Standard and Poor’s affirms CDB’s AA/ A-1+ ratings: Barbados needs to learn what CDB did right
Leading rating agency, Standard and Poor’s has affirmed the Caribbean Development Bank’s ‘AA/A-1+‘ credit ratings as well as its financial outlook at stable.
“We are affirming our ‘AA/A-1+‘ long- and short-term issuer credit ratings on CDB. The stable outlook reflects our view that CDB will retain its high capital adequacy and sufficient liquidity, and that its sovereign borrowers will treat the bank as a preferred creditor,” the ratings agency said in a May 7, 2015 note.
S&P said the continued fiscal consolidation of CDB’s borrowing members has kept loan demand subdued, which, in combination with capital installment payments and internal capital generation, has led to an increase of the Bank’s risk-adjusted capital ratio to 26%.
“Based on this, we have revised our assessment of the bank’s stand-alone credit profile to ‘aa‘ from ‘aa-‘,” S&P said.
The agency said the ratings on CDB are based on its strong business profile which is reflected in its role as “the cornerstone lender” to Caribbean governments and its “extremely strong financial profile”, by S&P definitions. Together these form CDB’s ‘aa’ stand-alone credit profile (SACP).
The credit ratings pertain only to CDB’s Ordinary Capital Resources (OCR), the bank’s primary operations.
According to S&P, CDB’s strong business profile reflects first its role as a prominent lender in the Caribbean and its ability to lend to sovereigns throughout the credit cycle. Second, CDB’s members demonstrated their support for the bank’s mandate by granting a 38% increase of paid-in capital in 2010, although some members have continued to be late in paying their subscriptions. Third, the bank’s borrowing members have treated CDB’s OCR as a preferred creditor in most, but not all, periods of stressed external liquidity.
The agency said CDB’s extremely strong financial profile reflects its strengthening capital adequacy, its less diversified funding profile, and its solid liquidity.
In its analysis of the Bank’s performance, S&P said significant support from non-regional members, including funding of CDB’s Special Funds Resources (not rated), which provides grants and concessional loans to lower-income countries, has helped sustain the credit quality of the OCR.
“The bank has also continued to strengthen its governance structure through the consolidation of its risk management and monitoring framework, as well as through the introduction of new institutional checks and balances.”
Historically, CDB has maintained a high level of capitalization to offset the correlation risk of borrowing members. This correlation pertains not only to the bank’s region of operations, but also to the common characteristics of many of its borrowers. These include economic structure, monetary arrangements, fiscal challenges, and reliance on foreign savings.
With reference to the stable outlook, S&P said CDB will maintain high capitalization to offset the embedded credit risk in its sovereign loan portfolio, particularly as its borrower members continue their fiscal consolidation efforts in 2015.
“We believe that the fiscal reform continued this year, in addition to the further improvement of the external liquidity vulnerabilities of some of CDB’s lowest-rated members, strengthen borrowers’ capacity to service their U.S.dollar-denominated debt to the bank ,” S & P said.
It added that a potential moderate credit deterioration of some of CDB’s borrowing members would have only a limited effect on the Bank’s capital adequacy, by S&P’s calculations