KABANDA CHULU, Lusaka
AFRICAN Development Bank (AfDB) may suspend lending due to indebtedness if no sufficient capital increase is done within the next two years.
However, Fitch Ratings has affirmed the bank’s long-term issuer default rating (IDR) at ‘AAA’ with a stable outlook due to the bank’s extraordinary support from its shareholders.
Fitch notes that fast growth in lending in the last two years has translated into a rapid increase in AfDB’s indebtedness.
“Management has indicated that if there is no clear evidence of a capital increase within the next two years, it will curb lending growth to preserve the bank’s solvency metrics.
“However, if no capital increase is approved by 2019, debt will not be fully covered by callable capital from ‘AAA’ rated countries,” it states.
Fitch states that AfDB’s capitalisation is strong but declining as a result of the rapid growth in lending.
“Additionally, internal capital generation has been affected by the negative impact of low interest rates on the pension scheme and high relocation costs in Abidjan, Ivory Coast.
“The bank’s equity-to-asset ratio decreased to 23 percent in 2016 from 27 percent in 2015 and, based on the current trend, is projected to decline further in the coming years, although AfDB is still receiving annual instalments from its 2010 capital increase,” it notes.
It notes that asset quality is also affected by the 2014 change in credit policy which has allowed the bank to extend loans to poor countries eligible for concessional lending.
However, Fitch notes that AfDB’s overall exposure to risks is deemed as low.
“Since 2015 it has benefited from the marked improvement in risk concentration, driven by the introduction of Exposure Exchange Agreements [EEAs] with the World Bank and the Inter-American Development Bank.
“As a result, the share of the five largest exposures has decreased to 36 percent of the banking portfolio in 2016, from 56 percent in 2014,” it states.
The AfDB enjoys strong support from its 80 member states, which include 26 non-African countries with high average ratings.