DBRS Morningstar Confirms the European Investment Bank at AAA, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) 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.

KEY RATING CONSIDERATIONS
The Stable trend on the ratings reflects the resilience of the Bank to downside risk as a result of its strong fundamentals. DBRS Morningstar 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 to represent best the interests 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.

On 1 February 2020, the United Kingdom (U.K., AAA, Negative) ceased to be a EU member state. Consequently, from that date, the Bank’s shareholders exclude the U.K. and are the 27 member states of the EU. Although under the withdrawal agreement the U.K. remains liable for its share capital in the EIB as it stood before withdrawal for years to come, its subscribed capital in the Bank was fully replaced by a pro rata increase of the capital of remaining EU member states as well as using existing reserves. Subsequently, on 1 March 2020 the EIB also proceeded with increases in the capital subscribed by Poland and Romania, more than offsetting the effect of the U.K.'s departure on its subscribed capital position. DBRS Morningstar considers that the replacement of the U.K. subscribed capital by the EIB's remaining member states exemplifies and reinforces their full commitment to the institution.

The recent Coronavirus Disease (COVID-19) outbreak, together with its large scale economic impact is likely to affect the Bank's risk profile in coming years, through the deterioration of the quality of some of its assets. Nevertheless, DBRS Morningstar considers that the EIB's very strong capital position, as well as its sound liquidity and risk management practices should help mitigate the adverse consequences of the pandemic on the Bank's overall financial performance. In addition, DBRS Morningstar continues to expect that EU member states would provide timely support to the EIB, if necessary. The EIB’s ratings are further supported by the European Central Bank (ECB)’s policy measures, EIB’s bonds being eligible for the ECB's asset purchase programmes and refinancing operations.

RATING DRIVERS
The rating could be downgraded if one or a combination of the following occur: (1) there is a marked deterioration in the creditworthiness of a single core shareholder, particularly if it reflects a material weakening of the cohesion of core member states or of the strength of their political commitment to the EIB; (2) there is a substantial weakening of the EIB's Intrinsic Assessment; or (3) although currently unlikely, both France (AAA, Negative) and Germany (AAA, Stable) are downgraded.

RATING RATIONALE

The Support Assessment Reflects the Credit Quality and Support Commitment of Core Shareholders

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 EIB's core shareholders group is composed of the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Negative), the Republic of Italy (BBB (high), Negative), and the Kingdom of Spain (A, Stable). DBRS Morningstar views these countries as core shareholders of the institution because they represent the four largest EIB shareholders –with a capital share more than double that of the next shareholders, the Netherlands (AAA, Stable) and Belgium (AA (high), Stable)– they represent together 68% of the EIB’s subscribed capital and account for 47% of the geographical distribution of the Bank’s stock of disbursed loans at the end of 2019.

The weighted median shareholder rating of this group, which is the primary driver of the Support Assessment, currently remains at AAA. Nevertheless, this weighted median could be lowered if France's ratings were to be downgraded. DBRS Morningstar, however, recently highlighted in a commentary on European Supranational institutions that lowering the median rating of the core group would not prompt a downgrade of the Support Assessment per se. The EIB's Support Assessment would remain underpinned by the strong commitment of EU member states towards the institution and by additional diversification benefits stemming from AAA governments outside the core group.

The EIB may request its shareholders to pay the balance of their subscribed capital if ever needed by the institution to meet its obligations. DBRS Morningstar views such commitment reinforced by the very strong economic incentive for EU member states to support the EIB, given that each member state is simultaneously a shareholder and a beneficiary of projects financed within their respective territory. DBRS Morningstar therefore considers the shareholders’ interests as aligned with that of the Bank.

