think its ability to access funding in the capital markets could be curtailed.
• We foresee a heightened probability of rapid asset quality deterioration that will weigh on EDB's capital adequacy position over the next three months given the high concentration of its loan exposures to Russia and Belarus.
• We therefore lowered our long- and short-term foreign currency issuer credit ratings on EDB to 'BBB-/A-3' from 'BBB/A-2' and placed them on CreditWatch with negative implications. We also placed the 'kzAAA' Kazakhstan national scale issuer credit rating on CreditWatch with negative implications.

Rating Action

On March 11, 2022, S&P Global Ratings lowered its foreign currency credit ratings on EDB to 'BBB-/A-3' from 'BBB/A-2 and placed our ratings on CreditWatch with negative implications.

At the same time, we placed our 'kzAAA' Kazakhstan national scale rating on CreditWatch with negative implications.

CreditWatch

We expect to resolve the CreditWatch placement in the next 90 days when we have more clarity on how the significant economic and financial stress in both Russia and Belarus will affect EDB's loan portfolio, and once we understand the consequences for its capital base and financial risk profile. The negative implications of the CreditWatch indicate that we could lower our ratings on EDB during the 90-day period.

Rationale

The downgrade reflects our view that, given the challenging operating environment, EDB's loan portfolio growth will likely remain subdued and weigh on its policy relevance. Its ability to access funding in the capital markets if needed also remains uncertain. We also see a further downgrade as highly likely given that EDB's asset quality could rapidly weaken, reflecting its large lending concentration to Russia and Belarus. Combined, they account for about 60% of the lending portfolio as of June 2021.

While it operates as a regional multilateral institution, EDB has a high concentration in Russia and Belarus. Both countries are under severe sanctions due to the military intervention in Ukraine. We expect business growth to be subdued and any new lending to Russia and Belarus to be marginal. We think the bank's lending activity will likely reduce, which will continue to constrain our view of its mandate and overall rating.

As of June 2021, EDB had posted very robust funding and liquidity ratios (and we do not expect this will have changed materially). However, if the military intervention is protracted and sanctions on Russia remain for a long time, EDB's access to funding from the international capital markets, when and if needed, could become uncertain.

As of today, EDB has two outstanding international bond issuances: US$500 million due in September 2022 and €300 million due in March 2026. As of June 2021, the bank also had local debt issuance of US$879 million, of which about US$170 million matures in the next 12 months. Therefore, the total remaining debt maturities in 2022 are US$670 million.

Also as of June 30, 2021, EDB had US$357 million in customer deposits, which have been sticky historically. In 2018, the bank started to provide settlement and clearing services to its customers. As of June 30, 2021, all deposits were from corporate customers based in the bank's member states, of which more than 60% was from state owned companies.

On June 30, 2021, the bank's liquid assets totalled approximately US$1.35 billion. Therefore, we expect the bank to be able to cover upcoming maturities in 2022 as well as a potential withdrawal of deposits without any new market funding. As of June 2021, we consider the bank to be properly hedged from a currency perspective with a significant surplus of U.S. dollar assets.

EDB should be exempted, as per its charter and in line with other multilateral lending institutions (MLIs), from currency restrictions imposed by member governments--which in this case would be Russia's central bank.

Furthermore, EDB is not on any sanctions list issued by the U.S, EU, or the U.K., and therefore should be able to receive foreign currency from borrowers (residents and nonresidents) as well as execute outgoing foreign exchange and local currency payments. However, this remains to be fully tested in these unprecedented times.

The increasing risk of Russia and/or Belarus defaulting--reflected in our recent downgrades of both sovereigns--has already negatively affected EDB's risk-adjusted capital (RAC) ratio. After MLI adjustments, this ratio has reduced to 16% from 20% (based on financial data as of June 2021). The RAC reduction has pushed the bank's capital adequacy very close to a weaker assessment. Given the ratings on both sovereigns are on CreditWatch negative, any further weakening in their credit standings could weigh further on EDB's capital adequacy in the near term. We also think the US$700 million capital increase assumed under the bank's 2022-2026 strategy will likely be delayed.

Following our action on Russia, we also downgraded all our rated Russia-based corporates by several notches (see "Russian Corporates Downgraded To 'CCC-' After Similar Action On Sovereign; Ratings Placed On CreditWatch Negative," March 7, 2022). Although EDB's portfolio in both countries is highly concentrated in state-owned companies and quasi-sovereign institutions and the majority of its Russian loans are in roubles, we expect significant asset quality pressure could build in the near term. Asset-quality deterioration could weigh on EDB's S&P Global Ratings-adjusted RAC ratio and indicate a less favorable loss experience, which could weaken our view of its capital adequacy. This could lead us to take a further negative rating action.

Our long-term rating does not incorporate extraordinary shareholder support from EDB's callable capital.  This is because, while our sovereign rating on Kazakhstan is at the level of our 'bbb-' assessment of EDB's stand-alone credit profile (SACP), our assessment of the bank's policy importance as moderate precludes the notion of extraordinary support.

EDB's enterprise risk profile (ERP) is very weak, in our view. Our assessment is constrained by the bank's limited geographic diversification compared with other supranational peers and its highly idiosyncratic ownership structure, with Russia and Kazakhstan accounting for 99% of shares. Our ERP assessment also factors in the bank's inability to meet its growth targets previously, as well as the heightened challenges it faces to pursue its business goals.

EDB is the key MLI for the Eurasian Economic Union.  Established in 2006 by an intergovernmental agreement, EDB's purpose is to contribute to the development and growth of the market economy in member states and promote trade and economic integration among them by engaging in investment activities. EDB has improved its role and competitive position in its member countries, shown by the significant increase in the loan portfolio in 2018 and 2019, but it has remained very small compared with the economies of its members. EDB is owned by Russia (65.97%), Kazakhstan (32.99%), Belarus (0.99%), Armenia (0.01%), Tajikistan (0.03%), and Kyrgyzstan (0.01%).

EDB's private-sector-focused mandate precludes it from being treated as a preferred creditor. This is because private-sector companies cannot selectively default to one group of creditors while paying others as sovereigns can. We therefore do not incorporate preferred creditor treatment (PCT) in our assessment of the enterprise risk profile. However, given EDB's status as an MLI, we do consider PCT granted by the governments of countries in which it operates, and we incorporate this into our assessment of EDB's financial risk profile. Contrary to our current expectations, a weaker performance of sovereign-related exposures could also weigh on our adjusted RAC ratio in the future.

Environmental, social, and governance (ESG) credit factors for this change in credit rating/outlook and/or CreditWatch status: 

• Other governance factors

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Governments | General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Dec. 14, 2018
• General Criteria: Methodology For National And Regional Scale Credit Ratings, June 25, 2018
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Russian Corporates Downgraded To 'CCC-' After Similar Action On Sovereign; Ratings Placed On CreditWatch Negative, March 7, 2022
• Belarus Ratings Lowered To 'CCC' And Placed On CreditWatch Negative On Mounting Risks Related To Russia-Ukraine Conflict, March 4, 2022
• Russia Ratings Lowered To 'CCC-' And Kept On CreditWatch Negative On Increasing Risk Of Default, March 3, 2022

Ratings List