The credit rating of New Development Bank (hereinafter, NDB, or the Bank) is primarily based on the Bank’s very strong intrinsic financial strengths that stem fr om strong capital adequacy, an adequate risk profile, strong liquidity and funding, as well as its systemic importance to the shareholder founding members that enhances the quality of commitments.
With the five BRICS countries (Brazil, Russia, India, China, and South Africa) as its equal founding shareholders, NDB is an International Financial Institution (IFI) with a mandate to finance infrastructure projects with a strong emphasis on sustainability and promote economic cooperation among the shareholder countries. Additional focus is placed on emerging markets and developing countries (EMDCs). As of end-June 2021, the founding members remain the only shareholders with each owning a fifth of the Bank’s paid-in capital. Bangladesh, the United Arab Emirates (UAE) and Uruguay were announced by the Bank as new members in September 2021. ACRA notes that the Bank’s founding shareholders are to retain the majority collectively at more than 55%, however, many new member states are set to join as per its inception principles.
Key assessment factors
The Bank’s management quality, strategy, and operational transparency are strong. The Bank’s management and governance boards consist of senior industry experts from the shareholder countries with extensive relevant private and public sector experience, including staff who joined NDB from leading multilateral development institutions such as the IMF and World Bank. ACRA believes that the management team and operational effectiveness of NDB are suitable to meet the needs required to run the Bank successfully in terms of risk mitigation and capital generation. The Bank’s financial statements are published on a quarterly basis and all lending and funding projects are publicly disclosed. The Bank continued to expand both at its headquarters in Shanghai as well as via regional offices in the shareholder countries in 2020. The senior management of the Bank is on a rotational basis and in the second half of 2020, the presidency of the Bank transferred from India to Brazil. ACRA notes the lack of vetoing power by shareholders.
NDB’s capital adequacy is strong. As of end-June 2021, NDB’s subscribed capital stood at USD 50 bln, of which USD 10 bln was paid-in capital. In comparison, the total assets of the Bank stood at USD 22.7 bln with Tier 1 capital at 67.99% as of the same period. The Bank is expected to gradually utilize a substantial portion of this capital to finance key infrastructure projects within the jurisdictions of the shareholder countries and throughout other developing countries. However, as of end-June 2021, capital usage was 11.62% as the Bank has been able to tap into its substantial debt programs in local and international capital markets in order to provide funding to projects at member states as per its mandate.
ACRA assesses NDB’s risk profile as adequate. The Bank’s risk governance and management systems are in line with best practices of leading financial institutions. This includes dedicated committees for credit and non-credit risk assessment, thorough know your client (KYC), anti-money laundering (AML), and anti-terrorism funding (ATF) control practices. The Bank continuously reviews its risk management structure and upgrades it by adding new internal regulations phase-by-phase.
As of end-June 2021, India was the largest recipient of credits at USD 3.3 bln, followed by South Africa at USD 2.3 bln, China at USD 1.9 bln, Brazil at USD 1.6 bln, and Russia having received USD 0.8 bln.
In 2020 and 2021, a period which could be defined by the still ongoing COVID-19 global pandemic, the Bank acted quickly in raising funds as the detrimental event became clear, more than USD 4.5 bln in the member states’ and international markets, and disbursing credits to member states for pandemic-relief purposes. As of May 2021, the Bank has already disbursed USD 5 bln of emergency funding for health and social safety expenditures, as well as supporting member states’ economies. This factor, along with further enlarged placements with major financial institutions, resulted in very high concentration on the top-ten counterparties, which drives the adequate risk profile assessment in spite of solid creditworthiness of counterparties and sovereign guarantees.
NDB’s investment portfolio still consists largely of time deposits placed with large investment-grade financial institutions. However, ACRA expects that as the Bank builds its track record and investments in different jurisdictions grow, the structure of the investment portfolio will change significantly.
