SOVEREIGN AND SUPRANATIONAL

African Development Bank – Aaa stable

ISSUER IN-DEPTH
16 November 2021

Annual credit analysis
OVERVIEW AND OUTLOOKRATINGS

AfDB
Rating Outlook
Long-term Issuer

Aaa

STA

Short-term Issuer

P-1

--

TABLE OF CONTENTSOVERVIEW AND OUTLOOK
1Organizational structure and strategy 2
CREDIT PROFILE
3
Capital adequacy score: baa1
3
Liquidity and funding score: aa1
9Qualitative adjustments
12
Strength of member support score:
Very High13
ESG considerations
15
Rating range
16
Comparatives
17
DATA AND REFERENCES
18

Analyst Contacts
David Rogovic+1.212.553.4196
VP-Senior Analyst
david.rogovic@moodys.com

The credit profile of the African Development Bank (AfDB) is supported by the bank's robust
capital buffers and superior risk management, which mitigate risks arising from the low credit
quality of the bank’s development-related assets. An ample liquidity buffer and unfetteredaccess to the international capital markets also support its ability to meet its debt-service
obligations. Moreover, the bank has a long track record of being the premier development
institution in Africa and benefits from shareholders' ability and willingness to support its
development objectives, exemplified by the most recent general capital increase (GCI) andthe significant contributions of highly rated non-regional member countries.
The bank's credit challenges include its weak development asset credit quality compared with
Aaa-rated peers because of its exposure to non-sovereign borrowers as well as to low-rated
sovereign borrowers. However, the bank enjoys preferred creditor status on its sovereign loan
exposure, which limits asset quality risks. Although still in line with Aaa-rated peers, AfDB's
leverage ratios have deteriorated over the past decade.
A significant weakening in asset quality, as reflected in a sizable increase in nonperforming
assets, especially in the context of a deteriorating operating environment and an increase inleverage, would prompt us to reassess the quality of risk management and could result in adowngrade.
This credit analysis elaborates on AfDB’s credit profile in terms of capital adequacy, liquidityand funding and strength of member support, which are the three main analytical factors in
Moody’s Supranational Rating Methodology.

Serra Battal+1.212.553.0300
Associate Analyst
serra.battal@moodys.com
Matt Robinson+44.20.7772.5635
Associate Managing Director
matt.robinson@moodys.com
Marie Diron+44.20.7772.1968
MD-Sovereign Risk
marie.diron@moodys.com

This document has been prepared for the use of Mamadou Ouattara and is protected by law. It may not be copied, transferred or disseminated unlessauthorized under a contract with Moody's or otherwise authorized in writing by Moody's.

