Credit risk

EBRD faces limited credit risk due to reduced exposure to Russia and Ukraine

BUCHAREST (Romania), March 2 (SeeNews) – The European Bank for Reconstruction and Development (EBRD), along with other creditors in Russia and Ukraine, is facing a potential deterioration in the quality of its portfolio as as the crisis worsens, but it is well protected by its reserves, loan diversification and preferred creditor status, Scope Ratings said on Wednesday.

The EBRD’s credit strengths, including “very strong” financial and institutional profiles and “very high” shareholder support, provide comfortable buffers to the bank’s AAA rating, Scope said in an analysis.

The EBRD (AAA/stable) is a major institutional lender in Ukraine and has equity investments in Russia, but its exposure has declined in recent years, Scope noted.

The bank’s overall loan exposure to Ukraine, Russia and Belarus more than halved to around 2.8 billion euros ($3.1 billion) in January 2022, from approximately €6.2 billion in 2010. In addition, country lending represents approximately 9.4% of the bank’s total lending, down from 40% in 2010. The bank has not signed new projects in Russia since 2014 and recently stopped new signings in Belarus, he added.

On Tuesday, the bank’s board of directors voted to suspend indefinitely EBRD financing and expertise in Russia and Belarus. The decision must be approved by its board of directors within 30 days by a two-thirds majority representing at least three-quarters of the total votes of the members.

Scope analysis indicates that the EBRD is a key institutional player in promoting economic development in Ukraine, with assets under management of around €2.4 billion, or 7% of total assets under development related to development of the bank, mainly related to loans, mainly to industry, commerce and agribusiness, followed by exposure to sovereign and sustainable infrastructure. Equity exposure in the country is at its lowest at 263 million euros, or around 1.3% of the bank’s equity and reserves.

With regard to exposure to loans in Russia, Scope notes that these have decreased significantly, from approximately 4.2 billion euros in 2010 to approximately 150 million euros, or approximately 27% of total exposure to less than 0.5% in January 2022. However, equity exposure remains relatively high at around €700 million, or around 3.5% of the bank’s equity and reserves of 19 .8 billion euros in the third quarter of 2021. Yet of these investments, around a third are in diversified funds, which reduces risk, Scope pointed out.

“However, should the conflict and/or high sanctions persist throughout the year, we expect the currency valuation and depreciation effects on the equity portfolio in Russia to be significant, as these represent approximately 15% of the bank’s total equity investments in January 2022, and thus weigh on the bank’s bottom line in 2022,” Scope Ratings said.

Provision levels for non-performing exposures in the countries concerned are high: non-performing loans amounted to €147 million in Ukraine (provisioned at 42%), €1.3 million in Russia (provisioned at 54%) and €3.5 million in Belarus (provisioned at 54%). at 29%). “Recognizing the prevailing uncertainty, we expect non-performing exposures and associated provisions to increase in 2022, further reducing net earnings,” Scope added.

In 2014, the bank’s non-performing loans increased to 1.2 billion euros from 660 million euros in 2013, leading to an increase in the NPL ratio from 3.3% to 5.6%, writes Scope in analysis. The bank’s NPL levels were already relatively high before the conflict escalated, at €1.6 billion or 5.4% of total lending at the end of the first half of 2021. However, Scope notes positively that the profitability of the EBRD, with an expected net profit of more than 2 billion euros for 2021, provides the bank with significant reserves to absorb losses resulting from the Russia-Ukraine shock this year. At the end of the third quarter of 2021, the accumulated reserves amounted to 13.5 billion euros.

“Essentially, if the bank’s asset quality deteriorates significantly in Ukraine, Russia and Belarus, we would expect the bank to continue to benefit from its track record of exempting debt restructurings from sector exposures. sovereign and public, which make up around 30% of the portfolio in Ukraine,” Scope said.

“Similarly, we would expect its private exposures to be free of transfer and convertibility risk. by the state in Tajikistan. This is an important assumption underlying our AAA rating,” the agency concluded.