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

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

DBRS rates the EIB on the basis of both the Support and the Intrinsic Assessments. As the bank of the European Union (EU), the EIB works closely with other EU institutions to implement EU policies and represent best the interest of the EU member states. The EIB borrows funds on the capital markets to support projects through loans and guarantees that contribute to growth and employment in Europe. The Bank’s shareholders are the 28 member states of the EU. DBRS expects that EU member states 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 would face distressed funding conditions that could trigger the need for an extraordinary support action. The EIB’s access to the European Central Bank (ECB)’s main refinancing operations further supports the rating.

The outcome of the United Kingdom (UK) referendum on 23 June 2016 opened a period of political uncertainty in Europe. With the formal withdrawal request made by the UK on 29 March 2017, the two-year negotiation period has now started. Nevertheless, at the moment, the terms of the future withdrawal agreement between the UK and the EU and the impact of the UK’s departure on the cohesiveness of the remaining EU member states remain unclear. The potential impact of the UK’s departure from the EU on the EIB’s capital structure will depend on the particular terms of the withdrawal agreement between the UK and the EU. The position paper from the European Commission’s task force for the preparation and conduct of the negotiations with the UK under Article 50 on “Essential Principles of Financial Settlement” published on 12 June 2017, foresees the possibility of limited disruptions in terms of capital and overall risk profile for the EIB, which DBRS views positively. As a result, despite the challenges brought forward by the Brexit vote, DBRS considers the EIB to be well positioned to weather potential shocks that could arise in the short-term. DBRS also continues to believe that the Bank’s other shareholders remain fully committed to the institution and would provide timely support to the EIB if ever necessary. The Stable trend on the ratings reflects the resilience of the Bank to downside risk as a result of its strong fundamentals.

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. The uncertainty around the shape of the withdrawal agreement between the UK and the EU has led DBRS to take the conservative assumption to exclude the UK from the core shareholder group of the institution for the time being. With the exclusion of the UK (AAA, Stable), the core shareholders group is composed of the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Stable), the Republic of Italy (BBB (high), Stable), and the Kingdom of Spain (A (low), Stable).
DBRS views these countries as the core shareholders because, excluding the UK, they represent the four largest EIB shareholders –with a capital share more than double the next shareholder, the Netherlands (AAA, Stable)– and represent together 58% of the EIB’s subscribed capital, and 53% of the EIB’s credit exposure. The weighted median shareholder rating of the group is AAA, and represents the primary driver of the AAA Support Assessment of the EIB.

In addition to the statutory right EIB has to request shareholders to pay the balance of its subscribed capital if this is required to meet its obligations, DBRS sees the member states as having a very strong economic incentive to support the EIB, because each member state is simultaneously a shareholder and a beneficiary for projects within its own territory. Thus, DBRS views the shareholders’ interests as aligned with that of the Bank. This alignment has been evidenced by the cash capital increase executed in 2012. This operation added EUR 10 billion in paid-in and subscribed capital, increasing the EIB’s signature capacity by EUR 60 billion between 2013 and 2015 with the objective to increase the countercyclical investment activity of the Bank. This additional financing activity enabled the EIB to unlock around EUR 180 billion of additional investments across the EU over the period.

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 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 Bank’s signed loan book is large, representing EUR 569 billion at the end of 2016, of which 88.6% was for projects within the EU.

The EIB’s role was reinforced by the Investment Plan for Europe announced in November 2014 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. 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. As of mid-June 2017, EUR 209 billion of investment, or 66% of the EFSI target had already been approved.

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 the end of 2016 represented only 0.3% of the total portfolio, largely reflecting the EIB’s strong risk management practices and its high share of secured loans. In addition, the majority of the EIB’s disbursed exposures to projects outside the EU, at EUR 41 billion at year-end 2016, 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 status, and that sovereign guarantees will be honoured. This expectation has been evidenced by the successful conclusion of the Greek debt exchange in 2012, when the EIB’s holdings of Greek debt did not suffer a haircut. EIB loans in Greece also continued to be serviced in 2015, even when payments to the IMF were suspended.

DBRS also views the Bank’s capital adequacy as very strong. Its Basel III Core Equity Tier 1 (CET1) ratio was 26.4% at year end-2016, increasing from 23.9% the year before. The EIB also conservatively manages its liquidity and funding. The ratio of net treasury assets over annual expected cash outflows was equivalent to 75% at year-end 2016, well above the minimum requirement of 25% and increasing from 60% at year-end 2015. 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 is viewed as a credit positive.

Despite its significant strengths, the EIB also faces several challenges. The uncertainty surrounding the withdrawal terms between the UK and the EU, and the implications for the EIB’s capital structure, could impact funding conditions for the EIB in the event of turmoil in financial markets. In addition, preserving a highly performing loan book while increasing the risk associated with the loan activities could prove challenging. Weaker than expected growth in the EU Member States could impact the EIB’s asset quality. Indeed the EIB’s exposure to riskier private and public sector assets, including the minimum acceptable risk and high risk credit tranches as assessed by the EIB, amounted to a significant EUR 61.1 billion in 2016 (around 92% of paid-in equity and reserves), slightly improving from EUR 62.2 billion in 2015. Finally, scarce project generation capacity in the public and private sectors could pose risks to the delivery of the increased lending operations.

RATING DRIVERS

Downward pressure on the ratings could materialise if several core shareholders experience ratings downgrades or if there is a marked deterioration in the creditworthiness of a single core shareholder. This is especially the case if the credit deterioration is caused or compounded by a weakening of the cohesion among core shareholders, or if there is a weakening of the political commitment to the EU or the EIB of core member states. An agreement between the EU and the UK that weakens the EIB’s capital structure could also add downward pressure to the ratings.

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

The principal applicable methodologies are Rating Supranational Institutions and Rating Sovereign Governments, 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. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Last Rating Date: 29 June 2016

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