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Organizational structure and strategy
Premier African multilateral development bank with over 50 years of operations
AfDB's overall goal is to contribute to the economic and social progress of its regional member countries, both individually andcollectively. The agreement establishing the bank was adopted and opened for signature at a conference in Khartoum, Sudan, on 4
August 1963 and came into force on 10 September 1964. The bank's operations effectively began on 1 July 1966.
Membership was originally reserved for African sovereigns, but the bank gave non-regional sovereigns access to membership in 1982.
Non-regional members contribute to AfDB’s capital, but cannot borrow from it. The AfDB has 81 shareholders, including 54 regional
member countries and 27 non-regional member countries. The latter are mostly composed of highly rated governments from theOrganisation for Economic Cooperation and Development (OECD) and the Middle East. South Sudan joined as the 80th member
country in April 2015. Ireland (A2 positive) became the 81st member in May 2020. By statute, African countries have 60% of the bank’s
shareholding.
The balance of regional and non-regional countries' participation is reflected in AfDB’s governance structure. All the bank's powers
are vested in the board of governors, with one governor appointed by each of the bank's members. The governors exercise the voting
power of their appointing member country. Decisions by the board of governors require a two-thirds majority, or 70% on key issues if amember country requires it. As the voting power of each member is proportionate to that country's capital subscription, the voting ruleensures any significant decisions require the support of both regional and non-regional members.
The board of governors elects a board of directors, which is responsible for the conduct of the AfDB’s operations. The board of directors
comprises 20 members, with 13 executive directors representing the 54 regional member states and seven directors representing
the non-regional member states. Similar to votes by the board of governors, decisions by the board of directors require a twothirds majority, or 70% on key issues if expressly required by a member, with votes weighted by the share of capital of the members
represented by each director.
The bank's “High 5s” strategy emphasizes sustainable energy solutions
Under its “Ten Year Strategy for 2013-22,” the AfDB has been implementing an operational agenda dubbed the “High 5s.” The aimsof the “High 5s” are to: (1) light up and power Africa; (2) feed Africa; (3) integrate Africa; (4) industrialize Africa; and (5) improve thequality of life for the people of Africa. These operational priorities are informed by the 17 UN Sustainable Development Goals1 (SDGs),
which expand on the Millennium Development Goals2 to include areas such as climate change, economic inequality, innovation,
sustainable consumption, peace and justice. AfDB is in the process of preparing the successor to the Ten Year Strategy, which will
include a financing strategy that increases co-financing, balance sheet optimization and strengthens the capital base.
With regards to the “integrate Africa” priority, in March 2018 the AfDB approved a new regional integration strategic framework (RISF)
covering the period 2018-25. The RISF emphasises the importance of the private and financial sectors as the key drivers of regional
integration and focuses on three pillars: power and infrastructure connectivity, trade and investment, and financial sector integration.
The bank plans to ramp up investments, providing guarantees, co-financing and syndication under its “light up and power Africa”
priority, including through private sector participation in initiatives such as the Africa Renewable Energy Initiative3 and the Sustainable
Energy for All4 Initiative. In 2020, the initiative received approvals up to $183 million and benefitted over 16 million people. The funds
support investment in technologies for improved production of major staples. The bank expects to allocate $25-$40 billion to the“industrialize Africa” priority with a view to mobilizing a cumulative $56 billion. In 2020, the initiative received approvals up to $287
million and benefitted over 1.4 million individuals.

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MOODY'S INVESTORS SERVICECREDIT PROFILE
Our determination of a supranational’s rating is based on three rating factors: capital adequacy, liquidity and funding and strengthof member support. For Multilateral Development Banks, the first two factors combine to form the assessment of intrinsic financial
strength. Additional factors that can impact the intrinsic financial strength, including risks stemming from the operating environmentor the quality of management, are also considered. The strength of member support is then incorporated to yield a rating range. For
more information please see our Supranational Rating Methodology.

Capital adequacy score: baa1
Factor 1: Capital adequacy
Scale

aaa

aa1

aa2

aa3

a1

a2

a3

+

baa1 baa2 baa3 ba1

ba2

ba3

b1

b2

b3

caa1 caa2 caa3

ca

c

-

Assigned

Sub-factor scores
Capital position
Development asset credit quality
Asset performance

baa1
baa
a3

Capital adequacy assesses the solvency of an institution. The capital adequacy assessment considers the availability of capital to cover assets in light of theirinherent credit risks, the credit quality of the institution's development assetsand the risk that these assets could result in capital losses.
Note: In case the Adjusted and Assigned scores are the same, only the Assigned score will appear in the table above.

We score AfDB’s capital adequacy at “baa1,” reflecting the robust capital position supported by member contributions despite weak
areas of operation and moderately high leverage metrics.
AfDB's leverage has deteriorated, but remains in line with that of peers
Our primary measure of a bank’s capital position is the leverage ratio, which compares the size of its development-related assets (DRA)
and treasury assets rated A3 and below against its usable equity.
For several years, AfDB’s DRA grew faster than usable equity, resulting in an increase in leverage for most of the past decade. AfDB’s
leverage ratio, which was slightly stronger than the Aaa median in 2012-14 and 2016, peaked at just under 300% in 2019. In 2020,
leverage declined slightly to 295% as the first contributions under the GCI VII contributed to faster growth of usable equity comparedwith DRAs. Although capital adequacy metrics have worsened in recent years, they remain in line with Aaa-rated peers (see Exhibits 1
and 2).
Exhibit 1

Exhibit 2

Increase in usable equity supports stabilization in leverage ratio

AfDB's leverage ratio is in line with its Aaa-rated peers

Annual growth of usable equity and development-related assets (% change
year-over-year), leverage (%)(Development related assets plus treasury assets rated A3 and below as
percentage of usable equity, %)Leverage (RHS)

