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. AsDB's issue ratings have also been affirmed at 'AAA'/'F1+'. The Short-Term IDR has been affirmed at 'F1+'.

The ratings reflect the strong support from AsDB's shareholders and its intrinsic strengths, in particular its strong capitalisation, conservative risk management and excellent loan book performance.

KEY RATING DRIVERS
AsDB's capitalisation is strong and ranks unfavourably compared with its 'AAA' peers, with equity-to-adjusted assets ratio of 20.5% in 2014 (compared with 20.7% in 2013). Profitability has also decreased in 2014, with ROAE of 2.3%, versus 3.4% in 2013.

In May 2015, the AsDB's Board of Governors agreed to merge the bank's balance sheet with that of its autonomous concessional lending arm, the Asian Development Fund (ADF). The consolidation will become effective in 2017 and, in Fitch's view, will substantially improve AsDB's capital adequacy metrics.

AsDB's strategy remains conservative. Although outstanding private sector loans are increasing (+12.5% in 2014 compared with 2013), lending priority is still given to the sovereign sector, which accounted for 90.37% of the bank's total exposure in 2014.

The performance of AsDB's loan book is excellent (no impairment on its sovereign portfolio), which highlights its preferred creditor status. The average rating of loans remains stable at an estimated 'BBB-' at end-2014, in the higher range of 'AAA' rated MDBs. Fitch understands that the merger with ADF loans portfolio will modestly lower AsDB's average loan rating.

AsDB's balance sheet remains very liquid, with the share of 'AAA' to 'AA' rated treasury assets increasing to 70.2% at end-2014 (versus 57.3% in 2013). AsDB's liquid assets to short-term debt ratio decreased to 175.8% in 2014, compared with 193.5% in 2013. In Fitch's opinion, the consolidation with ADF will improve the bank's overall liquidity.

AsDB's loan portfolio is highly concentrated. The five largest exposures accounted for 77.2% of loans and 258.5% of AsDB's equity, which is high compared with peers. The concentration risk is mitigated by the investment-grade category of the four largest borrowers, China (A+), India (BBB-), Indonesia (BBB-) and the Philippines (BBB-). The consolidation with ADF is expected to decrease AsDB's portfolio concentration.

RATING SENSITIVITIES
Downward pressure on the ratings would arise from the combination of the following factors:
- A downgrade of the US, one of its two largest shareholders, as it would significantly lower the level of 'AAA' rated callable capital.
- A significant decline in the quality of the loan portfolio, resulting either from rising exposure to private sector or from a serious breach of the preferred creditor on sovereign loans.

KEY ASSUMPTIONS
Fitch assumes that highly rated shareholders would honour their commitment to pay callable capital if required.