Fitch Affirms Asian Development Bank at 'AAA'; Outlook Stable

(The following statement was released by the rating agency)
Fitch Ratings-London-10 July 2020:
Fitch Ratings has affirmed Asian Development Bank's Long-Term Issuer Default
Rating (IDR) at 'AAA' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The affirmation reflects AsDB's intrinsic credit quality, with solvency and
liquidity both assessed at 'aaa'. Fitch's assessment of AsDB's business
environment is unchanged at 'low' risk, which would translate into a one-notch
positive adjustment to the lower of our liquidity and solvency assessments if
either of these fell below 'aaa'.

In March 2020, AsDB initially responded to the coronavirus pandemic by
announcing its COVID-19 Pandemic Response Option (CPRO), a USD6.5 billion
package to be made available to its members to help mitigate immediate public
health pressures and longer-term economic and financial pressures. In April
2020, the package was increased to USD20 billion, with the majority designated
for sovereign operations (USD18.2 billion), and the remaining USD1.8 billion
for non-sovereign borrowers. AsDB's response has been a combination of
mobilising additional resources (68%) and the re-allocation of existing
resources (32%), with the mobilisation of additional resources requiring an
increase in debt issuance.

AsDB's 'excellent' capitalisation continues to be a rating strength, with its
equity-to-adjusted-assets and guarantees ratio of 32% as of end-2019 (FYE18:
35%) among the highest for regional MDBs. Fitch also uses its usable capital
to risk-weighted assets ratio (FRA ratio) to assess capitalisation. AsDB's FRA
ratio is significantly above the threshold for an 'excellent' assessment
(above 35%) for this metric. Usable equity includes a portion (10%) of
callable capital from shareholders rated 'AA-' or above and is discounted to
reflect the concessional loan balance in AsDB's financing portfolio.

Given the increase in lending as a result of the bank's COVID-19 response over
the short to medium term, Fitch expects both capitalisation metrics to decline
but to remain above the 'excellent' thresholds by 2022. The headroom above the
equity-to-adjusted assets and guarantees ratio threshold is becoming
increasingly narrow but is forecast to remain above the 25% 'excellent'
threshold in our criteria. Growth in equity will be exclusively driven by
internal capital generation over the coming years.

In 2019, the bank's Board of Directors approved the revision of AsDB's
provisioning policy to comply with the new Current Expected Credit Loss (CECL)
model under US GAAP, which requires the early recognition of credit losses and
a lifetime ECL of the underlying asset to be recognised at inception. This
shift in provisioning policy, effective from January 2020, will impact the
bank's profitability, with the 'day one' impact a reduction in the bank's
equity of USD474 million, reflecting an increase in impairment provisioning as
a result of the change.

AsDB's 'aaa' solvency assessment is also supported by its 'low' risk profile.
Fitch views the exposure of AsDB to credit risk as 'low', which balances the
average rating of its loans and guarantees (end-2019: BB+), with its very-low
non-performing loan (NPL) ratio (end-2019: 0.1%), and its 'excellent'
preferred creditor status (PCS), which results in a three-notch upward
adjustment to the average rating, resulting in an adjusted average rating of
'BBB+'.

Fitch conservatively assumes the bank's average rating of loans and guarantees
to fall to 'BB' from 'BB+' over the medium term, reflecting the possibility of
further sovereign downgrades across its borrowers. Of the bank's 10 largest
sovereign borrowers, three of their ratings are currently on Negative Outlook
(India: BBB-; Sri Lanka: B-; Azerbaijan: BB+). Fitch also forecasts an
increase in the bank's NPL ratio over the medium term but for it to remain
below the 1% 'very low' threshold outlined in our criteria.

The 'low' risk assessment also considers the 'moderate' concentration risk
assessment, with the bank's top five obligor exposures accounting for 57% of
the total as of end-2019. Geographically, China (A+/Stable) and India are the
main countries of exposures, accounting for around 30% of AsDB's total loans,
guarantees, and equity investments. The 'low' risk assessment is also
supported by a 'very low' market risk assessment, 'very low' exposure to
equity risk and 'excellent' risk management policies. AsDB's overall risk
management framework is robust and includes conservative internal limits on
both lending and borrowing levels.

