Moody’s Investors Service has confirmed the East African Development Bank’s (EADB) Baa3 long-term issuer rating and maintained its stable outlook.
The affirmation of the rating is based on several factors. Firstly, EADB’s strong capital position is a significant mitigating factor despite concerns about low development asset credit quality and a history of high non-performing assets (NPAs). Additionally, the bank benefits from relatively robust liquidity levels, although its funding structure is less diversified compared to its peers.
Moody’s assessment of member support takes into account the substantial callable capital but also considers the limited ability of shareholders to provide support, given the low credit ratings of the EADB’s four main shareholders: Kenya (B3 negative), Rwanda (B2 stable), Tanzania (B2 positive), and Uganda (B2 negative).
The stable outlook reflects a balance of risks. Despite challenges in the operating environment and a concentrated loan portfolio, the potential for capital erosion is reduced due to the bank’s low leverage ratio and cautious approach to new lending. Moody’s expects the bank to enhance its risk management framework while maintaining strong capital adequacy and prudent liquidity levels.
Here are key points from the rationale:
Strong Capital Position Mitigates Low Asset Quality:
EADB’s leverage ratio has improved from 126% in 2017 to 102% in 2022, making it one of the lowest among rated multilateral development banks (MDBs). While concentration risk is a concern, the bank’s strong capital position helps offset low development asset credit quality.
Liquidity Supported by Prudent Management:
EADB has maintained liquidity with liquid resources more than covering net cash outflows. However, its funding relies on a limited investor base, primarily lines of credit from MDBs and regional financial institutions.
Limited Shareholder Support:
Shareholders have limited ability to provide support due to their low credit ratings, reducing the bank’s uplift from its callable capital buffer.
Rationale for the Stable Outlook:
The stable outlook reflects a balance of risks, considering the challenging operating environment and concentration of the bank’s portfolio. However, potential capital erosion is mitigated by low leverage and cautious lending practices.
Environmental, Social, and Governance (ESG) Considerations:
EADB has moderate exposure to environmental risks and is working on strengthening its risk management framework as part of its strategic plan.
Factors Affecting Rating:
Upgrades could occur if the bank diversifies its investor base, reduces concentration risks, and maintains strong financial metrics. Downward pressure could result from a continued decline in the loan portfolio, deteriorating asset quality, and reduced shareholder support.