Tuesday 04, July 2017 by Matthew Amlôt

Moody's: AFC's credit profile supported by sound capital adequacy & ample liquidity

The Africa Finance Corporation's A3 rating and stable outlook reflect a range of credit strengths, including sound capital adequacy and a high liquidity position, an absence of non-performing loans and stringent prudential ratios aimed at reducing credit risk, Moody's Investors Service said in a report published this past week.

The Lagos-based multilateral development bank also faces several credit challenges, including its increasing exposure to economic and political risk in sub-Saharan Africa as it expands its portfolio. Shareholders' and borrowers' commitment to the bank, along with the bank's ability to diversify its shareholders beyond Nigeria are other key credit challenges.

"The Africa Finance Corporation's credit strengths include sound capital adequacy and a high liquidity position," said Zuzana Brixiova, a Moody's Vice President -- Senior Analyst and co-author of the report. "The bank has no non-performing loans (NPLs) and only a small impairment provision on its balance sheet. But as the bank expands its balance sheet and gradually increases leverage, it will be more exposed to risk. Moreover, the bank's lack of callable capital and absence of investment-grade shareholders and members result in a subdued assessment of its member support." AFC shareholders are not contractually committed to provide capital in the event of stress or solvency/liquidity challenges.

In pursuit of its mission to be the leading financer of African infrastructure on the continent, the AFC plans to continue to expand its balance sheet within its self-imposed, conservative prudential framework.

Moody's expects, in line with the AFC's projections, that the bank's total assets will exceed $5 billion in 2019. To support this growth, the bank plans to execute a balanced funding programme, and to continue to develop its broad risk-management and control-focused functions.

The AFC's strong capital adequacy metrics, with a capital to assets ratio currently exceeding 40 per cent, are expected to continue to gradually decline towards a 30 per cent limit over the next few years as the bank executes its business plan. This will involve growing its balance sheet, with total assets exceeding $5 billion by 2019, according to the AFC's projections.

The AFC's liquidity position is very strong because the bank is only starting to gradually expand its development-related operations. While the AFC's strong liquidity position will continue to gradually decline as the bank leverages itself and expands its lending operations, Moody's expects its liquidity to remain strong.

The AFC's own prudential limits are defined to maintain capital adequacy and leverage ratios at conservative levels, and compare favourably with rated peers.

Although profitability is not the main objective of most multilateral development banks, in some cases it plays a supportive role in our assessment of capital adequacy, as measured by a bank's ability to strengthen its own capital base through yearly retained earnings.

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