AsDB's liquidity metrics are in-line with 'AAA' rated peers, with a
liquid-assets-to-short-term-debt ratio of around 200% at end-2019. While we
expect this ratio to fall as lending activity accelerates, it is forecast to
remain comfortably above the 150% level consistent with an 'excellent'
assessment. The quality of the bank's treasury assets is 'strong' with around
60% of the portfolio rated 'AA-'and above. The bank also benefits from
'excellent' access to capital markets and a diversified investor base. In
2019, the bank raised USD24.6 billion in 18 different currencies, which ranks
among the highest for MDB issuers. Fitch expects liquidity to remain a key
rating strength.

Fitch continues to deem AsDB's business profile as 'low' risk, given the size
of its banking portfolio, its sovereign-lending focus (92% of total banking
exposure at end-2019), and high governance standards. The importance of AsDB's
public mandate further contributes to this assessment. The total banking
portfolio grew to USD119 billion at end-2019 from USD111 billion at end-2018,
which remains at the higher end of Fitch-rated MDBs. AsDB's operating
environment is assessed as 'medium' risk, reflecting the relatively weak
credit quality and moderate income levels in its countries of operations.

Given the intrinsic credit quality of the bank, our assessment of support is
not a rating driver for AsDB. Extraordinary support for AsDB is now assessed
at 'a', which is anchored on the weighted average rating of the bank's key
shareholders. In Fitch's view, downside risks around the capacity of
shareholders to support the bank have increased somewhat since last year's
review as two of AsDB's key shareholders, Australia (AAA) and India, have been
assigned Negative Outlooks in recent months. Also, in line with our support
assessment criteria, the bank would require callable capital provided by
shareholders rated 'A-' or above to cover its outstanding net debt obligations
at the end of our forecast period of 2022. This reflects the material increase
in expected borrowing to fund the bank's coronavirus policy response. The
propensity of shareholders to support AsDB is assessed as 'strong' and
therefore receives no rating uplift.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

The ratings are at the highest level on Fitch's scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

- Solvency: A large increase in leverage or in loan impairments, potentially
caused by faster than expected loan growth, that erode the bank's capital
position and affect our 'excellent' capitalisation assessment.

- Solvency: A revision of our 'low' credit risk assessment, caused by either a
large decline in asset quality metrics (resulting from a series of negative
sovereign rating actions, from rising exposure to the private sector or from a
serious breach of its preferred creditor status on sovereign loans) or from an
upward revision of our assessment of the bank's 'moderate' concentration risk
metrics.

- Liquidity: Evidence of a large decline in the bank's
liquid-assets-to-short-term-debt ratio to below the 150% 'excellent' threshold
or a marked deterioration in the asset quality of treasury assets, which could
lead to the revision of our assessment of the bank's 'aaa' liquidity
assessment.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and
Infrastructure issuers have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive direction)
of three notches over a three-year rating horizon; and a worst-case rating
downgrade scenario (defined as the 99th percentile of rating transitions,
measured in a negative direction) of three notches over three years. The
complete span of best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit
ratings are based on historical performance. For more information about the
methodology used to determine sector-specific best- and worst-case scenario
credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
Key Assumptions
Fitch assumes the bank will continue to maintain high-quality risk and
underwriting standards.

We assume that the global economy develops in line with our Global Economic
Outlook published on 29 June, including a deep but short-lived recession in
2020 due to the pandemic.
Sources of Information
The source(s) of information used to assess these ratings were AsDB's
financial statements, and other information provided by AsDB.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.

Asian Development Bank; Long Term Issuer Default Rating; Affirmed; AAA; RO:Sta
----; Short Term Issuer Default Rating; Affirmed; F1+
----senior unsecured; Long Term Rating; Affirmed; AAA
----senior unsecured; Short Term Rating; Affirmed; F1+

Contacts:
Primary Rating Analyst
Nick Perry,
Associate Director
+40 20 3530 2727
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN

Secondary Rating Analyst
Enrique Bernardez,
Associate Director
+44 20 3530 1964

Committee Chairperson
Tony Stringer,
Managing Director
+44 20 3530 1219

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
peter.fitzpatrick@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
Supranationals Rating Criteria (pub. 30 Apr 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10118078)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10128657)
Solicitation Status
(https://www.fitchratings.com/site/pr/10128657#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10128657#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10128657#endorsement-policy)

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