OREANDA-NEWS. February 11, 2016. Fitch Ratings has affirmed the International Bank for Reconstruction and Development Bank's (IBRD) Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and its Short-term IDR at 'F1+'. IBRD's senior unsecured debt has also been affirmed at 'AAA'.

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

IBRD's ratings are primarily driven by intrinsic strengths, including its excellent asset quality. Loans extended to investment-grade borrowers accounted for 78.0% of gross loans at end-June 2015, higher than peers. As IBRD's loan portfolio is exclusively directed to sovereigns, it is protected by its preferred creditor status. At end-June 2015, the only non-performing loan (NPL) was to Zimbabwe (0.3% of gross loans). The average rating of loans was stable at 'BBB-'at June 2015, among the highest of its peers. Fitch expects this rating would remain resilient to the downgrade of IBRD's top borrowers (Brazil, Mexico, China, India and Indonesia).

IBRD's liquidity is good, with 75.8% of the portfolio rated 'AA-' or higher. However, IBRD's liquidity has typically been lower than other 'AAA' rated peers, with liquid assets covering short-term debt by just 123.2% at end-June 2015. Prudent management and the short-term duration of the liquidity portfolio enhance IBRD's liquidity profile. IBRD also enjoys good access to international capital markets and a diversified source of funding across investors and currencies.

Capitalisation is robust and consistent with the 'AAA' rated multilateral development banks (MDB), but is at the lower end of the 'AAA' spectrum, with an equity-to-adjusted assets ratio of 18.3% at June 2015 (2014: 18.4%). As part of a capital increase initiated in 2012, Fitch expects IBRD to receive another USD1.4bn paid-in capital in the coming years.

Lending approvals increased by 26.5% in 2015, a record high since 2010. Consequently, Fitch expects outstanding loans to grow by 5% on average in the coming years. Despite the expected proceeds from capital increase, acceleration in lending activity should slightly deteriorate capitalisation metrics throughout the rating horizon.

Concentration risk is a key risk for MDBs, including IBRD. The share of the five largest exposures as a proportion of IBRD's total exposure was 43.2% at end-June 2015, and is relatively low compared with 'AAA' regional MDBs. However, Fitch expects this metric to worsen slightly over the forecast horizon due to the slight loosening of the single borrower limits on individual countries in 2014.

Shareholder support is very strong, although not a key rating factor. Capital is held by 188 member states, with the US (AAA/Stable) holding the largest share (17.0% of callable capital). Most of the capital takes the form of callable capital, which the member states commit to provide in case of need. Fitch deems shareholders' ability to support the bank as strong, in line with peers; their willingness to support the bank is excellent given its visibility for member states. In the event of a downgrade of the US, Fitch expects support for the IBRD to be negatively affected, though the impact on IBRD's ratings would be limited as long as the bank's intrinsic features remain robust.

RATING SENSITIVITIES
The Outlook on International Bank for Reconstruction and Development's Issuer Default Rating (IDR) is Stable. The factors that could, individually or collectively affect IBRD's ratings are:

A deterioration in capitalisation due to a rapid increase in lending or substantial credit or market losses would negatively affect the ratings.

A significant deterioration in the ratings of the IBRD's large borrowers, leading to a rise in non-performing assets, would likely put downward pressure on its ratings.

KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
- Fitch assumes that most borrowing member states, even if experiencing severe difficulties, will preserve the bank's preferred creditor status should they decide to default selectively on their debt.
- Fitch assumes that IBRD will maintain its cautious stance on risk management and governance.