As of end-June 2021, the Bank did not have any impaired assets. However, ACRA believes that the quality of the Bank’s loan book will be tested as it continues to expand its operations, including in emerging market countries wh ere credit risk is higher than in the BRICS countries. On the other hand, expansion into new markets will help NDB to achieve higher diversity in the portfolio, mitigating the current concentration levels. The Bank sets aside reserves for eventual credit deterioration based on its expected credit loss assessment practice.
ACRA notes the environmental, social and governance (ESG) focus that the bank increasingly emphasizes, as the topic remains a key consideration at its member states because they consist of material shares of the global population and landmass. The Bank has publicly declared its commitment to the Paris Accord on Climate Change and a material portion of its upcoming financing projects are aligned with the Sustainable Development Goals (SDGs) of the Paris Accord.
NDB’s liquidity and funding position is strong. Currently, the majority of NDB’s funding is in USD as the Bank’s capital is provided in that currency. In order to finance projects within the shareholder countries and as per its mandate, the Bank often resorts to raising funds in the member states’ local markets and in their respective currencies.
The Bank has registered substantial debt programs in different markets and currencies, including RMB 20 bln in China, ZAR 10 bln in South Africa, RUB 100 bln in Russia, USD 50 bln EMTN (Euro Medium-term Note), as well as USD 8 bln ECP (Eurocommercial Paper), as of end-June 2021.
The Bank continues to take advantage of the substantial programs at its disposal; its credit journey was given a boost in early 2020 as the global pandemic triggered reliable funding needs in essential sectors in its member states. Placements since the start of the pandemic include a USD 1.5 bln COVID response bond in international markets in June 2020, as well as a RMB 5 bln (USD 700 mln) Coronavirus Combating Bond in April 2020, a RMB 2 bln (USD 300 mln) bond in July 2020, a USD 2 bln bond in September 2020, a RMB 5 bln in March 2021, and a USD 1.5 bln in April 2021.
ACRA assesses support from shareholder countries as moderately high. This assessment is supported by two elements: ACRA’s view that the importance of NDB’s operations for shareholder countries is at the highest possible level and the adequate average creditworthiness assessment of shareholder countries.
NDB’s credit rating is AAA(RU), outlook Stable, under the national scale for the Russian Federation as per the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation.
Key assumptions
-
Maintaining systemic importance to the shareholder countries;
-
Maintaining robust credit underwriting standards and as a result, maintaining strong asset quality;
-
Maintaining very high capitalization levels within the 12 to 18-month horizon despite some usage for credit disbursement;
-
Continued refinement of governance and risk management policies.
Potential outlook or rating change factors under the international scale
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Rating upgrade not possible as the current rating is the highest possible on ACRA’s international rating scale.
A negative rating action may be prompted by:
-
Substantial deterioration in the creditworthiness of shareholder countries resulting in a weaker credit profile for NDB;
-
Decrease in systemic importance for key shareholder countries;
-
Substantial deterioration in capital adequacy;
-
Substantial deterioration in liquidity and funding;
-
Continued persistence of concentration of assets.
Potential outlook or rating change factors under the national scale for the Russian Federation
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A negative rating action may be prompted by:
- Multi-notch downgrade of NDB’s credit rating under the international scale.
Rating components under the international scale
SCA: aaa.
Adjustments: none.
Regulatory disclosure
The credit rating has been assigned to New Development Bank under the international scale based on the Methodology for Assigning Credit Ratings under the International Scale to International Financial Institutions and Other Supranational Development Institutions. The credit rating has been assigned to New Development Bank under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit ratings under the international scale and the national scale for the Russian Federation were published by ACRA for the first time on January 23, 2020. The credit ratings and credit rating outlooks for New Development Bank are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings were assigned based on data provided by New Development Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of New Development Bank. The credit ratings are solicited, and New Development Bank participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to New Development Bank. No conflicts of interest were discovered in the course of the credit rating assignment.
