JEDDAH – Fitch Ratings has affirmed the Islamic Development Bank’s (IDB) Long-term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook and Short-term IDR at ‘F1+’.
The ratings primarily reflect IDB’s strong capitalization. The bank is one of the most highly capitalized multilateral development banks (MDBs) rated by Fitch. The equity to assets ratio has remained above 65 percent since inception (70.7 percent at end-1431H (corresponding to Dec. 6, 2010).
The IDB also maintains comfortable liquidity and compliance with Shariah principles induces extremely low leverage (21.3 percent at end-1431H).
IDB’s capital is owned by 56 countries, all members of the Organization of the Islamic Conference. Its main shareholder is Saudi Arabia (‘AA-’/Stable), which owned 24.6 percent of callable capital at end-1431H.
Although the proportion of ‘AAA’ and ‘AA’ rated shareholders is lower than for other ‘AAA’-rated MDBs (42.5 percent at end-1431H), support is strong, as indicated by continuous capital increases since 2006.
IDB mainly extends project financing guaranteed by states or state-owned banks to finance infrastructure or social services; due to compliance with Islamic finance principles, most financing is asset-backed.
As for other MDBs, activity is mostly focused on speculative-grade borrowers (68.8 percent at end-1431H), but the bank benefits from preferred-creditor status on sovereign-guaranteed operations, which has enabled it to keep NPLs at a minimum (1.0 percent of non-equity operations at end-1431H).
The bank also abides by strict country and single obligor limits on its financing operations, limiting concentration risk (the five largest obligors accounted for 30.7 percent of equity at end-1431H, which compares favorably with other MDBs).
Credit risk on treasury assets is mitigated by the recourse to short-term investments in a diversified range of regional and European banks.
The IDB is not profit-oriented and does not distribute dividends. Its profits are used to strengthen the equity base. RoE has averaged 2.9 percent since 2006, and profitability improved in 1431H thanks to reduced borrowing costs, depreciation and provisions for loan losses.
Like other MDBs, the bank has carried out countercyclical activity since 2009: total outstanding operations rose by 19.2 percent in 1430H (2009) and 9.4 percent in 1431H. It intends to increase operations by 10 percent a year until 2013 but with no significant shift in business model: sovereign-guaranteed operations should remain prominent despite rising private-sector financing. Fitch does not expect any loosening in the bank’s prudential framework. – SG