Usable Equity

DRA
350%

25%

300%

20%

800
250%

75th-100th percentile

25-75th percentile

Aaa universe

Median

AfDB

700

15%

600
200%

500

10%
150%

5%

400
300

100%

200
0%

50%

-5%

0%
2013

2014

2015

Source: Moody's Investors Service3

16 November 2021

2016

2017

2018

2019

2020

100
0
2015

2016

2017

2018

2019

2020

AIIB is excluded because of its short operational history
Source: Moody's Investors Service

African Development Bank – Aaa stable: Annual credit analysis

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MOODY'S INVESTORS SERVICEAfDB repurposes lending to sovereigns in response to coronavirus shock
AfDB's response to the coronavirus pandemic balanced increased demand for resources from regional member countries against the
bank's limited space to increase lending and leverage relative to internal capital thresholds. Rather than increase overall lending in
2020, AfDB repurposed its sovereign lending program, redirecting $2.4 billion under its Crisis Response Budget Support (CRBS) for 14
member sovereigns. AfDB's concessional lending arm, the African Development Fund, approved $1.2 billion and disbursed 92% of it
through CRBS to 25 member sovereigns.
In the second quarter of 2020, AfDB breached its 100% limit on its risk capital utilization rate (RCUR), an internal prudential measureof capital adequacy, as it accelerated disbursements of loans under the CRBS. The bank returned below its RCUR limit after receiving
UA 231 million ($333 million), as part of GCI VII and earlier payments under earlier capital increases as well as the clearance of Sudan'sarrears. However, AfDB adjusted downward its annual average level of lending that it plans over the next several years to ensure it
remains in compliance with internal capital limits. The bank reduced its average annual lending to UA 5 billion, compared to UA 6.5
billion as originally agreed under GCI VII (see Exhibit 3).
In 2021, the bank aims to return toward more normal lending operations. AfDB does not anticipate any lending under the CRBS,
instead focusing lending on the health sector, such as projects around water and sanitation, and driving investment that supports
private-sector industrialization, such as the development of the health industry on the continent.
GCI VII represents sizeable increase in capital stock, but unlikely to significantly reduce AfDB's leverage
In October 2019, AfDB's Board of Governors agreed to a 125% capital increase. The first paid-in capital contributions from GCI VII has
helped alleviate pressures related to pandemic lending (see Exhibit 4). As of July 2021, 45 member countries have already paid theirsubscriptions, including 25 who made their first payments in 2020, with the remainder expected by the end of 2021.
The 125% capital increase will moderate the rise in leverage, but the relatively low share of paid-in capital, which represents 6% paid inover an average of 10 years, will limit the improvement in leverage. We expect leverage to remain broadly stable in 2021 and 2022 as
the combination of additional paid-in capital and lower lending targets dampen the rise in leverage.
Exhibit 3

Exhibit 4

AfDB revised its lending and disbursement programs during 2020
to remain within its internal risk limits

Usable equity has grown because of the arrival of paid-in capitalfrom the general capital increase approved in 2010

(UA billions)(Unit of account)

6

Reserves

5.5

Paid-in capital

5.2

7,000

5
4.1
4

3.5

6,000

5,000
4,000

3

3,000

2

2,000
1

1,000

Source: African Development Bank

2020

2019

2018

2017

2016

2015

2014

2013

Initial
Reviseddisbursement limit disbursement limit

2012

Revised lending
target2011

Initial lending
target2010

00

In 2020, 1 Unit of Account was equal to 1.43 USD
Source: African Development Bank

Development asset credit quality is set to deteriorate
We assess AfDB's development asset credit quality at “baa,” reflecting the potential for losses stemming from the low credit qualityof the bank’s loan portfolio and exposure to non-sovereign borrowers, which tend to weigh on the overall credit quality of the loan
portfolio. Weak development asset credit quality is a long-standing credit constraint and reflects the difficult operating environment on
the African continent.

