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Standard & Poor’s downgrades the Caribbean Development Bank (CDB)
Standard & Poor’s credit agency here has downgraded the Caribbean Development Bank (CDB) from (AAA) Triple A, the firm’s highest rating, stating that its risk management has weakened.
“We lowered the long-term issuer credit rating on the bank to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating,” said the Wall Street-based Standard & Poor’s Rating Services (S&P) in a statement issued on Wednesday.
(More: Moody’s downgrades the CDB)
But it added, “The stable outlook reflects our expectation that despite weaknesses in the risk management framework, the bank’s financial position will remain in line with its rated peers and that the very strong shareholder support will persist.”
S&P said the downgrade reflects its view that CDB’s risk management is not commensurate with other “AAA” rated multilateral lending institutions, particularly given its size and regional economic weakness.
“The CDB has failed to comply with one of its internal liquidity policy guidelines, and borrower concentration remains high,” it said.
The rating agency said the bank’s liquidity was tighter in 2011 than in previous years, stating that at the end of 2011, the CDB had a negative funding gap of 3 to 12 months due to US$226 million of debt maturing in 2012.
It said liquid assets represented 70 percent of undisbursed loans and projected one year of debt service at the end of 2011.
Despite covering 143 percent of debt maturing in one year or less, S&P said the CDB’s liquid assets were less than the minimum of 200 percent it maintained during the prior five years.
It said the CDB expects to raise sufficient debt this year to roll over its 2012 maturities and finance a planned US$100 million of lending.
“Related to liquidity, funding management is of concern and compares less favorably with the diversified funding strategies of other small multilateral institutions,” the statement said.
It said the CDB’s reliance on capital markets has resulted in a concentration of maturities in 2012-14.
“Borrower concentration has historically been high for the CDB, and stresses have emerged because of the prolonged economic weakness in the Caribbean,” said S&P said, adding that five borrowers account for 63 percent of loans and 103 percent of narrow risk-bearing capacity.
“Given rising credit vulnerabilities in the region, this high concentration is an increasing credit weakness for CDB,” it added.
The credit rating agency said the on-going economic and financial stress in the region contributed to “public-sector past-due-but-not-impaired loans” of 2.4 percent of public-sector loans in 2011.
Under an accounting presentation change in 2011, S&P said the CDB recognized the full amount of “past-due-but-not-impaired loans” in lieu of the balance of “billed-but-uncollected amounts.”
It said the CDB determined no public-sector loans were impaired in 2011, “and it has not taken provisions for its public-sector portfolio,” stating that two private-sector impaired loans represented 21 percent of the private sector loan portfolio at the end of 2011.
S&P said the bank has taken a 47 percent provision against these loans. It said the CDB’s loan portfolio growth slowed to 2 percent in 2011 from 21 percent in 2010.
“The CDB recognized comprehensive income of US$41 million in 2011 and US$42 million in the restated 2010 period,” it said.
“However, the bank’s net interest margin (net interest and similar income-to-average loans outstanding) and its investment income-to-average investments outstanding have decreased since 2009, a trend of lower profitability that, if continued, could put pressure on the bank’s generated cash flows in the medium term,” S&P added.
It noted that the Barbados-based CDB has experienced recently a change of senior management and that it was in the process of filling a number of senior positions.
It said the bank is also reviewing its risk management and capital adequacy frameworks, which are expected to be completed by the end of 2012.
“Despite the aforementioned qualitative weaknesses, we believe that the CDB’s financial profile, especially its very strong capitalization, supports the rating,” S&P said.
“The CDB traditionally has been well-capitalized and continued to be so as of the end of 2011, with narrow risk-bearing capacity to development-related exposure (DRE) of 60 percent,” it added.
“The stable outlook reflects our expectation that the financial profile will remain stable, with new capital subscriptions offsetting lower profitability seen this past year and that it will remain so in the near future,” S&P continued.
It said it expects the continuation of “preferred creditor treatment and the bank’s “prominent position” as a lender in its borrowing member countries.
“Strengthening of risk management policies could contribute to an upgrade,” S&P said.
“The deterioration of the financial profile would lead to a downgrade. Additionally, the ratings could be affected – up or down – by our new criteria for multilateral lending institutions, which we expect to adopt later this year,” it added.
The 42-year-old development banke was Triple-A rated by S&P in 2004 and 2010, with the rating agency saying that if it maintained “its prudent financial policies of the past, its rating should remain stable over the medium term.” -CMC