Fitch Ratings has reaffirmed the African Development Bank (AfDB)’s Long-Term Issuer Default Rating (IDR) at ‘AAA’, maintaining a stable outlook. Detailed rating actions can be found at the conclusion of this commentary.
Support from Non-Regional Shareholders Crucial for ‘AAA’ Rating: The AfDB’s top-tier rating benefits significantly from robust support by its non-regional shareholders, rated ‘aaa’. Their strong inclination to support the bank results in a zero-notch adjustment in our support capacity assessment. This support is complemented by the bank’s Standalone Credit Profile (SCP), which has been upgraded to ‘aa+’ from ‘aa’, reflecting expectations of improved capital ratios in the medium term. The liquidity is also rated ‘aaa’.
Risk Reduction Measures by AfDB: By the end of 2023, the AfDB implemented various measures, including a risk transfer mechanism (“Room2Run”) that covered UA1.5 billion of sovereign loans in 2022. This improved the average credit quality of AfDB’s loan portfolio by approximately one notch, though sovereign downgrades in countries such as Egypt (B-/Positive), Kenya (B/Negative), Nigeria (B-/Positive), and Tunisia (CCC-) moderated this improvement.
Impact of US Downgrade on AfDB’s Ratings: In August 2023, Fitch downgraded the US’s Long-Term IDR to ‘AA+’/Stable. As AfDB’s second-largest shareholder, this downgrade affected the coverage of net debt by ‘AAA’ rated callable capital, decreasing it from 217% at the end of 2022 to 127% by the end of 2023. However, AfDB’s callable capital is expected to remain adequate to cover its net debt, supported by a significant increase in callable capital approved by the board of governors in May 2024.
Enhanced Capitalization: AfDB’s capitalization metrics improved markedly in 2023 due to capital inflows from the seventh general capital increase (GCI), enhancing the equity to assets (E/A) ratio to 28% by the end of 2023. Fitch anticipates the bank will maintain its E/A ratio above 25% and its capital-to-risk-weighted assets (FRA) ratio above 35%, thresholds for ‘Excellent’, supporting the upgrade of our capital assessment to ‘Excellent’.
High Credit Risks Offset: AfDB has managed high credit risks by maintaining a weighted average rating of ‘B+’ for its loans and guarantees before adjustments for preferred credit status (PCS). The bank’s PCS reflects a strong track record of sovereign loan performance, enhancing the weighted average credit quality of the bank’s portfolio by two notches to ‘BB’.
Limited Other Solvency Risks: Fitch views the bank’s risk management policies as ‘excellent’, comparable to its peers, with low concentration risks aided by exchange exposure agreements with other multilateral development banks. The bank’s liquidity profile remains ‘excellent’, with high-quality liquid assets and reliable access to capital markets.
Medium-Risk Business Environment: AfDB operates in a ‘medium risk’ business environment, balanced by a ‘low risk’ business profile and a ‘high risk’ operational setting due to the lower ratings and high political risks in its member countries.
Rating Downgrade and Upgrade Scenarios: Factors that could lead to a downgrade include a drop in net debt coverage by ‘AAA’ rated callable capital below 100% or a substantial weakening in the bank’s solvency assessment. Since the ratings are already at the highest level of ‘AAA’, an upgrade is not possible.
