OREANDA-NEWS. January 12, 2011. Fitch Ratings has changed Eurasian Development Bank's (EDB) Outlook to Positive from Negative. It has also affirmed EDB's Long-term Issuer Default Rating (IDR) at BBB' and  upgraded its Short-term IDR to 'F2' from 'F3'.

The Outlook change and Short-term IDR upgrade reflect the proven capacity of the bank, despite its short track record, to develop its operations while maintaining excellent asset quality, strong capitalisation and a high level of liquidity. The Outlook change also follows the recent change in Outlook on Russian Federation (RF; 'BBB'/'F3') and the Republic of Kazakhstan (RK; 'BBB- /'F3'), which are EDB's main shareholders.

So far, the RF and RK have been the main recipients of the EDB's financing: they accounted for 98.2% of EDB's portfolio at end-June 2010. The bank's operations are concentrated on the private sector; only 4.2% of loans benefited from a public-sector guarantee at end-June 2010. Since the creation of EDB, the portfolio has grown rapidly to reach USD853.3m at end-June 2010. Despite the difficulties of the financial sector in Kazakhstan since 2009, the bank has suffered only marginal credit losses, and had a single impaired loan at end-September 2010. Concentration risk is limited by the bank's large buffer of equity; its five largest exposures totalled 24.6% of equity at end-June 2010,  far below comparable peers'.

EDB is not subject to banking regulation but has to abide by some internal prudential ratios. Debt is limited to 200% of equity and short-term assets must cover at least 100% of short-term debt. At end-June 2010, this ratio amounted to 994%. EDB has high levels of liquidity, despite the long-term nature of its lending operations. A large share of the capital injected into EDB at inception has been invested in a treasury portfolio, made up of bank placements and securities. This portfolio accounted for 67% of total assets at end-June 2010. Despite rapid lending growth, capitalisation remains comfortable: at end-June 2010, Fitch's usable capital/required capital ratio of 3.2x provided headroom  for operational developments.

EDB's ratings also reflect support from its two founding members states, the RF and the RK, which own 66% and 33% of its capital respectively; the rest is owned by Armenia, Tajikistan and, since June 2010, Belarus. Although the bank is open to membership from other Eurasian Economic Community (EurAsEC) countries, Fitch expects its two key member states to maintain a majority stake in the  EDB's capital, with the RF's holding not falling below 50% plus one share.  Unlike at other multilateral development banks (MDBs), shareholders have not  subscribed to callable shares. EDB benefits from privileges and immunities  conferred by its shareholders. In particular, preferred creditor status gives it priority of repayment in the event of a sovereign default and protects it  against restrictions on FX transfers. Fitch believes support would be provided, if needed, from the shareholders.

An upgrade in the Long-term IDR could be triggered by continuous improvement in performance; in particular, the agency will focus on the capacity of the bank to maintain low levels of impaired loans while its assets expand. A change in  the RF's ratings could also prompt a review of EDB's ratings. However, some     uncertainty remains regarding the shareholders' propensity to support the bank, as its liabilities are not formally guaranteed by the shareholders.

EDB is a MDB created by RF and RK to facilitate the development of market economies and foster economic integration in EurAsEC, which includes the RF, the RK, Belarus, the Kyrgyz Republic, Uzbekistan and Tajikistan. Headquartered in Almaty, the bank had 212 staff at end-June 2010.