Fitch upgrades Islamic Development Bank to 'AAA'; outlook stable

Fitch has changed the Outlook for the Long-term IDR to Stable from Positive. Fitch has also affirmed IDB's Short-term IDR at 'F1+'.

The upgrade stems from further improvements made in the credit standing of the bank's main shareholders, their ongoing subscription to the capital increase initiated in May 2006 and the progress observed in the establishment of its concessional fund, the Islamic Solidarity Development Fund (ISDF).

IDB benefits from the strong support of its 56 member countries, all members of the Organisation of the Islamic Conference (OIC). Support takes the form of uncalled subscribed capital that the bank would be authorised to call in case of need to meet its financial obligations.

Several Islamic countries have recently benefited from an upturn in their sovereign ratings and this trend was affirmed in 2007. In particular, the Outlook for Saudi Arabia's Long-term IDR (IDB's largest shareholder with 27.9% of subscribed capital) was revised from Stable to Positive on 31 July 2007, following Fitch's upgrade of its Long-term IDR to 'A+' from 'A' in 2006.

Furthermore, the agency assigned the Emirate of Abu Dhabi (the largest of the seven emirates making up the United Arab Emirates and IDB's fifth-largest shareholder with 7.9% of subscribed capital) a Long-term IDR of 'AA' with a Stable Outlook on 2 July 2007, reflecting IDB's improving credit environment.

The rating action is also supported by the shareholder's further adherence to the decision of IDB's Board of Governors (BoG) to launch a substantial increase in subscribed, paid-in and callable capital.

To date, the bank has received acceptance from shareholders accounting for 84% of its capital compared with 40% of the shares at end-November 2006. Once completed, the capital increase will translate into an approximate 50% rise in paid-in capital over the next five years to IDN4.1bn from IDN2.7bn, illustrating the willingness of member countries to support the bank. This will also reinforce IDB's comfortable capitalisation, which already benefits from its large equity base. Since inception, IDB has indeed been funded quasi-exclusively by equity and while the bank has begun to resort to market funding in 2003, it exhibits extremely low leverage ratios (debt accounted for 12.6% of shareholders' equity at end-1427H (19 January 2007)).

The capital increase will enable the bank to maintain leverage below 20% of shareholder's equity while increasing its financing by 10% per annum.

In addition to these positive developments, Fitch foresees an eventual improvement in the bank's operating performance and asset quality. While most of IDB's financing is directed to speculative-grade countries (79.5% of the bank's portfolio at end-1427H), IDB has traditionally recorded a very low level of non-performing assets, with impaired financed operations standing at only 1.2% of the bank's portfolio (excluding equity stakes) at end-1427H.

The performance of IDB's portfolio is all the more noteworthy since concessional financing has been historically funded through the bank's ordinary capital, while other multilateral development banks (MDBs) generally rely on a separate financial arm.

Hence, IDB's credit risk exposure will be further diluted by the establishment of the ISDF which was formally approved by IDB's BoG in May 2007, after the summit of the OIC called for its creation in December 2005. The target capital of ISDF is USD10bn and up to now 29 member countries (compared with 18 at end-November 2006) have agreed to participate in the fund for a total amount of $1.6bn.

As the bank progressively transfers some of its riskiest assets to this fund, the average credit quality of its portfolio should improve, thereby fuelling its capitalisation and the resilience of its credit profile to the projected growth in operating assets.

IDB is an MDB based in Jeddah, Saudi Arabia. Created in 1975 with the aim to foster economic development and social progress, it provides project and trade finance as well as technical assistance to its member countries. The bank operates in accordance with the principles of Islamic Law, and its financing instruments are mainly asset-backed. It employed 942 staff members at end-1427H.