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Rating downgrades among regional member countries contributed to a worsening of AfDB's weighted average borrower rating (WABR).
In 2020, AfDB's WABR decreased to B2 (see Exhibit 5). The score reflects over 50% of AfDB’s portfolio is provided to borrowers rated
Ba2 or lower. Indeed, AfDB’s WABR has oscillated between B2 and Ba3 since 2006 given the bank's bias toward sovereign loans and its
region of operation. AfDB faces similar challenges to other large regional MDBs with exposure to lowly rated borrowers, such as InterAmerican Development Bank (IADB, Aaa stable) or Islamic Development Bank (IsDB, Aaa stable), a challenge that is compounded byprivate-sector exposure, which tends to be even lower credit quality than sovereign borrowers (see Exhibit 6).
As a result of the fiscal pressure of the pandemic, we do not expect an improvement in the credit quality of the bank’s borrowers. In
fact, more than half of AfDB's top 10 borrowers Morocco (Ba1 negative), Tunisia (Caa1 negative), Nigeria (B2 negative), South Africa(Ba2 negative), Senegal (Ba3 negative) and Kenya (B2 negative) have negative outlooks, signaling further pressure on the WABR.
Exhibit 5

Exhibit 6

Borrower quality has deteriorated in line with sovereign
downgrades in recent years

AfDB still has some of the weakest borrowers among Aaa-rated
supranationals(Cumulative distribution of country exposures by sovereign rating acrossrated sovereigns, %)(Weighted average borrower rating, 2020)

2020 WABR

2019

WABR

2020
100%
90%
80%
70%
60%
50%

40%
30%
20%
10%

WABR = Weighted average borrower rating
Source: African Development Bank

Aa2

A1

Aa3

A2

A3

Baa1

Baa2

Ba1

Baa3

Ba2

B1

Ba3

B2

B3

Caa1

Caa2

Caa3

C

Ca

0%

European Investment Fund
Nordic Investment Bank
European Investment Bank
Asian Infrastructure Investment Bank
Asian Development BankInternational Bank for Reconstruction and Development
African Development BankInternational Development Association
International Finance Corporation
European Bank for Reconstruction and Development
Islamic Development BankInter-American Development Bank

Baa1
Baa2
Ba1
Ba2
Ba3
B1
B2
B2
B2
B2
B3
B3

Source: Moody's Investors Service

AfDB’s exposure to the private sector, which accounts for 18% of total loans, also contributes to the relatively low credit quality of its
development-related assets; the bank’s non-sovereign loans tend to have a lower average borrower rating compared with its sovereignloans. In addition to loans, the bank is exposed to the private sector through its equity portfolio. Of the bank’s equity investments,
about half are investments in funds, with the remainder direct investments, mostly in development finance institutions.
Single-name and country concentration are low compared with rating peers. AfDB’s largest exposure, Morocco, accounted for 12%
of total development-related assets in 2020, lower than the corresponding figure for other Aaa-rated entities like the International
Development Association (Aaa stable, 12%), IADB (15%) and Asian Development Bank (Aaa stable, 15%). The Herfindahl-HirschmanIndex (HHI) for AfDB’s country concentration was 5% in 2020, lower than 6% in 2018. This HHI is in line with or below that of mostother Aaa-rated entities (see Exhibit 7). AfDB’s top 10 exposures account for 63% of its development-related assets, in line with mostpeers.

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Exhibit 7

AfDB's asset quality indicators are in line with those of most Aaa supranationals(2020)DACQ Assesment