The EIB’s Mandate Has Been Reinforced by its Role in the EU COVID-19 Response Package

The participation of the EIB in the EU COVID-19 response package further strengthens the commitment of its shareholders. The EIB Group, which includes the European Investment Fund (EIF; AAA, Stable) initially presented a first response package expected to mobilise up to EUR 28 billion of financing to support European companies and is also expected to introduce a new pan-European Guarantee Fund (EGF) to tackle the consequences of the pandemic. This EGF, based on guarantees of up EUR 25 billion from participating member states, is expected to enable the EIB to increase its support to European enterprises, mobilising up to EUR 200 billion of additional financing to companies in all participating member states.

Strong Mandate and Low Risk Profile are Core Elements of the Bank’s Intrinsic Assessment
The Bank’s signed loan book is large, representing EUR 560 billion at the end of 2019, of which 88% was for projects within the EU. In addition, since 2015, the EIB has been implementing the Investment Plan for Europe through the European Fund for Strategic Investments (EFSI). The EFSI has an extended investment target of EUR 500 billion until the end of 2020. EFSI’s operations benefit from an EU guarantee, which DBRS Morningstar views positively, as it limits the Bank’s risk exposure. As of 15 May 2020, projects expected to mobilise around EUR 486 billion of investments, or 97% of the EFSI target had been approved.

From 2021, the EIB is expected to play a key role in the European Commission's (EC) InvestEU programme. This programme will be supported by an EU budget guarantee – initially set at around EUR 38 billion but recently increased in the new proposal by the EC – and is intended to maintain and streamline the positive crowd-in of other public and private investors that occurred with the EFSI and other EU financing programmes.

The EIB’s risk profile is low, with sound asset quality. At the end of 2019, impaired loans represented only 0.4% of the Bank’s total portfolio, stable compared to 2018, 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 40.4 billion at year-end 2019, benefit from a guarantee from the EU budget or directly from member states. DBRS Morningstar’s 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.

The Coronavirus and its Wide-Ranging Economic Impact Will Prove Challenging

Despite this very strong position at the end of 2019, DBRS Morningstar considers that maintaining a highly performing loan book might be challenging for the institution. The significant economic shock derived from the coronavirus crisis is expected to affect the EIB’s asset quality. Nevertheless, DBRS Morningstar considers that conservative risk and liquidity management practices as well as strong credit enhancements should mitigate the impact on the EIB's financials.

The EIB’s exposure to riskier private and public-sector assets, namely the high risk exposures for loans with internal grading of D- and below (for which allocations to the Special Activities Reserve are made) amounted to EUR 10.8 billion in 2019, slightly decreasing from EUR 11.5 billion in 2018 (on a consolidated basis). DBRS Morningstar will monitor this metric in the short-to-medium-term to assess for a deterioration in the Bank's overall risk profile.

The EIB Continues to Benefit from a Very Strong Capital Position and a Sound Liquidity Profile

DBRS Morningstar views the Bank’s capital adequacy as very strong. Its Basel III Core Equity Tier 1 (CET1) ratio stood at 32.9% at year end-2019, down from 35.1% in 2018, but substantially higher than the average of approximately 25% recorded between 2012 and 2016. The EIB also conservatively manages its liquidity and funding. The year-end 2019 ratio of net treasury assets over 2020 annual expected cash outflows was equivalent to 89%, 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.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include the role of the EIB in the EU response to the COVID-19 outbreak, the potential impact of the pandemic on the Bank’s operations, the U.K. exit of the EU and its impact for the EIB’s capital position, the EIB’s risk profile and the commitment of its shareholders in supporting the institution in case of need.

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

The principal methodology is the Global Methodology for Rating Supranational Institutions (3 March 2020) https://www.dbrsmorningstar.com/research/357589/global-methodology-for-rating-supranational-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include the European Investment Bank’s annual reports from 2015 to 2019, the EIB annual 18-K/A report 2018 (Amendment No. 10) for its capital position as of March 2020, the 2019 annual report from the European Investment Fund and the latest EIB’s Investor Presentation (June 2020). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362886.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions and Sovereign Ratings Group
Initial Rating Date: August 1, 2014
Last Rating Date: June 21, 2019

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