Fitch Ratings has affirmed New Development Bank's (NDB) Long-Term Issuer Default Rating (IDR) at 'AA+' with a Stable Outlook. Fitch has also affirmed NDB's Short-Term IDR at 'F1+'.

NDB's 'AA+' rating continues to be driven by its existing and expected Standalone Credit Profile (SCP), based on Fitch's long-term projections. Given NDB's relatively early years of development, Fitch bases its projections on a seven-year forecast period (2021-2027). The bank's SCP is underpinned by its solvency assessment of 'aa', which is the lower of its solvency and liquidity assessments. The bank's liquidity is assessed at 'aaa'. In Fitch's view, NDB operates in a 'medium-risk' business environment, which translates into a positive adjustment of one notch above its solvency assessment, resulting in an overall SCP of 'aa+'.

Over the past 15 months, NDB has supported its member states (MS) with a USD10 billion Covid-19 crisis response package, to provide financing for both healthcare services as well as supporting MS' longer-term economic recovery. By the end of June 2021, USD9 billion of this package had been approved, with USD6.4 billion disbursed. All loans under this package are either directly to the sovereign MS or sovereign-guaranteed. NDB has not participated in any Covid-19-related deferral scheme with its borrowers, as has been the case at other multilateral development banks (MDB) over the past year.

Fitch continues to consider NDB's capitalisation as 'excellent'. NDB was endowed with subscribed paid-in capital of USD10 billion, of which over 80% had been received from the bank's five MS at end-June 2021. Fitch notes the paid-in capital arrears of Brazil (USD167 million) due to delays in Congress approval in Brazil and the re-direction of funds to support domestic efforts in response to Covid-19, which Fitch expects to be cleared over the coming months. The 'excellent' assessment is principally driven by Fitch's expectation that the equity-to-assets ratio and Fitch's risk-weighted capitalisation (FRA) ratio will remain above the 'excellent' thresholds of 25% and 35%, respectively. Fitch expects the equity-to-assets ratio to be just above 25% in 2027 and the FRA ratio to be around 40-45%.

In terms of profitability, Fitch continues to expect NDB's internal capital generation (ICG) to average around 2.0% per year between 2021 and 2027. This healthy ICG is in line with our expectations that NDB will continue to benefit from relatively high net interest margins on its non-sovereign operations (expected to account for about 20% of total loans) and will continue to remain a streamlined organisation, despite the expected move to significantly larger new headquarters.

Our assessment of NDB's risk profile is unchanged at 'low', which balances the bank's 'low' credit risk profile, its 'strong' risk management policies as well as its 'high-risk' concentration metrics. Fitch understands that NDB will lend to sovereign and non-sovereign entities based within its five MS and expects the average rating of the loan portfolio to be 'BB+' by 2027. This expectation is unchanged from last year. However, since the last review of NDB, Fitch downgraded the sovereign rating of South Africa to 'BB-' from 'BB' in November 2020 and its Outlook is Negative, as are the Outlooks on the sovereign ratings of India (BBB-) and Brazil (BB-).

In Fitch's view, the bank will benefit from 'strong' preferred creditor status (PCS), mainly reflecting repayment priority from its sovereign borrowers, which we expect to account for around 80% of total exposures by end-2027. After adjusting for NDB's 'strong' level of PCS (providing a two-notch uplift), this translates into a projected average rating of loans of 'BBB' for NDB, a high level relative to the Fitch-rated supranationals universe.

Fitch assesses NDB's risk management policies as 'strong', mainly reflecting the bank's self-imposed rules, primarily on capitalisation and liquidity metrics. Most of NDB's policies are prudent and in line with 'AAA' rated peers, including the bank's minimum equity/assets prudential threshold of 25%, adherence to which is instrumental in the maintenance of the bank's current solvency assessment. The bank's rules on concentration restrict any country exposure (sovereign plus non-sovereign) to the lower of 20% of subscribed capital or 30% of total approved loans. Since the last rating review, the bank's policy of assessing sovereign credit risk has changed. Previously, the bank took the highest sovereign rating for its MS from each of the three main credit rating agencies but it now takes the average, which is more in line with common practice amongst MDBs.

NDB's business environment assessment is unchanged at 'medium-risk', which translates into a one-notch uplift to the SCP. NDB's 'medium-risk' operating environment reflects the 'medium' credit quality and political risk in most countries of operations, which may be tested if the bank's limited shareholder base experience multiple negative sovereign rating actions. The 'medium risk' assessment also reflects the strong operational support we expect the bank will receive from its MS, with an already tangible example of this support being NDB's new headquarters currently being built in Shanghai, funded by the Chinese authorities.

NDB's liquidity is still assessed at 'aaa', mainly reflecting the 'excellent' liquidity buffers the bank is expected to maintain, relative to its short-term financial commitments, consistent with its stringent policy limits. The minimum rating level for treasury investments is 'A-', subject to a carve-out that allows 10% of treasury assets to be rated lower than 'A-' but at least investment grade. Based on indications from the bank's management, Fitch expects that around 65-70% will be invested in assets rated 'AA-' or higher by 2027. The share of treasury assets rated above 'AA-' (14% in June 2021) is currently well below our long-term expectation.

Propensity to support is considered 'strong' and therefore Fitch applies no discount or credit to the capacity to support. The high ratio of paid-in to subscribed capital (20%) highlights the strong shareholders' commitment to provide support to the bank.

Fitch Ratings