Herfindahl-Hirschman Index

Weighted Average
Borrower Rating

Country of risk

Sector

MDB

Issuer rating

AfDB

Aaa

baa

B2

5%

21%

ADB

Aaa

a

Ba3

9%

18%

AIIB

Aaa

a

Ba2

10%

42%

EBRD

Aaa

baa

B2

6%

15%

EIB

Aaa

aa

Ba1

8%

17%

EIF

Aaa

aa

Baa1

12%

25%

IADB

Aaa

baa

B3

8%

17%

IBRD

Aaa

aa

B1

5%

100%

IDA

Aaa

baa

B2

6%

100%

IFC

Aaa

baa

B2

5%

23%

IsDB

Aaa

ba

B3

4%

26%

NIB

Aaa

a

Baa2

21%

18%

Source: Moody's Investors Service

AfDB's balance sheet optimization framework intended to preserve Aaa rating, create headroom to expand lending andmobilize private investment for development financing
The bank approved a balance sheet optimization (BSO) framework in May 2020 to help mitigate some credit risks associated with its
non-sovereign loans via a number of risk-transfer mechanisms. In the past, AfDB used various risk-transfer mechanisms, including an
exposure exchange agreement (EEA) with other MDBs, a private sector facility (PSF) and, most recently, a synthetic securitization andcredit insurance on a portion of its non-sovereign loan portfolio. We expect AfDB to continue using various risk-transfer mechanisms
under its BSO framework, which will create room under its internal risk guidelines to support additional lending. These tools should
provide enough risk mitigation to manage additional growth in AfDB's development-related asset portfolio without creating additional
asset quality risk.
The synthetic securitisation and credit insurance in particular reduce the risks associated with the riskiest portion of the bank’s loan
portfolio and its low quality development-related assets, creating additional headroom under its capital adequacy framework to
support its development mandate.
Exposure exchange agreements: AfDB has also reduced portfolio concentration through its participation in the EEA with theInternational Bank for Reconstruction and Development (IBRD, Aaa stable) and IADB. The agreement allows for a synthetic exchangeof exposures to the nonperformance of sovereign borrowers with comparable credit profiles. Because the agreement is purely synthetic
in nature, the lender of record does not change and any preferred creditor claims remain unimpaired. Because the exposures that areexchanged are of similar credit quality and the risks from exposures to Aaa-rated guarantors are minimal, the EEA has no immediate
impact on capital adequacy under our methodology. It does, however, materially reduce AfDB's portfolio concentration (see Exhibit 8).
The EEA, by its nature, also reduces regional exposure, although the improvement in the country HHI was marginal as AfDB's portfolio
was already broadly diversified at the country level.

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Exhibit 8

Exposure exchange agreements materially improve the AfDB's portfolio concentration(% of total, HHI)
100%

90%
80%
70%
60%
50%

40%
30%
20%
10%
0%
Before EEA

After EEA

Exposures in Africa as % of total exposures

Before EEA

After EEA

Top 10 exposures as % of total exposures

Before EEA

After EEACountry Herfindahl-Hirschman Index (HHI)

Source: AfDB

Synthetic securitizations: Another scheme that has boosted asset quality is AfDB’s September 2018 synthetic securitisationtransaction, the first of its kind by an MDB. Through the transaction with a private investor and Africa50, an investment infrastructure
fund partially owned by AfDB, the bank reduced the credit risk on a portion of its private-sector loan portfolio. Although the size of thetransaction ($1.0 billion in notional value) was small relative to AfDB’s overall loan portfolio of $25 billion, it offers an innovative way
for AfDB to satisfy shareholders' demands to increase lending with impacting capital.
A total of $1 billion in loans is included in the reference portfolio. Of that amount, AfDB retained a 2% first-loss tranche. The bulk ofcredit risk was transferred to the private investor, which took the next 15.25% of potential losses. AfDB retained the remaining risk via
the senior tranche.
The deal substantially reduces credit risk associated with the $1 billion portfolio. The transfer of credit risk beyond the first-loss trancheand below the senior tranche improves the quality of this share of AfDB’s loan portfolio substantially, though the benefits to the bank’s
overall credit profile are more limited based on the size of the transactions relative to the bank’s development-related assets.
To improve its asset quality further and unlock capital for additional lending based on its own risk-adjusted capital adequacy
framework, AfDB has also engaged with the African Trade Insurance Agency (ATI, A3 stable) to buy credit protection against a portfolioof 30 non-sovereign loans. The outstanding balance of the reference portfolio is $500 million, or around 2% of the bank's total loan
book. AfDB estimates it can undertake approximately $450 million in new private-sector lending on the back of this transaction.
Asset performance is set to worsen as a result of the pandemic
We assess AfDB’s asset performance at “a3” based on its nonperforming asset (NPA) ratio of 2.6% in 2020. AfDB's mandate to lend ina region with volatile macroeconomic and operating conditions, combined with its hybrid focus on both public and private borrowers,
translates into a persistently higher level of NPAs compared with most Aaa-rated regional and global MDBs.
AfDB’s NPA ratio decreased to 2.6% in 2020 from 2.7% in 2019, but remained significantly above the Aaa-rated median of 0.4%
(see Exhibits 9 and 10). We expect the overall NPA ratio to remain broadly stable, with resolution of arrears owed by Somalia in 2020
reducing the sovereign NPA ratio.

