OREANDA-NEWS. Fitch Ratings has affirmed the Council of Europe Development Bank's (CEB) Long-Term Issuer Default Ratings (IDR) at 'AA+' with a Stable Outlook and Short-Term IDR at 'F1+'. A full list of rating actions can be found at the end of this rating action commentary.

KEY RATING DRIVERS

The affirmation and Stable Outlook reflect the following key rating factors:

The 'AA+' IDRs are fully driven by the intrinsic credit quality of CEB, notably its high level of solvency (assessed at aa-), its excellent liquidity (assessed at aaa) and a low-risk business environment it operates in, which provides an uplift of two notches to the solvency assessment of 'aa-', resulting in an intrinsic rating of 'aa+'.

The bank's strong solvency assessment is driven by the CEB's very low risk profile, notably the excellent performance of its loan book (no loan impairment). This ability to manage a fully-performing loan book is made possible by CEB's strategy to solely focus the bank's lending programmes on its European member countries (80.5% of loans were to investment-grade counterparts at end-2015).

Total assets are likely to remain broadly stable. We expect loans to increase significantly to provide support to projects targeting the long-term integration of migrants and refugees. However, this will not immediately affect capitalisation owing to CEB's strategy of replacing liquid assets with loans, and projected increases in equity through internal capital generation, albeit at a slower pace than in previous years. Nevertheless, the expected accelerated lending is viewed as a key risk to the ratings, as it is not supported by additional capital injection from shareholders, and the reduction in treasury assets may affect liquidity over time.

The very low risk profile of CEB also reflects the bank's strong risk management, strong average rating of loans (BBB+) and low counterparty loan concentration, as assessed under Fitch's new supranationals rating criteria, with 31.6% of CEB's loan book concentrated in its five largest counterparties.

Fitch's solvency assessment also reflects the moderate capitalisation of CEB. This is driven by CEB's equity-to-adjusted assets ratio of 11.1% at end-2015, which is weak compared with other Fitch-rated multilateral development banks (MDBs). Fitch expects this figure to remain stable at approximately 11% over the medium term.

CEB enjoys one of the strongest liquidity profile among Fitch-rated MDBs. Liquid assets covered 288% of short-term liabilities at end-2015. The quality of the liquidity portfolio is strong, with 58.8% of treasury assets rated 'AA-' or above, and the bank has excellent access to financial markets.

CEB operates in a low-risk business environment. Its business profile is medium risk according to Fitch's criteria; this reflects the modest size of CEB's banking portfolio and the large share of non-sovereign loan book (52.6% end-2015 of banking exposure), as well as the bank's excellent governance standards. The strategy of the bank is driven by its public mission mandate and strategic objectives have been adjusted following the migrants crisis, which will translate into accelerated lending.

A particular challenge that the CEB has faced this year is the migrant and refugee crisis in Europe. The Migrant and Refugee Fund (MRF) was established in October 2015 by CEB to provide immediate finance to member countries most in need of support. The MRF has been funded by contributions from CEB member states, the European Investment Bank and CEB itself. As of end-June 2016, the CEB has approved EUR16.6m in grants towards 11 MRF projects.

The operating environment presents low risks, in Fitch's view. This assessment is driven by the focus of CEB's financing operations on European states, which are, overall, high-income, politically stable countries. This is also supported by the bank's headquarters being located in Paris.

CEB does not benefit from an uplift above its intrinsic rating due to a lack of extraordinary support from shareholders. Although the average rating of key shareholders stood at 'AA-' at end-2015, callable capital does not provide full coverage of net debt. In addition, in Fitch's view, propensity of member states to bring extraordinary support is weak compared with peers, as illustrated by the absence of paid-in capital injection from shareholders in the last two decades.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's expectation that CEB's credit profile will remain commensurate with the bank's 'AA+' IDR.

However, future developments that could, individually or collectively, result in negative rating action include:

- Deterioration in the bank's capitalisation metrics.

- A substantial deterioration in CEB's average rating of loans or deterioration in the bank's underwriting standards.

- Rapid growth in lending affecting capitalisation metrics, which would have a negative impact on the ratings.

Conversely, future developments that could, individually or collectively, result in positive rating action include:

- A capital injection from shareholders strengthening the solvency of the bank, which would have a positive effect on the Long-Term rating.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

- CEB's conservative risk management framework is maintained.

- Slight deterioration in credit quality of CEB's portfolio over the medium term.

The full list of rating actions is as follows:

Long-Term IDRs affirmed at 'AA+'; Stable Outlook

Short-Term IDR affirmed at 'F1+'

Senior unsecured debt affirmed at 'AA+'/'F1+'

Commercial paper affirmed at 'F1+'