OREANDA-NEWS. Fitch Ratings has affirmed the Asian Development Bank's (AsDB) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook. The Short-Term Foreign Currency IDR has been affirmed at 'F1+'. AsDB's issue ratings have also been affirmed at 'AAA'/'F1+'.

The ratings reflect AsDB's intrinsic strengths, in particular the bank's strong capitalisation, sound liquidity and excellent loan book performance.

KEY RATING DRIVERS

AsDB's strong capitalisation is a key credit strength. The equity/adjusted assets ratio stood at 20.2% at end-2015 and from 2017 will increase significantly as a result of the consolidation of AsDB's concessional arm (Asian Development Fund (ADF)) with its ordinary operations balance sheet, as ADF's capital base almost entirely comprises paid-in contributions. Internal capital generation improved in 2015, mainly due to positive fair value adjustments on derivative instruments and higher interest revenues.

Fitch deems the business profile of AsDB as "low-risk", given the size of its banking portfolio, largely concentrated on sovereign lending, prudent strategy and high governance standards. Fitch expects AsDB to maintain high disbursement volumes in sovereign lending and a fairly limited exposure to the non-sovereign sector (9.45% at end-2015). The operating environment is assessed as "medium-risk", reflecting the overall medium-to-low credit quality of borrowing member states, and the low-to-intermediate national income level of a large number of Asian countries.

AsDB has a very low exposure to credit risk. The quality of AsDB's loan book remains at the higher-end of 'AAA' peers, with an average rating of the bank's loans at 'BBB-' at end-2015. In addition, AsDB benefits from preferred creditor status on its sovereign loans. Fitch does not expect the consolidation to materially impact AsDB's very low non-performing loan (NPL) ratio (0.03% at end-2015). However, based on Fitch's projections, the overall quality of its loans book will deteriorate, with the average loan rating expected to reach 'BB+' over the next three years.

The concentration of AsDB's lending portfolio is a key rating weakness, with the five largest borrowers accounting for 73.6% of total loans at end-2015. However, the bank's four largest borrowers are investment-grade: China (A+/Stable), India (BBB-/Stable), Indonesia (BBB/Stable) and the Philippines (BBB-/Positive). The amalgamation of the ADF will reduce concentration in the medium-term, with the five largest borrowers expected to account for 60%-65% of total loans.

AsDB's liquidity buffers are consistent with a 'AAA' rating, with a liquid-assets-to-short-term-debt ratio of 170% at end-2015. Fitch expects the coverage of short-term debt by liquid assets to improve in the coming years, as ADF is not funded by debt and holds a sizeable liquidity buffer. Fitch expects the share of 'AA' to 'AAA' treasury assets to stabilise at around 65% in the coming years (2015: 71.4%) The bank benefits from strong access to capital markets and a diversified investor base.

The capacity of shareholders to support the bank has slightly weakened due to net debt no longer being covered by callable capital from 'AAA' shareholders since 2015, increased leverage and a decrease in the value of special drawings rights (SDRs)-labelled callable capital. However, given the excellent intrinsic strength of the bank, no credit uplift from support is needed to achieve an overall rating of 'AAA'.

RATING SENSITIVITIES

Downward pressure on the ratings would arise from the combination of the following factors:

-A decline in the quality of its loan portfolio, resulting from rising exposure to private sector operations, deterioration in borrower's credit quality, or a material breach of its preferred creditor status on sovereign loans. Fitch will closely monitor the concentration of the loan portfolio

-A significant loosening of risk management and governance standards and a material change in the bank's prudent strategy

KEY ASSUMPTIONS

Fitch assumes that highly rated shareholders would honour their commitment to pay callable capital if required. The agency also assumes the AsDB will consolidate its ordinary resources balance sheet with ADF effective on 1 January 2017.