CREDIT ANALYSIS REPORT

ISLAMIC DEVELOPMENT BANK - 2021

Report ID 6053890024 Popularity 39 views 7 downloads 
Report Date Sep 2021 Product  
Company / Issuer Islamic Development Bank Sector Finance - Financial Institution
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Rationale
Rating action     
MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB). Concurrently, the rating agency has affirmed its rating of AAAIS on the Sukuk Wakalah programme of up to RM400 million issued by Tadamun Services Berhad, a trust established by IsDB. The ratings outlook is stable. The programme currently has an outstanding amount of RM350.0 million.

Rationale     
The affirmed FI ratings incorporate IsDB’s preferred creditor status as a multilateral development bank (MDB) established by the Organisation of Islamic Cooperation (OIC), its strong support from key shareholders, and its sound liquidity and low leverage positions. As per its mandate, IsDB has continued to provide financial support for development projects of OIC member countries and Islamic communities in non-member countries.

For 2020, IsDB registered a growth of 5.3% y-o-y in total gross financing to ID16.2 billion, primarily driven by Istisna’a financing for infrastructure projects for utilities, transportation and telecommunication. In line with its development mandate, its financing book is concentrated in the infrastructure sector, accounting for 69.2% of net financing. During the year, IsDB issued US$1.5 billion sukuk, the proceeds of which were utilised to support its members to help mitigate the impact from the COVID-19 pandemic. In terms of geography, the bank remains focused on providing financing to developing countries in Asia and Africa which accounted for 56.8% and 40.3% of the total net financing exposure  as at end-2020 (2019: 58.9%, 38.8%).

In part due to the pandemic, overdue instalments rose slightly to 0.9% of total financing in 2020 (2019: 0.8%); this could further increase in the near term. Nonetheless, IsDB has strong capitalisation that offers a buffer to absorb further increases in overdue instalments; its provisions stood at ID381.9 million against ID149.0 million of overdue instalments, translating to provisioning coverage of over 250%. Its members’ equity-to-assets ratio stood at a healthy 37.3%, higher than many of its peer MDBs.

In terms of capital, its subscribed capital comprises callable capital of ID40.9 billion and called-up capital of ID9.4 billion, of which ID5.94 billion has been paid and the remainder expected to be paid over the next 15 years. IsDB’s policy of restricting earnings distribution until general reserves attain 25% of subscribed capital is viewed as prudent; as at end-2020 this stood at 6.0%.
IsDB also has a sound liquidity position as reflected by its liquid assets-to-total borrowings ratio of 49.3%. Its liquid assets, which stood at ID7.2 billion as at end-2020, comprised deposits with banks, cash balances and sukuk investment. It has been noted that the bank has also sourced deposits of ID347.2 million from related parties in 2020, which provides some diversification to its funding base that has previously comprised solely of borrowings.

As with other MDBs, IsDB benefits from a preferred creditor status which places priority of debt payments to MDBs ahead of other creditors. As at end-2020, 90.8% of the bank’s top 20 sovereign exposures were unrated and non-investment grade countries with some members having a negative outlook or having been recently downgraded. Despite the relatively weak credit quality of the financing book, overdue financing remains low, supported by the high level of sovereign-backed exposures.

Rating outlook     
The stable outlook reflects MARC’s expectation that IsDB will continue to receive strong support from its key shareholders as well as continue to benefit from its status as a preferred creditor.

Rating trajectory

Downside scenario     
A downside rating action would be triggered by visible signs of weakening support from its key shareholders and/or changes in its mandated role.

Key strengths
Preferred creditor status
Strong key shareholders’ commitment to subscribe to callable capital
Sound liquidity position and capitalisation

Key risk
Significant credit exposure to sovereigns with weak credit profiles

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