Adesina Thrilled as S&P Affirms AfDB’s Positive Ratings

Obinna Chima

Standard & Poor’s (S&P) Global Ratings has affirmed its ‘AAA/A-1+’ long- and short-term issuer credit ratings on the African Development Bank (AfDB).
The global rating agency also stated that the outlook of the Abidjan-based multilateral institution remains stable.

The rating excited President of AfDB, Dr. Akinwumi Adesina, who said it reflected the bank’s strong financial position, risk management and sound governance.

S& P, in its latest rating on the bank dated June 19, which was obtained yesterday, noted that the bank’s policy importance was adjudged to be –very strong; governance and management was rated –adequate; financial risk profile – very strong; capital adequacy -very strong; funding and liquidity – strong.

Commenting on the allegations against Adesina, the New York-based rating agency said the bureau of the boards of governors of the bank recently addressed allegations against the president, and agreed with the findings of the ethics committee absolving the president of any wrongdoing and authorising an independent review of the report.

This, it stated, was consistent with the assumptions in its existing assessment of the institution’s governance and management.
“Regardless of the outcome of the independent review, we expect that shareholder support will remain robust, especially in light of the recently approved general capital increase.

“We are therefore affirming our ‘AAA’ long-term issuer credit rating on AfDB. The stable outlook reflects our expectation that, over the next two years, AfDB will prudently manage its capital levels and maintain shareholder support, and that borrowers will continue to treat the bank as a preferred creditor,” it stated.

S&P expressed the belief that the allegations were being appropriately addressed through the proper institutional channels.
“We assume in the ratings that shareholder structure and composition, with 59 per cent of voting shares coming from regional members, are potentially vulnerable to agency risk, meaning the interests of borrowing members could differ from those of creditors.

“(Once the remaining installments of paid-in capital from the sixth general capital increase are received, the composition of the shareholder structure will be 60 per cent regional members and 40 per cent non-regional members.)

“This weighs on our governance assessment for AfDB. This is counter-balanced by our view of AfDB’s strong risk management and risk culture–which we believe extends to the appropriate rules and procedures to handle personnel and other ethics-related matters,” it explained.

In October 2019, the bank’s shareholders approved its seventh general capital increase, effectively increasing the institution’s capital base by $115 billion, of which six per cent was paid-in and the remaining is in the form of callable capital, to the tune of $208 billion.

In addition, recently, the board of governors approved the replenishment to the African Development Fund, which underscored its important role in Africa, marked by a long track record of fulfilling its policy mandate through economic cycles, combined with robust shareholder support.

According to S&P, the AfDB will play a key role supporting the region, particularly in the context of COVID-19, as the institution recently approved an up to $10 billion relief package for 2020, of which $6.9 billion would be financed by AfDB and the remainder through its concessional lending window.
“This relief package largely represents a repurposing of existing lending, which will support its capital position. As of December 2019, AfDB’s risk-adjusted capital (RAC) ratio was 19 per cent.

“We factor extraordinary support in the form of callable capital–from the bank’s highly rated shareholders (‘AA+’ and ‘AAA’)–into the rating on AfDB. This provides a significant uplift to our RAC ratio and mitigates the impact on the financial risk profile following a potential deterioration of AfDB’s capital adequacy.

“The stable outlook reflects our expectation that, over the next two years, AfDB will prudently manage its capital while maintaining solid levels of high-quality liquidity assets and robust funding,” S&P stated.

It also anticipated that shareholders would remain supportive by providing timely capital payments; that the bank would continue benefiting from preferred creditor treatment (PCT) and would prudently manage growth in private-sector lending in a way that’s aligned with its mandate.

“We could lower our ratings if we observe signs of weakening PCT from borrowing members, or if there are significant delays from shareholders in paying in capital, which could limit AfDB’s ability to carry out its public-policy mandate.

“We could also lower the ratings if capital adequacy and liquidity ratios deteriorate as the bank pursues private-sector or less-creditworthy sovereign exposures, or if we perceive internal controls to be ineffective,” it added.

Commenting on the development, Adesina, said: “We are delighted with and welcome S&P Global’s decision to affirm the bank’s AAA/A-1+ rating. It reflects the bank’s very strong financial position and risk management, as well as our sound governance. We will continue to maintain these standards, with the strong support of all our shareholders, as we deliver much needed financial, knowledge and policy support to our regional member countries during and after this period of the COVID-19 pandemic.”