DBRS Confirms the European Investment Bank at AAA, Stable Trend

DBRS Ratings Limited (DBRS) confirmed the European Investment Bank’s (EIB or the Bank) Long-Term Issuer Rating at AAA and its Short-Term Issuer Rating at R-1 (high). The trend on both ratings is Stable.

KEY RATING CONSIDERATIONS

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 Stable trend on the ratings reflects the resilience of the Bank to downside risk as a result of its strong fundamentals.

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. Although unlikely, greater than anticipated disruptions following the UK exit of the EU that markedly weaken the EIB’s capital structure could also add downward pressure to the ratings.

RATING RATIONALE

The EIB’s Capital Disruption from the UK’s Departure of the EU is Expected to Remain Well Contained

The formal two-year negotiation period ahead of the United Kingdom’s (UK) EU withdrawal started on 29 March 2017. Preliminary agreements concerning the impact for the EIB’s capital structure of the UK exit have been introduced in the “Joint Report” from the UK and EU negotiators on 8 December 2017 and further described in the draft withdrawal agreement on 19 March 2018.

In line with the key principles disclosed in these documents with respect to the EIB, DBRS views positively that any disruption in terms of capital and overall credit profile for the Bank should remain very well contained. This reflects the fact that the UK will remain linked to the EIB for multiple decades after the official withdrawal date, given that the draft withdrawal agreement foresees that the UK will remain liable for its share of the existing stock of the EIB’s operations (as of the withdrawal date) until they have been amortised.

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-to-medium-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 Support Assessment Reflects the Credit Quality and Support Commitment of Core Shareholders

Given the scheduled UK exit of the EU, DBRS has taken the conservative assumption to exclude the UK from the core shareholder group of the institution. 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, 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) – they represent together 58% of the EIB’s subscribed capital and they account for 46% of the Bank’s credit exposure. The weighted median shareholder rating of the group, which is the primary driver of the Support Assessment, is AAA.

In addition to the statutory right the EIB has to request that shareholders 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 of projects within their own respective territory. Thus, DBRS views the shareholders’ interests as aligned with that of the Bank.

Strong Mandate and Low Risk Profile are Core Elements of the Bank’s Intrinsic Assessment

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 568 billion at the end of 2017, of which 88.9% 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 initially aimed to mobilise EUR 315 billion of new investments from 2015 to 2018 through the European Fund for Strategic Investments (EFSI), which is implemented by the EIB. The EFSI was reinforced at the end of 2017 with the EFSI 2.0, raising the investment target to EUR 500 billion by the end of 2020. DBRS takes comfort in the fact that this increased lending activity benefits from an EU guarantee, thereby containing the Bank’s risk exposure. As of 12 June 2018, EUR 294 billion of investment, or 59% of the EFSI 2.0 target had 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 2017 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 40.3 billion at year-end 2017, 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 any haircut. EIB loans in Greece also continued to be serviced in 2015, even when payments to the IMF were suspended.

The EIB Benefits from a Very Strong Capital Position and a Sound Liquidity Profile

DBRS also views the Bank’s capital adequacy as very strong. Its Basel III Core Equity Tier 1 (CET1) ratio was 28.5% at year end-2017, increasing from 26.4% 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 74% at year-end 2017, well above the minimum requirement of 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, which would provide additional protection in circumstances of extreme liquidity tensions. This distinguishes the EIB from other supranational institutions and is viewed positively.

Despite Its Significant Strengths, the EIB Also Faces Several Challenges

While the uncertainty surrounding the withdrawal terms between the UK and the EU with respect to the EIB has somewhat decreased over the last six-to-twelve months with the presentation of the draft withdrawal agreement, the effective UK exit and the future relationship between the UK and the EIB have yet to be agreed.

In addition, preserving a highly performing loan book while increasing the risk associated with the loan activities could prove challenging. Going forward, weaker than expected growth in the EU member states could impact the EIB’s asset quality. The EIB’s exposure to riskier private and public-sector assets, namely the high-risk credit tranche as assessed by the Bank (for which allocations to the Special Activities Reserve are being made), amounted to EUR 30.2 billion in 2017 (around 44% of paid-in equity and reserves), increasing from EUR 26.8 billion and 40% in 2016.

Finally, scarce project generation capacity in the public and private sectors could pose risks to the delivery of the increased lending operations under the EFSI programme.

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include: impact of the UK’s departure on the EIB’s capital, EIB’s operations and risk profile, EIB’s core shareholders commitment.

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Supranational Institutions, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

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 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 and US regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Last Rating Date: 28 June 2017

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