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Exhibit 9

Exhibit 10

AfDB has one of the highest nonperforming assets ratio in the Aaarated universe…

…while provisioning has increased(Provisions as % of gross loans)(Nonperforming assets as % of development related assets)
25-75th percentile of Aaa universe
Aaa universe
MedianAfDB

8.0

25-75th percentile of Aaa universe
Aaa universe
Median
AfDB

7

7.0

6

6.0

5

5.0

4

4.0

3

3.0

2

2.0

1

1.0
0.0
2012

2013

2014

Source: Moody's Investors Service

2015

2016

2017

2018

2019

2020

0
2012

2013

2014

2015

2016

2017

2018

2019

2020

Excluded: AIIB (short operational history), International Finance Corporation (IFC,
exclusive focus on private sector), and European Investment Bank (EIB) and EIF (lack ofdata)
Source: Moody's Investors Service

The bank has made progress in addressing its legacy sovereign NPAs. In 2020, Somalia settled its arrears with the bank, while in 2021
Sudan cleared $206 million in arrears, which resulted in the bank writing back $124 million of provisioning. Zimbabwe is the lastremaining sovereign with arrears to AfDB. The country is seeking to reengage with its official lenders with a desire to clear its arrears.
Like other large MDBs, AfDB does not write off its sovereign exposures.
The bank's non-sovereign loan portfolio remains the main source of asset quality risk. The nonperforming loans (NPL) ratio on AfDB’s
non-sovereign loan portfolio is higher than that on its sovereign portfolio, at 8.6% of total non-sovereign loans, higher than 7.4% in
2019. Of the 120 basis point increase in non-sovereign NPLs in 2020, 90 basis points was driven by a reduction in the size of AfDB's
non-sovereign loan portfolio. The impairments on non-sovereign loans reflects idiosyncratic factors related to the projects and entities
rather than the impact of a broad-based deterioration in the operating environment.
AfDB's non-sovereign NPLs are higher than the NPL ratio of other highly rated MDBs that have exposure to the private sector, such as
International Finance Corporation (IFC, Aaa stable) and European Bank for Reconstruction and Development (EBRD, Aaa stable).

8

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Liquidity and funding score: aa1
Factor 2: Liquidity and funding
Scale

+

aaa

aa1

aa2

aa3

a1

a2

a3

baa1 baa2 baa3 ba1

ba2

ba3

b2

b3

caa1 caa2 caa3

ca

c

-

Assigned

Sub-factor scores
Liquid resources
Quality of funding

b1

a2
aaa

An entity’s liquidity is important in determining its ability to meet its financial obligations. We evaluate the extent to which liquid assets cover net cash flows
over the coming 18 months and the stability and diversification of the institution’s access to funding.
Note: In case the Adjusted and Assigned scores are the same, only the Assigned score will appear in the table above.

AfDB’s credit profile benefits from liquidity and funding positions that are in line with those of other Aaa-rated MDBs, with the “aa1”liquidity and funding position score reflecting these strengths. As part of AfDB’s risk appetite statement, the bank seeks to maintainsufficient liquidity to continue normal operations for up to one year without recourse to capital markets. In practice, it maintains
liquidity comfortably above the minimum set in the risk appetite statement.
The bank is a very frequent issuer of debt in the international capital markets, and enjoys access to borrowings at very low interest rates
and from a large and diverse investor base. In addition to issuing debt in various currencies and markets, AfDB issues thematic bonds,
such as green and social bonds, which help to deepen and diversify its investor base.
Liquid resources of the bank remain in line with peers
AfDB’s “a2” score is based on our assessment of the bank's availability of liquid resources (ALR) to cover forthcoming loan
disbursements, debt servicing and other potential cash outflows. We measure ALR by comparing projected net outflows over the next
18 months to discounted liquid assets. The numerator of the ALR, estimated net cash outflows, are outflows from mandate activities
minus inflows from mandate activities plus debt repayments (both principal and interest). We include cash and cash equivalents,
treasury assets rated A2 or higher and committed, unrestricted credit lines with prime lenders with a maturity greater than two years
in the denominator. The composition and size of a supranational institution’s liquid assets are important indicators of its capacity toreadily sell assets to offset a deterioration in its cash inflows and its access to funding.
As of the end of 2020, AfDB’s ALR was 101% of projected 18-month net cash outflows down from 133% in 2019. The bank’s policy
requires it to meet its net cash flow requirements (including debt-service payments, net loan disbursements, the notional value ofcommitted guarantees and the value of undisbursed equity investments) over a rolling one-year horizon without recourse to capital
markets. Compliance with this policy supports AfDB's favorable liquidity position.
Although AfDB compared favorably with Aaa-rated peers on other measures of liquidity before 2020, in 2020 the proportion of liquid
assets to short-term debt plus currently maturing long-term debt decreased to 194% from 288% in 2019. AfDB’s cash and treasury
assets account for 32% of total assets, above the Aaa-rated median of 29% (see Exhibits 11 and 12).

