Moody’s Upgrades East African Development Bank to Baa3 with a Stable Outlook

Rating Action: Moody’s upgrades East African Development Bank to Baa3 with a stable outlook
Global Credit Research – 19 Jun 2015

London, 19 June 2015 — Moodys Investors Service has today upgraded the long-term issuer rating of the East African Development Bank to Baa3 from Ba1. The outlook on the rating is stable.

SUMMARY

The main reasons for EADB’s upgrade to Baa3 are:

1. A significant improvement in the bank’s capital buffer due to a material increase in paid-in capital by the bank’s shareholders.

2. A sharp decline in non-performing loans as a result of the Bank’s sustained efforts to restructure its balance sheet.

RATINGS RATIONALE

First Driver — A significant improvement in capital adequacy

The EADB has significantly increased its share capital in the last few years. At the end of 2014, EADB’s subscribed capital amounted to $932 million out of $1,080 million of authorized capital. Paid-in capital amounted to $173 million, corresponding to a 14% increase compared to the previous year, and a 73% increase since December 2012. As a result of the increase in capital and the downsizing of the loan portfolio since 2008, EADB’s capital position has significantly improved. As at end 2014, total usable equity (excluding callable capital) more than fully covered the investment portfolio, representing 192% of the sum of gross loans outstanding and equity operations, compared to 33% in 2007. This is one of the highest (equity to assets) ratio in Moodys MDB rating universe (as a comparison, PTA Bank and Shelter Afrique (both rated Ba1 stable) had a ratio of 25% and 61% respectively in 2013). Rising profitability has also supported EADB’s capital position.

Second Driver — A significant reduction in NPLs

Asset quality has improved significantly. EADB has managed to achieve a sharp reduction in non-performing loans, from a high of 32% of gross loans in 2010, to 1.4% at the end of 2014. The sharp reduction in NPLs reflects debt restructuring, loan write-offs and enhancements in the bank’s risk-management procedures. The bank has also increased its provision coverage. At the end of 2014, total provisions amounted to $6.0 million, covering outstanding NPLs by a factor of close to 4 times.

RATIONALE FOR STABLE OUTLOOK

EADB’s Baa3 rating carries a stable outlook, balancing the improved health of the bank’s balance sheet and supportive liquidity position, against a history of acute asset quality pressures, expansion plans and an evolving risk management framework that has yet to show its full effectiveness.

WHAT COULD CHANGE THE RATING — UP

A continued rise in profitability alongside the maintenance of low NPL levels while the bank expands its balance sheet in the coming years could exert upwards pressure on the rating. Maintaining strong capital adequacy relative to risk assets, in accordance with our definition and relative to other MDBs, would also be credit positive.

WHAT COULD CHANGE THE RATING — DOWN

The rating could face downward pressure if asset quality deteriorated significantly (as reflected in NPLs in both nominal and percentage terms). If the bank’s rapid growth disproportionately increases the credit risks that it faces (thus undermining recent years’ governance and risk-management gains), the rating could be impacted.

The principal methodology used in this rating was Multilateral Development Banks and Other Supranational Entities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 (“Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7”) in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody’s was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody’s to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rita Babihuga
Asst Vice President – Analyst
Sovereign Risk Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD-Banking & Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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