Fitch Ratings has affirmed the African Export-Import Bank’s (Afreximbank) long-term issuer default rating (IDR) at BBB- with a stable outlook and short-term IDR at F3.
Afreximbank’s ratings primarily reflect the bank’s sound structural asset quality despite its risky business environment. Afreximbank’s operations are overwhelmingly made of short-term and self-liquidating trade finance loans extended to African banks and corporates. Through the extensive recourse to trade receivable collateralisation, transaction structures often shift a substantial part of the bank’s credit risk to entities located in OECD countries and mitigate the concentration risk on some countries (Nigeria and Zimbabwe), sectors and specific obligors. At June-2011, 67.6% of net loans were collateralised with trade receivables, guarantees or cash deposits. The bank also benefits from a form of preferred creditor status in its countries of operations.
Afreximbank’s asset quality is therefore better than usually observed for financial institutions operating in Africa. Impaired loans, which have been regularly decreasing since 2007, accounted for 0.5% of gross loans at June-2011, and were adequately covered by loan loss reserves.
The bank has sharply increased operations since 2009 to sustain trade development in Africa while private financing flows to the continent were drying up. This has affected capitalisation, the Basel II ratio of equity to assets fell to 20.7% at June-2011 from 31.4% at end-2009. The bank intends to maintain it above 20% in the coming years, through recourse to fresh additional capital by new shareholders. The affirmation of the ratings takes into account the forthcoming capital increase in the coming months.
In line with dynamic lending growth, leverage rose significantly to 368.4% at June-2011, from 230.4% at end-2009. Liquidity is moderate in absolute terms compared to most multilateral development banks, with bank deposits covering 21.7% of short-term liabilities at end-2010. However, liquidity is enhanced by the short tenor of loans (with an average maturity of 11 months at end-2010) and available committed credit lines of USD619m at June-2011, covering an additional 76.9% of short-term debt.
Support is provided by the bank’s 122 public and private shareholders, which have paid in 40% of their capital commitment. The remaining share, accounting for $249.6million at June-2011, can be called by the bank if needed. Some shareholders, such as the African Development Bank (AAA/Stable) benefit from high ratings, and the bank’s statutes strongly entice shareholders to honour their commitment (through significant penalties) but the overall quality of callable capital remains weak, with an estimated average rating of ‘B+’ at June-2011.
Contrary to most multilateral development banks, Afreximbank is a profit-oriented institution that distributes around a fifth of its net income in dividends. It has constantly been profitable since inception in 1993. Even though profitability has recently eroded due to rising operational and borrowing costs, it still remains comfortable, with return on assets and return on equity at 2.7% and 10.1% respectively at end-2010.
Afreximbank is a specialised supranational development finance institution, established in 1993 to finance and promote trade between African countries and between Africa and the rest of the world. It operates as a profit-oriented institution with a focus on the private sector.