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African Development Bank – Aaa stable: Annual credit analysis

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Exhibit 11

Exhibit 12

AfDB holds a larger share of liquid assets than most Aaa-rated
peers…

…and in liquid assets relative to maturing debt
(Liquid assets as % of short-term and currently maturing long-term debt)(Liquid assets as % of total assets)
Aaa universe
25-75th percentile of Aaa universe
MedianAfDB

60

Aaa universe
25-75th percentiles of Aaa universe
Median
AfDB

700
600

50

500

40

400
30
300
20

200

10
0
2012

100
2013

2014

2015

2016

AIIB is excluded because of short operational history
Source: Moody's Investors Service

2017

2018

2019

2020

0
2012

2013

2014

2015

2016

2017

2018

2019

2020

AIIB is excluded because of its short operational history. IDA excluding because of scale
Source: Moody's Investors Service

The bank’s cash and treasury investments amounted to UA11.16 billion ($15.9 billion), or 32% of total assets and 44% of debt
outstanding, as of the end of 2020, down from UA12.46 billion in 2019. Treasury investments are divided into three portfolios: anoperational portfolio, a prudential portfolio and an equity-backed portfolio. Each portfolio has different liquidity characteristics andbenchmarks, reflecting the cash flow and risk profile of its assets and funding sources. The core liquidity and prudential portfolios areheld for trading, whereas the equity-backed portfolio is managed over a repricing period of 10 years and held at amortized cost.
The amortized cost portfolio is invested in a 10-year laddered portfolio with about 10% maturing in each year. Government agency
and supranational obligations represented about 89% of the amortized cost portfolio excluding cash in June 2021. The credit quality ofassets held in the portfolio is very high, with Aaa exposures making up 49% of the total (excluding cash).
The bank's risk management rules require it to match assets and liabilities by currencies via swaps and require borrowers to service theirloans in the disbursed currencies. Even after matching assets and liabilities in the various currencies, any net asset position is matchedto the currency composition of the SDR to minimize currency risk. The bank also manages interest rate risk via swaps with a view togenerating a broadly stable overall net interest margin that is adequately resilient to sharp changes in market interest rates.
Quality of funding reflects reliable market access and favorable borrowing costs
Our assessment of AfDB’s quality of funding at “aaa” takes into account the bank’s track record of being a frequent issuer of debt ininternational capital markets, enjoying access to borrowings at very low interest rates and from a large and diverse investor base.
A large and broadly diversified investor base allows AfDB to reliably borrow at rates comparable to other Aaa-rated issuers, even as its
funding needs increase. The weighted average cost of AfDB's direct borrowings stood at 1.93% as of the end of 2020, with a weighted
average maturity of 3.84 years. Recent benchmark issuances in US dollars and euros, ranging from three-year to 10-year maturities,
have come at relatively favorable rates.
In March 2020, AfDB issued $3.1 billion under its “Fight Covid 2019 Social Bonds” with a maturity of three years, the largest social bondissue at the time of issuance. The bond received strong demand from the market and further diversified the bank's investor base, adding
seven new investors. The bank also issued two additional global benchmark bonds amounting to $2.5 billion in March 2021 and $2.75
billion in July 2021.
AfDB is able to place bonds with a diverse investor base across the globe. Of its US dollar- and euro-denominated benchmark global
bonds, almost half are held by central banks and other official institutions, while 30% are held by banks, and 28% are held by asset
managers.

