S&P: Austria-Based Oesterreichische Entwicklungsbank 'AA+/A-1+' Ratings Affirmed; Outlook Stable
The ratings reflect our opinion that there is an almost certain likelihood that the Austrian government and OeEB's parent Oesterreichische Kontrollbank AG (OKB; AA+/Stable/A-1+) would provide timely and sufficient extraordinary support to OeEB in the event of financial distress. Our view of an almost certain likelihood of extraordinary government and parental support is based on our assessment of OeEB's:
Critical role for Austria (AA+/Stable/A-1+), given that it was created forand operates only on behalf of the government. OKB established OeEB on thegovernment's mandate to provide banking services for business transactionsthat commercial financial institutions are unwilling or unable to provide. OeEB is the sole agent for financing private-sector investments in developing and transition countries, supported by government guarantees that mitigate political and economic risks for its client-related business. In this respect, OeEB supports the Austrian government in meeting international obligations for development cooperation; and
Integral link with the Austrian government, given the bank's public mandate and the government's provision of asset guarantees and general propensity to intervene in favor of its agents. This link extends to OKB, which is intended to provide funding to OeEB from its own common funding sources that generally benefit from unconditional, irrevocable, and timelyguarantees from Austria.
Austria guarantees OeEB's loan and investment portfolio and, in 2012, appointed OeEB as trustee for fund and equity investments. OeEB has a long history of close integration with its parent and cooperation with the Austriangovernment, including payment of guarantee claims. This has alleviated our previous concerns that the guarantee framework between OeEB and the governmentdoes not ensure timely payment and excludes the government from liability if OeEB had prior knowledge of a loss or committed gross negligence, misconduct, or fraud. Given its integration and cooperation with the community of multinational and national development banks, OeEB has become a key instrumentthrough which the Austrian government meets its international obligations on development cooperation.
The guarantees protect virtually all of OeEB's operating assets against political and economic risk stemming from its operations. Because OeEB's loan and investment portfolio consists of facilities guaranteed by the government, asset quality risk is low, in our view. This also accounts for OeEB's exemption from capital adequacy or risk-segmenting rules under Basel II and Basel III, based on the Austrian Banking Act.
We currently have no doubt about the Austrian government's willingness to support OeEB, as a key government-related entity, in practically all circumstances or about the government's propensity to support OeEB. In addition, the government has sufficient financial resources to support OeEB.
OeEB's credit strengths include the low embedded credit risk of its development-related portfolio, which rests on the state guarantees covering its assets. As OeEB develops, we expect its currently limited access to markets to improve. Although its nominal equity is low compared with its loan and investment portfolio, it is sufficient according to banking regulation. The low equity stems from the bank's fully-sovereign-guaranteed loan and investment portfolio, which has a zero risk weighting, and from the government's trust investment portfolio, for which OeEB assumes no economic risks, although it is on the bank's balance sheet.
The government does not own OeEB or OKB. It is, however, closely involved in OeEB's affairs through a committee and advisory board. The ministry of financegrants explicit guarantees for each transaction, and the committee and advisory board approve all of OeEB's investments and government guarantees. The government has contractually agreed to reimburse any losses that OeEB may incur. Although the underlying contract can be changed only by mutual agreement, we think that, in reality, the government can change the contract at its discretion. Should this occur, we would still anticipate that the government would honor all prior contractual obligations.
OKB is OeEB's sole owner and exerts full management control. We expect OKB to be the main source of OeEB's funding.
OeEB's operations include the provision of long-term investment financing in the form of loans or equity funding on trust, and to provide advisory programsto support projects in developing countries. It also offers advisory services to help clients identify, implement, and monitor projects and investments. We understand that OeEB plans to increase its investment portfolio by about €210 million in 2016 and €225 million in 2017, with increasing amounts compared with past years. Since 2012, OeEB has also acted as a trustee for the Austriangovernment's fund and equity investments, with reinvestment options of sold participations.
As a commercial entity, OeEB aims to make profits, but its specific role implies that it is not a profit-maximizing entity. OeEB increased again its annual net profit to €6.1 million in 2015 compared with €4.3 million in 2014, despite the low interest environment. Profits were retained and transferred toreserves as in previous years. The bank's overall earnings' capacity is weak, but similar to that of other development banks. Although all lending transactions have to cover risk and administrative costs, the bank's margins are thin, reflecting the nature of this business.
At year-end 2015, OeEB had €294,000 in cash, and €61 million in loans and advances with its parent OKB, some for approved but not finalized fund and equity investments. OeEB's balance sheet is small but rapidly expanding, at €666 million as of year-end 2015, more than twice that in 2012. We expect the balance sheet will enlarge further in the coming years, particularly due to refinancing of financial institutions.
We expect most of OeEB's funding to come from OKB, apart from funding-entrusted equity investments, which are covered by government sources. Austria guarantees OeEB's assets related to lending and investment business, but we believe there is potential for short-term mismatches if a client were to default. We understand, however, that OKB is willing to bridge temporary mismatches. We also see a strong incentive for OKB to provide OeEB with funding because doing so could prevent damage to its own reputation. We consider OKB's capacity to provide funding to be very high because OeEB's potential liquidity needs are, in our view, insignificant relative to the available liquidity on OKB's balance sheet. OeEB has a reduced banking license, which allows it access to European Central Bank (ECB) funding. Because of its owner structure, OeEB is not included in the ECB's quantitativeeasing list.
The stable outlook reflects that on the sovereign and our opinion that OeEB will continue to play a critical role in the Austrian government's developmentpolicy. This importance is underscored by the inclusion of OeEB's investment financings in the Export Guarantees Act and its new role as the government's trustee for equity investments. Given its mandate to operate as the sole agentfor financing commercial development projects, OeEB will likely maintain its integral link with the government. Guarantees against political and economic risks strengthen this link, in our view, and reflect OeEB's critical role for and integral link with OKB, its sole owner and lender of last resort. We do not expect that the critical role and integral link to change over the next 24months.
We could take a negative rating action if OeEB's critical role for or its integral link with the Austrian government were to weaken, if we observed a weakening relationship with its owner OKB, or if we were to take a negative rating action on Austria.
Additionally, we could raise the ratings if Austria's credit quality were to improve and the likelihood of support for OeEB remained almost certain.
We currently view both alternative options as unlikely.
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