OREANDA-NEWS. Fitch Ratings has affirmed the European Bank for Reconstruction and Development's (EBRD) Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and its Short-term IDR at 'F1+'. A full list of all rating actions follows at the end of this rating action commentary.

KEY RATING DRIVERS
EBRD's ratings are underpinned by its intrinsic strength and strong capitalisation, as evidenced by its equity-to-adjusted-asset ratio of 26.0% as of June 2015 (2013: 30.4%), in line with 'AAA' peers. Leverage, with a debt-to-equity ratio of 272.8% at June 2015, is moderate compared with regional MDBs. Fitch expects capitalisation to erode in the coming years due to the projected rise in lending, which will not be accompanied by an injection of fresh capital. However, it should remain commensurate with a 'AAA' rating.

In 2014, EBRD's usually volatile profitability was mainly impacted by the depreciation of the Russian rouble, which translated into a EUR748m loss on its equity portfolio. Combined with major loan impairments related to the bank's lending exposure in Ukraine, EBRD posted a net loss of 1.41% of total average assets as of December 2014. This trend has been partially reversed as of June 2015 (net profit of EUR588m), as a result of a revaluation of EBRD's equity investment portfolio and a lower amount of loan loss provisions.

EBRD's preferred-creditor status (PCS) does not directly apply to private sector exposures but Fitch expects that it will continue to provide effective protection against the risk of exchange controls on foreign currency loans preventing such exposures being repaid. EBRD's NPLs have reached 5.7% of gross loans in June 2015 (2014: 5.6%), in line with the deterioration of the quality of loans to Ukraine. The average rating of loans has deteriorated to 'B+' from 'BB-', following the downgrades of Ukraine, Serbia, Croatia and Russia, but still remains consistent with an 'AAA' rating given the EBRD's other credit strengths. Asset quality may not recover to previous levels, as a result of EBRD's operations in Ukraine and increasing exposure to challenging regions (especially the southern and eastern Mediterranean region).

EBRD remains heavily exposed to Russia and Ukraine (with a direct exposure of 18.8% and 10.9% of banking portfolio as of June 2015, respectively, excluding guarantees and regional funds). However, exposure to Russia has declined since 2013, as EBRD will not extend any additional financing to this country until further notice. EBRD's portfolio is more diversified than those of other regional MDBs, as evidenced by the rapid increase in operations in Turkey and in the southern and eastern Mediterranean region.

The bank's risk management framework remains conservative, as EBRD abides by strict, self-imposed capitalisation, gearing, liquidity and underwriting criteria. Liquid assets must account for at least 45% of the next three years' cash requirements. As of June 2015, 56.6% of treasury assets invested in bond or bank placements were rated 'AA-' or higher.

Although support is not the main driver of EBRD's 'AAA' rating, the average rating of EBRD's 66 shareholders remains high, at 'AA', translating into strong capacity to support the bank.

RATING SENSITIVITIES
The following developments could, individually or collectively, affect EBRD's ratings:

--Substantial deterioration in asset quality, resulting from the downgrade of large borrowers, would put pressure on the rating. This could mainly stem from a multi-notch downgrade of the sovereign ratings in the main countries of operation.

--A significant deterioration in capitalisation, following heavy losses on equity investments or on lending operations, would be rating negative.

--A breach of PCS by a large country of operation, such as Russia or Ukraine, would have negative rating implications, given the importance of PCS in protecting the bank against sovereign default or an embargo on foreign exchange.

KEY ASSUMPTIONS
Fitch assumes that EBRD will continue to abide by a cautious prudential framework on capitalisation, leverage, liquidity and loan selection.

The full list of rating actions is as follow:

Long-term IDR: affirmed at 'AAA', Outlook Stable
Short-term IDR: affirmed at 'F1+'
Market Linked Securities, LT rating affirmed at 'AAA' (emr)
Senior Unsecured, LT rating affirmed at 'AAA'
Commercial Paper, ST rating affirmed at 'F1+'
Senior Unsecured, ST rating affirmed at 'F1+'