Fitch, Moody's give the Islamic Development Bank AAA ratings

Fitch Ratings has affirmed the Islamic Development Bank (IsDB)'s long-term issuer default rating (IDR) at AAA with a stable outlook. The short-term IDR has been affirmed at F1+. The trust certificates issued by IDB Trust Services and guaranteed by IsDB have also been affirmed at AAA.

Meanwhile, Moody's Investors Service has affirmed the Islamic Development Bank's AAA rating with a stable outlook. The AAA-rating is based on the bank's strong capital base, Moody's said in a statement.

"The Islamic Development Bank benefits from a strong liquidity position, and is considered a benchmark issuer within the global sukuk market," Moody's said. "It is a benchmark issuer within the Islamic finance world, being one of the few AAA-rated issuers. Given the scarcity of high-quality, shari'ah-compliant securities, the bank's sukuks have always found strong demand."

The AAA rating of IsDB reflects its intrinsic credit strengths with its solvency and liquidity assessment both at 'aaa'.

The 'aaa' solvency assessment reflects IsDB's excellent capitalisation and low risk. Its equity- to-asset ratio was 43% in 2017, one of the strongest among multilateral development banks (MDBs). The ratio has declined in recent years (49% in 2015), reflecting rapid growth in IsDB's banking portfolio. However, Fitch expects lending growth to decelerate in line with IsDB's strategy and the equity-to-asset ratio to remain above 40% through to 2020. 

Fitch assesses IsDB's overall risks as low. Credit risk is moderate. The bank's operations in low-rated countries translate into an average rating of loans at B+. Impaired loans have remained moderate at 3.2% of total exposure in 2017 (based on Fitch's own calculation, which differs from IsDB's calculation) and primarily reflect the bank's sovereign exposure to Syria and Yemen. Concentration risk is low as the bank's five largest exposures account for 33% of the total. Equity risk is assessed as low, reflecting the bank's limited exposure to equity (10% of total banking operations in 2017).

The bank's risk management is conservative overall and risk management policies are deemed strong. Prudential rules include strict limits on country, sector and single borrower exposures. However, the provisioning of impaired assets is less conservative than at other AAA-rated peers. The leverage ratio maximum limit was loosened to 175% in 2017 from 125% previously. At 127% in 2017, it remains below that of AAA-rated peers.

IsDB's 'aaa' liquidity assessment balances the bank's liquidity buffers, with liquid assets-to-short-term debt expected to remain well above the 1.5x threshold by 2020 (4.9x in 2017), against the bank's moderate asset quality. The share of AA to AAA rated assets in the bank's treasury portfolio is expected to remain at around 15% in 2020 from 14.1% in 2017, well below AAA-rated peers. This is mitigated by an overall high share of investment-grade assets in total treasury assets (87% in 2017). IsDB's access to capital markets is deemed excellent as evidenced by regular sukuk issuance.

IsDB's business environment is assessed as medium-risk, which translates into no adjustment to Fitch's solvency assessment. Fitch views both the business profile and operating environment as medium-risk. This primarily reflects the bank's focus on lending to non-investment grade countries (only two of the top 10 exposures are investment-grade) and the generally low credit quality and high political risk in countries of operations. 

The medium-risk assessment also accounts for the moderate share of non-sovereign operations (16% of total) and the medium size of IsDB's banking portfolio (US$21 billion). This is mitigated by the bank's quality of governance, including experienced staff and a prudential risk framework. Fitch's assessment also reflects the importance of IsDB's public mandate for the bank's member countries and the operational support that member states can provide to the bank, including KSA where IsDB is located.

Shareholders' support is not a rating driver. The support rating is assessed at aa-, reflecting the coverage of net debt by callable capital rated AA- or higher. The average rating of key shareholders consisting of KSA (A+/Stable), the UAE, Libya, Iran and Nigeria (B+/Negative) is BB+.