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

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

CEB's rating is driven by the bank's intrinsic strengths, particularly its conservative lending strategy, prudent risk management framework, in addition to the excellent performance of its loan book. CEB provides loans to Central/Eastern European countries and Turkey (49% of loans outstanding) and to European public and private entities.

CEB has one of the strongest liquidity profiles of Fitch-rated multi-lateral development banks (MDB). Liquid assets accounted for 39.6% of CEB's total balance sheet at end-2014, and short-term liabilities are well covered by liquid assets.

CEB had no impaired loans despite the challenging operating environment, and is no longer exposed to any Greek counterparties. Overall asset quality has stabilised since 2013, after weakening in 2010-2012. The weighted average rating of the loan portfolio, at 'BBB+', remained unchanged compared to FY13 and the share of investment-grade counterparties is high compared with peers.

CEB's concentration risk remains high, as 32.2% of its loan book was concentrated in its five largest counterparties at end-2014. Credit exposure is dominated by Spanish (12.2% of loan book) and Polish (11.3%) entities; and the loan exposure to Cypriot counterparties remains significant (4.9% of total loans).

CEB's capitalisation is a weakness for its rating relative to other MDBs, with an equity-to adjusted assets ratio of 10.3% at end-2014. Relatively strong profitability has helped stabilise capitalisation metrics, although it did not affect paid-in equity. CEB's leverage is high compared to other MDBs, with a debt/equity ratio of 814.4% at end-2014.

Shareholder support is strong with an average rating of key shareholders of 'AA-' at end-2014. The proportion of shareholders rated 'AA-' and above has stabilised at 48.5% of callable capital, after deteriorating during the 2008-09 crisis.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's expectation that CEB's credit profile will remain commensurate with the 'AA+' rating. CEB's rating is driven primarily by its intrinsic factors (as opposed to support factors), and is consequently sensitive to the evolution of the ratings of its key borrowers. A significant downgrade of key borrowers' ratings would be likely to lead to downward pressure on CEB's rating.

A significant increase in the equity base, either by continued internal capital generation and/or paid-in capital, would provide a stronger capital cushion against potential losses, potentially creating uplift for the rating.

KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
- The ratings are based upon the assumption that CEB maintains a conservative risk management framework and in particular adheres to its strategy of modest growth in its loan portfolio.
- Fitch assumes that highly rated member states will remain committed to responding to any capital call.

The rating actions are as follows:
Long-term foreign and local currency IDR affirmed at 'AA+'; Stable Outlook
Short-term IDR affirmed at 'F1+
Senior unsecured debt affirmed at 'AA+'/'F1+'
Commercial Paper affirmed at 'F1+'.