KEY RATING DRIVERS
The ratings of AIIB are based on its existing and expected intrinsic strengths. Created in 2015, AIIB has been endowed with a substantial capital base which, in Fitch's view, will support the projected rapid expansion in lending; exposure to risk will be mitigated by a comprehensive set of policies and by high quality governance. AIIB enjoys an excellent level of liquidity and should benefit from easy access to capital markets.
The 'aaa' intrinsic rating reflects Fitch's long-term projections for capitalisation, risks and liquidity indicators, based on the bank's business plan. Capitalisation is assessed as Excellent, as the 80 existing member states have committed to subscribe USD100bn of capital, of which USD20bn will be paid-in. As the bank expands its operations - the loan portfolio should reach USD50bn by 2027 - the equity to assets ratio will progressively erode, but will remain above the 25% threshold consistent with our Excellent capitalisation assessment.
Risks are expected to remain Low. Based on the bank's strategy and policies, Fitch anticipates that the average rating of the loan portfolio will be around 'BB' over the 10-year forecast period. Approximately 60% of the loans will be extended to sovereign-backed borrowers, and will benefit from the preferred creditor status of AIIB, a common feature of multilateral development banks (MDBs). Concentration risk is assessed as Moderate. Given the internal limits set by the bank, the ratio of the 5 largest exposures to total banking exposures will progressively decrease and should be below 50% by 2027. AIIB will invest in some equity participations but, over time, they will account for less than 5% of the banking portfolio.
Based on discussions with management, Fitch expects AIIB to pursue conservative policies, and to maintain a very low exposure to market risks, in line with peers. However, risk management policies are assessed as Moderate, as a number of limits have not been yet been set explicitly, and the model to compute economic capital has yet to be finalised. The lower limit for the credit quality of liquid assets is 'A', which is not conservative relative to AAA peers. However, given the quality of the management team overall and their stated commitment to a conservative approach, Fitch expects AIIB's liquidity policy to be managed prudently.
Liquidity is assessed as excellent, reflecting the very large liquidity buffer set by the bank, which should remain above 150% of short-term debt in the forecast period. According to AIIB's internal policy, liquid assets must cover at least 40% of annual cash requirements, which is in line with peers. Although the minimum rating level for treasury investment is 'A', Fitch expects that at least 50% of assets will be invested in assets rated 'AA-' or higher.
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AIIB's business profile is assessed as Medium risk, which translates into a one-notch uplift for the intrinsic rating. AIIB operates in a high-risk operating environment, evidenced by the relatively low credit quality of its countries of operations. This is offset by the Low risk business profile of the bank, stemming from its high governance standards, clear strategy and well-controlled exposure to the private sector.
No credit uplift is granted for support. The average rating of key shareholders - China, India, Russia and Germany, which together own 54% of capital - is 'A-'; once the bank has reached its target size, net debt will not be covered by callable capital rated 'A+' and above. Nonetheless, the propensity of member states to provide extraordinary support is deemed Strong.
RATING SENSITIVITIES
The Outlook on the IDR is Stable. The factors that could, individually or collectively, lead to a negative rating action are:
- Lending growth more rapid than anticipated, leading to the equity to assets ratio falling below 25%, which would likely exert a negative impact on our Excellent assessment of AIIB's capitalisation ratio.
- Deterioration in expected asset quality leading to an average rating of 'B+' or lower or a marked increase in the impaired loan ratio.
- Longer than anticipated implementation of the risk management policies or any material change to the conservative approach to liquidity and other policies articulated by AIIB's senior management.
KEY ASSUMPTIONS
In its projections, Fitch assumes that capital will be paid-in according to the schedule and that, by 2027, the size of the loan portfolio will reach USD50bn with an average rating of BB. Additionally, any impaired loans will be 100% provisioned, the liquidity ratio will cover more than 150% of short-term debt, and consist of investment-grade assets, with at least 50% of them invested in AAA/AA assets or bank placements.
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