OREANDA-NEWS. Fitch Ratings has affirmed Inter-American Development Bank's (IaDB) Long-term foreign currency Issuer Default Rating (IDR) at 'AAA' with Stable Outlook. The issue ratings on IaDB's senior unsecured bonds have also been affirmed at 'AAA'. The Short-term rating has been affirmed at F1+.

KEY RATING DRIVERS
IaDB's 'AAA' IDR reflects the following key rating drivers:

Fitch deems IaDB's capitalisation in line with 'AAA' rated peers with an equity-to-asset ratio of 22% at June 2015. Fitch expects capitalisation to remain broadly stable in the coming years, as a result of slower lending activity.

Lending has decelerated in 2015, with approvals of USD12.7bn at end-2014 and USD4.8bn at Sept-2015 (USD13.3bn and USD6.4bn at end-2013 and September 2014, respectively), due to lower demand in member countries, especially Brazil. Sovereign-guaranteed loans remain the vast majority of total operations and will likely increase, as IaDB runs down existing private sector loans.

IaDB will progressively transfer its private sector activities to Inter-American Investment Corp (IIC, AAA / Stable), starting in 2016. While outstanding loans will remain on IaDB's balance sheet during the phase-in period ending in 2023, most new private sector loans will be extended by IIC. In return, IIC will receive capital contributions from its shareholders, including USD725m, to be drawn on IaDB's net income from 2018 and subject to annual approvals by the Management Board. In Fitch's view, the operation will have no impact on IaDB's risk profile.

The 'BB' average rating of loans is likely to be resilient to the downgrade in October 2015 of Brazil (BBB-/Negative), which is IaDB's largest credit exposure with 17.9% of loans at June 2015. The rise in non-performing private sector loans (6.5% of private sector exposure at end-June 2015) mostly reflects two specific troubled loans. While IaDB holds a large exposure to Argentina (46% of equity at June 2015), the country continues to make repayments to IaDB, illustrating its willingness to maintain a good relationship with the bank. Argentina's repayments to IADB are not affected by the 2013 New York court decision that prevented the sovereign from making payments to bondholders pending the resolution of its dispute with hold-out creditors.

Concentration remains high, even by industry standards, and is the main rating weakness. The largest (Brazil) and the five largest exposures (Brazil, Argentina, Mexico, Colombia and Ecuador) accounted for 64.1% and 200.6% of equity, respectively, at June 2015.

The bank recently tightened its liquidity policy and strengthened its liquidity buffers. At end-2014, treasury assets covered 189.7% of short-term liabilities (end-2013: 183.5%), and liquid assets accounted for 29.7% of total assets at June-2015 (end-2013: 22.1%), in the medium range of peers.

Although IaDB's rating is based on intrinsic drivers, Fitch considers that support from the 48 shareholders is strong, as evidenced by the timely disbursement of capital since 2012's capital increase. As of end-June 2015, the entire debt stock (net of highly rated treasury assets) was covered by callable capital provided by shareholders rated 'AAA', which illustrates shareholders strong capacity to support the bank. However, Argentina's default in 2014 has lowered the average rating of key shareholders to'A-' ('A' at end-2013).

RATING SENSITIVITIES
The triggers that could, individually or collectively affect IaDB's ratings are the following:
- A prolonged and significant decline in capitalisation related to asset losses or higher than expected loan growth.
- A payment default on debt owed to IaDB by one or several large sovereign borrowers, thereby undermining the bank's preferred creditor status, as concentration is a key weakness of the rating.

KEY ASSUMPTIONS
Fitch assumes that IaDB will continue maintaining a cautious prudential framework on leverage, liquidity and credit risk.

The full list of rating actions is as follow:

- Long-term IDR: affirmed at 'AAA', Outlook Stable
- Short-term IDR: affirmed at 'F1+'
- Senior unsecured notes: affirmed at 'AAA'.