Fitch Ratings has affirmed Islamic Development Bank’s (IDB) long-term issuer default rating (IDR) at ‘AAA’ and its short-term IDR at ‘F1+’. The outlook for the long-term IDR is stable. “The ratings primarily reflect IDB’s strong capitalisation, low leverage and strong support it derives from its member states,” Fitch in a statement said.
“Exposure to credit risk is mitigated by strict internal country and counterparty limits, and by preferred creditor status, which grants the bank priority over other creditors in a sovereign default. As a result, impaired operations only accounted for 2% of gross non-equity operations at end-1430H and were adequately provisioned for,” Fitch added.
IDB’s capital is owned by 56 countries, all members of the Organisation of the Islamic Conference (OIC). Its main shareholder is Saudi Arabia (‘AA-‘/Stable), which owns 26.8% of subscribed capital. Although the proportion of highly rated shareholders is lower than in other ‘AAA’-rated multilateral development banks (MDBs), with no shareholders rated ‘AAA’, their willingness to provide support has been demonstrated by continuous capital increases since 2005.
Financing is predominantly extended to sovereign or sovereign-guaranteed entities, which accounted for 87.8% of non-equity operations at end-1430H (equivalent to 2009 in the Gregorian calendar). Like other MDBs, IDB’s non-equity portfolio includes a large proportion of speculative-grade counterparties (69.3% at end-1430H).
“Other risks are also subject to strict internal prudential rules. Credit risk on liquid assets is limited through large recourse to diversified investment-grade counterparties, which enabled the bank to go through the financial crisis with no loss on liquid assets. Although fair-value losses on equity stakes have not yet been fully recovered, equity risk is limited by individual ceilings,” Fitch explained.
The bank’s intrinsic equity base is strong, with equity accounting for 67.5% of assets at end-1430H. Leverage is very low compared with that of other MDBs: the bank is subject to a strict debt/equity ratio limit of 50%.
As part of its countercyclical strategy, Fitch said, the bank increased its operations in 1430H by a significant 19.1%, slightly eroding capitalisation: Fitch’s ratio of usable capital/required capital fell to 5.5x at end-1430H from 6x at end-1429H (2008).
Fitch expects the bank’s capitalisation to remain strong, due to a further capital increase in 1431H, which will strengthen equity.