DBRS Assigns New Ratings to the European Investment Bank at AAA, Stable trend

DBRS Ratings Limited (DBRS) has assigned a long-term issuer rating of AAA and a short-term issuer rating of R-1 (high) to the European Investment Bank (the EIB or the Bank). The trend on both ratings is Stable.

DBRS rates the EIB at AAA on the basis of both the Support and the Intrinsic Assessment. Based in Luxembourg, the EIB is the bank of the European Union (EU). Established under the Treaty on the Functioning of the European Union signed in Rome in 1957 instituting the European Economic Community (now, the EU), as amended from time to time, the Bank is a policy-driven institution pursuing the mandate of contributing to the balanced and steady development of the internal market in the interest of the Union. To that end, the EIB borrows funds on the capital markets and utilises its own resources in order to provide loans and give guarantees to the corporate, financial and public sectors of the EU. The Bank’s shareholders are the 28 member states of the EU, and DBRS expects them, should the need arise, to provide timely support to the Bank, in order to preserve its creditworthiness. DBRS also views the EIB’s risk profile as low and the capitalisation as very strong, thus limiting the probability that the Bank will face distressed funding conditions that could eventually trigger an emergency support action. Downward pressure on the ratings could materialise in the event of multiple-notch downgrades of the core shareholders (as defined by DBRS in the current Methodology for Rating Supranational Institutions), and if the EIB’s balance sheet were to weaken considerably. The EIB’s ratings could be further pressured by evidence of a lower commitment of core shareholders to the EIB as a result of evolving priorities within the EU policy agenda.

The Support Assessment of the EIB is primarily based on the overall credit quality of its core shareholders and on the credibility of their commitment to support the Bank. In the EIB’s core shareholders group, DBRS includes: the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Stable), the United Kingdom of Great Britain and Northern Ireland (AAA, Stable), the Republic of Italy (A low, Negative) and the Kingdom of Spain (A low, Negative). We see these as the core shareholders because their governments have subscribed 74% of EIB’s capital, and their economies accounted for 62% of EIB’s credit exposure in 2013. The median shareholder rating of the group is AAA, which is the first driver of the AAA Support Assessment of the EIB.

Secondly, we see the commitment of the core shareholders to support the EIB as highly credible, primarily because of the strength of various provisions included in the Bank’s Statute. The Bank’s Statute is annexed as a protocol to the Treaty on European Union and the Treaty on the Functioning of the European Union (the Treaties) and as such its provisions prevail over national laws of member states. The Statute gives the Bank the authority to request from shareholders the payment of the balance of the subscribed capital (EUR221.6 billion, or 52% of EIB’s marketable debt, at end-2013), if this action were to be necessary to meet the Bank’s own obligations.

In addition to the legally binding pledge of shareholders to support the Bank, DBRS sees member states as having a very strong economic incentive to support the EIB, because each member state is simultaneously a shareholder and beneficiary of the Bank. Thus, DBRS views shareholders’ interests as aligned with that of the Bank. For example, the distribution of loans across member states is in most cases aligned with the relative ownership shares held by the European countries in the EIB’s capital. The alignment of interests has also been clearly demonstrated during the cash capital increase executed in 2012. This added EUR10 billion in paid-in and subscribed capital to the Bank’s capital. The additional capital endowment could allow the EIB to further boost its lending stance in a period of muted credit growth in Europe, and to increase the volume of signatures to around EUR65 billion per annum over 2013-2015.

The AAA Intrinsic Assessment of the EIB is primarily based on the Bank’s very strong mandate and capitalisation, and it is supported by a low risk profile and stable earnings. The EIB’s mission is to contribute to the balanced and steady development of the internal market in the interest of the EU. The Bank’s activities include lending to the private and public sector of the member states; blending its own resources with resources available in the EU budget; and advising on the technical, economic and financial aspects of investment projects. The three largest sectors where the EIB operates are transport networks, small and medium-sized enterprises (SMEs), and energy production, with a particular focus on renewable energy projects. Via its sizeable loan book of EUR521 billion in 2013, (4.0% of EU gross domestic product), charged at competitive rates, the EIB provides a countercyclical source of funding to the real economy.

DBRS also views the Bank’s capital adequacy as very strong. The Bank’s Basel III capital ratio was 26.1% at end-2013, entirely Tier 1, and the leverage ratio is strong at 11.3% on a total-asset basis. However, DBRS notes that since no provision regulates the procedure for shareholders’ withdrawal from the EIB’s capital, there is a possibility that the capital structure may change should one or more members leave the EU. The EIB’s risk profile is low, and the asset quality of the Bank’s exposures has been resilient to the financial and sovereign debt crisis. Impaired loans at end-2013 represented only 0.2% of the total portfolio. This largely reflects the EIB’s strong risk management practices, as well as the Bank’s high share of secured loans. Based on the total loan book in 2013, 46% of EU loans are made to or ultimately guaranteed by an EU sovereign or by the EU public sector. The EIB’s disbursed exposures to projects outside the EU, which amounted to EUR34.3 billion in 2013, are also largely secured, through a portfolio guarantee of either the EU budget or member states.

We underline that DBRS’s assessment of the EIB’s risk profile incorporates our assumption that EIB loans to sovereigns in the EU will continue to be subject to preferred creditor treatment, and that sovereign guarantees will be honoured at all times, at least in the EU. This expectation incorporates the successful conclusion of the Greek debt exchange in 2012, when the EIB’s holdings of Greek debt did not suffer any haircut. It is also underpinned by the member states’ interest in remaining current on EIB loans to benefit from the Bank’s financing channel, and in preserving the EIB’s profitability to limit the likelihood of the Bank requesting the disbursement of callable capital.

The main challenges faced by the EIB relate to the need to preserve a highly performing loan book. Riskier exposures in 2013 were contained, totalling EUR64 billion, or just 110% of total equity. DBRS views this level as commensurate to the EIB’s own funds and supportive of a high Intrinsic Assessment. Other challenges relate to the management of liquidity risk, which is managed by EIB so as to ensure a ratio of net treasury assets over annual expected cash outflows equivalent to at least 25% at all times. At end-2013 this ratio was much higher, at over 70%. Treasury assets also represent 63% of those exposures (as calculated by DBRS) that, in a stressed scenario, could trigger a cash outflow in 2014. Importantly, the EIB is an eligible counterparty in the Eurosystem’s monetary policy and therefore has access to the monetary policy operations of the ECB. This distinguishes the EIB from other supranational institutions and represents a credit strength. Finally, DBRS observes that the EIB will, over the next years, need to manage the expansion of its loan book without excessively increasing leverage. DBRS expects that the expansion of the Bank’s balance sheet may potentially lead to a capital increase over the medium term, as the EIB’s Statute dictates that the Bank shall never have loans and guarantees outstanding amounting to more than 250% of the sum of subscribed capital, non-allocated provisions, profit and loss account surplus and reserves. In 2013, this ratio was 152%.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Supranational Institutions, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the European Investment Bank, the European Commission, the European Central Bank, Haver Analytics, and DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Claudio Columbano
Rating Committee Chair: Roger Lister
Initial Rating Date: 1 August 2014
Most Recent Rating Update: n.a.

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960