DBRS Confirms European Investment Bank’s Rating at AAA, Stable Trend

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

DBRS rates the EIB AAA on the basis of both the Support and the Intrinsic Assessment. As the bank of the European Union, the EIB borrows funds on the capital markets and utilises its own resources 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 that they would provide timely support to the EIB if necessary. DBRS views the EIB’s risk profile as low and capitalisation as very strong, thus limiting the probability that the Bank will face distressed funding conditions that could trigger an emergency support action. The EIB’s access to the European Central Bank (ECB)’s main refinancing operations further supports the rating.

Downward pressure on the ratings could materialise in the event of multiple-notch downgrades of the core shareholders (as defined by DBRS’ methodology Rating Supranational Institutions). This is especially the case if the credit deterioration is caused by a weakening of cohesiveness among core shareholders, or if there is a weakening of the political commitment of core EU member states. The ratings could also come under downward pressure if the withdrawal of shareholders leads to a weakening of the commitment of the member states to the EIB, or if the EIB’s balance sheet were to weaken.

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. DBRS considers the EIB core shareholders group to be composed of the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Negative), the United Kingdom of Great Britain and Northern Ireland (AAA, Stable), the Republic of Italy (A low, Stable), and the Kingdom of Spain (A low, Stable). DBRS views these as the core shareholders because their governments have subscribed 74% of EIB’s capital, and their economies account for 62.4% of the EIB’s credit exposure. The median shareholder rating of the group is AAA, and this is the primary driver of the AAA Support Assessment of the EIB. While France’s AAA rating currently has a Negative trend, making the median shareholder rating mechanically sensitive to a one notch downgrade on the rating, the Support Assessment of the EIB would likely remain AAA as a result of the strong credibility of the shareholders’ commitments to the EIB, and the multiple sources of support that the Bank benefits from.

In addition to the shareholders’ legally binding pledge 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 a beneficiary. Thus, DBRS views shareholders’ interests as aligned with that of the Bank. This alignment was demonstrated during the cash capital increase executed in 2012. This added EUR10 billion in paid-in and subscribed capital, increasing the EIB’s signature capacity by EUR60 billion, on top of pre-crisis signature levels from 2013 to 2015, which enabled the Bank to catalyse EUR180 billion of investments.

The AAA Intrinsic Assessment of the EIB is primarily based on the Bank’s strong mandate and capitalisation, and is supported by a low risk profile and stable earnings. The EIB’s mission is to contribute to the development of the EU internal market. The Bank’s activities include lending to the private and public sectors 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, including renewable energy projects. Its signed loan book is large at EUR549.1 billion in 2014 (5.4% of EU GDP).

The EIB’s role was reinforced by the Investment Plan for Europe announced last November by the European Commission. The plan aims to mobilise EUR 315 billion of new investments from 2015 to 2018 through the European Fund for Strategic Investments (EFSI), which will be a managed account within the EIB. As a consequence, the Bank is expected to provide incremental financing of about EUR49 billion. Nonetheless, DBRS takes comfort in the fact that this increased lending activity will benefit from an EU first loss guarantee, thereby containing the Bank’s risk exposure.

The EIB’s risk profile is low, and the asset quality of the Bank’s exposure has been resilient to the Eurozone debt crisis. Impaired loans at end-2014 represented only 0.2% of the total portfolio, largely reflecting the EIB’s strong risk management practices and its high share of secured loans. Based on the ultimate obligor concept, 46% of the signed loan book is granted to the sovereign and public sector. The EIB’s disbursed exposures to projects outside the EU, at EUR36.9 billion, benefit from a guarantee from the EU budget or member states. DBRS’ assessment of the EIB’s risk profile incorporates the assumption that EIB loans to EU member states will continue to be subject to preferred creditor treatment, and that sovereign guarantees will be honoured. This expectation incorporates the successful conclusion of the Greek debt exchange in 2012, when the EIB’s holdings of Greek debt did not suffer a haircut. The EIB’s direct exposure to Greece is relatively small, at 3.4% of total disbursed loans, and the sovereign bond exposure is only 0.13% of total debt security holdings.

DBRS also views the Bank’s capital adequacy as very strong. Its Basel III capital ratio was 26% at end-2014, entirely Tier 1, and the leverage ratio is strong at 11.2% on a total-asset basis. However, since there is no provision that regulates the procedure for shareholders’ withdrawal from the EIB’s capital, the capital structure could change if one or more members were to leave the EU. Also, the EIB conservatively manages liquidity and funding.

The ratio of net treasury assets over annual expected cash outflows equivalent was 69% at end-2014, well above the stipulated 25%. Importantly, the EIB is an eligible counterparty in the Eurosystem’s monetary policy, and therefore has access to the main refinancing operations of the ECB. This distinguishes the EIB from other supranational institutions and represents a credit strength.

The main challenges faced by the EIB relate to the need to preserve a highly performing loan book. Riskier private sector exposures, including the minimum acceptable standard risk and high risk credit tranches as assessed by the EIB, amounted to EUR64.3 billion in 2014, or just over 100% of equity. DBRS views this level as commensurate with the EIB’s own funds and supportive of a high Intrinsic Assessment. The EIB manages the expansion of its loan book, taking into consideration the Bank’s Statute which 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 2014, this ratio was 187%. Finally, scarce project generation capacity in the public and private sectors and a low level of borrowing capacity at the sovereign level in several countries could pose risks to the delivery of the increased lending operations.

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. Other applicable methodologies include the following: Ratings Sovereign Governments. These 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.

The sources of information used for this rating include the European Investment Bank, the European Commission, the European Central Bank, Bloomberg and Haver Analytics. 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.

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http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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Lead Analyst: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Rating Committee Chair: Alan G. Reid
Last Rating Date: 1 August 2014

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