New BRICS bank wins AA+ rating. S&P notes ‘additional support’ from China

February 28, 2020

SINGAPORE -- S&P Global Ratings today affirmed its 'AA+' long-term and 'A-1+' short-term foreign-currency issuer credit ratings on the New Development Bank (NDB), a multilateral lending institution (MLI) established by Brazil, Russia, India, China, and South Africa (BRICS). "We affirmed the ratings on NDB to reflect our opinion that the institution will establish itself as a catalyst in reducing infrastructure deficits faced by its BRICS members," S&P said.

"At the same time, we expect NDB to continue to instil sound governance and risk management principles across its operations.
 "This expectation supports our assessment of NDB's strong enterprise risk profile and extremely strong financial risk profile."
 S&P said it expected NDB to deploy a significant portion of its resources to establish a track record and a strong footprint in BRICS countries.
 "The institution is an MLI formed by a relatively small group of countries (BRICS), compared with its
peer Asian Infrastructure Investment Bank," S&P said. NDB was established with an international treaty signed in 2014.
 Headquartered in Shanghai, NDB started its operations in 2015 with a mandate to mobilise resources for
infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.
 The founding members backed the institution with a subscribed capital base of US$50 billion, of which US$10 billion represented paid-in amounts to be funded in full by January 2022. Each member will contribute 20% of the capital.
 S&P said its views on NDB's role and mandate were underpinned by the pressing need for infrastructure investment in BRICS countries.
 "Over the next couple of years, we expect the institution to make significant strides in contributing financing and mobilising resources toward that end," S&P said.
 "NDB has charted an aggressive growth trajectory in its strategy for 2017-2021 which, if successful, would further underpin the institution's role and importance."
 As of January 15, 2020, NDB had approved more than US$15.2 billion in loans. The majority of these had gone to India (28%) and China (28%), which, S&P said, it believed reflected the challenges in finding viable bankable projects in Russia, Brazil and South Africa.
 "That said, we note the acceleration of loan approvals to these three countries. Their combined approvals increased to 43% of the total loan portfolio as of January 2020, from 34% the year before.
 "Notably, loan disbursements have yet to pick up at the same pace as loan approvals. In our view, faster disbursements will augment NDB's importance to its shareholders as a key institution in financing infrastructure needs in BRICS countries."
 S&P said that while the bank's charter allowed it to lend to all members of the U.N., it intended to focus on operations in BRICS countries for at least the medium term.
 "While this exposes NDB to significant concentration risks, BRICS countries have higher sovereign ratings (average 'BBB-') than many of the countries to which its MLI peers are lending.
 "We note that NDB membership is open to all U.N. Members, and the institution recently finalised its criteria for acceptance of new members.
 "An increase in shareholders would help NDB enhance its mandate across a wider geographical scale, and could support its key policy role, as well as reduce credit risk concentration."
 S&P noted that NDB had received what it terms "additional support" from China, with the Government of China and the Shanghai Municipal Government financing  construction of NDB's headquarters building.
 "In addition, China's Ministry of Finance and the People's Bank of China facilitated NDB's first green bond issuance," S&P said.
 "The institution issued two bonds in China for the aggregate amount of Chinese renminbi (RMB) 6 billion (about US$1 billion) in 2016 and 2019.
 "In April 2019, NDB established a US$2 billion debut international Euro Commercial Paper (ECP) programme, and has been placing regular trades since for liquidity management purposes.
 "NDB plans to raise funds from global capital markets and domestic capital markets of BRICS countries and promote green financing instruments, including green bond issuances."
 S&P described NDB's liquidity as "very robust", comprising mainly deposits with various financial institutions in China, Hong Kong, and Singapore. (ATI).