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AfDB completes most of its borrowing requirements in the US dollar and euro currencies, and issues in other jurisdictions including
Swedish krona, Norwegian krone and Australian dollar as well. In 2021, AfDB issued its largest Australian dollar denominated Kangaroobonds as well as its largest sterling denominated transactions. In addition, the bank has become a regular issuer of thematic bonds,
such as green bonds or bonds aligned with the operational priorities of its “High 5s.”
The market's capacity to absorb AfDB's issuance was tested in recent years by a sharp increase in the institution's net borrowing,particularly in 2016 and 2017, when the bank's borrowing program exceeded $9.0 billion per year. Rollover risk is limited by the bank’s
policy of limiting the amount of outstanding borrowing that can fall due in any year to 25% of total outstanding borrowing.

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Qualitative adjustments
Qualitative adjustments to intrinsic financial strength
Adjustments
Operating environment
Quality of management

0+1

The capital adequacy and liquidity and funding factors represent the key drivers of our assessment of an institution’s intrinsic financial strength (IFS).
However, assessments of the operating environment and the quality of management are also important components of our analysis. To capture these
considerations, we may adjust the preliminary IFS outcome that results from the capital adequacy factor and the liquidity and funding factor. The result of thisanalysis is the adjusted IFS outcome.

Diversified portfolio mitigates risks associated with difficult operating environment
While AfDB faces a difficult operating environment given the ongoing pandemic and its exposure in Africa, we do not make any
adjustments for a challenging operating environment because it is already captured in our subfactor scores for development asset
credit quality and asset performance. Additionally, the diversification of the bank's exposure across countries and sectors mitigate risks.
Exposure to sovereigns under stress like Zambia (Ca stable)and Gabon (Caa1 stable) make up about 3.6% of AfDB’s total developmentrelated asset. AfDB’s exposure to Tunisia is 7.4% of total development-related assets, placing it within the top 10 sovereign exposures.
Quality of management mitigates asset quality risks
We incorporate a “+1” adjustment to AfDB's intrinsic financial strength on account of its very robust and conservative risk management
practices. We believe that the quality of management limits the risks associated with its development-related asset portfolio.
The bank employs a capital framework that compares a measure of potential unexpected losses to the level of risk capital (paid-in
capital plus reserves). Total potential unexpected losses from sovereign and non-sovereign loans are calculated using a credit-valueat-risk approach, which incorporates assumptions on probability of default, loss given default, exposure at-risk and loan correlations.
The calibration of probability of default are based on the Global Emerging Market (GEM) risk database, which incorporates default andrecovery data from the 21 international financial institutions that are members of the GEM consortium.
The group chief risk officer is independent and reports to the president, while a board-approved risk appetite statement sets out how
much risk the bank can take across core risks (mainly credit risk) and non-core risks (such as market and operational risk). The bank’s
risk management framework incorporates limits on non-sovereign credit risk, which includes both loans and equity. The bank also setstarget ranges for its sovereign and non-sovereign loans, as well as equity exposure in terms of credit risk, based on its internal credit risk
scale. In addition, AfDB sets country, sector, single name and equity limits, measured in terms of risk capital.

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Strength of member support score: Very High
Factor 3: Strength of member support
Scale

+

Very High

High

MediumAssigned

Adjusted

Low

Very Low-

Sub-factor scores
Ability to support
Willingness to support: Contractual
Willingness to support: Non-contractualba2
aaa
Very High

Shareholders' support for an institution is a function of their ability and willingness. Ability to support is reflected by the shareholders' credit quality. Willingness
to support takes into consideration (1) the members' contractual obligations that primarily manifest in the callable capital pledge, a form of emergency
support, and (2) other non-contractual manifestations of support to the institution's financial standing and mission. Strength of member support can increase
the preliminary rating range determined by combining factors 1 and 2 by as many as three scores.
Note: In case the Adjusted and Assigned scores are the same, only the Assigned score will appear in the table above.

AfDB benefits from a “Very High” strength of shareholder support, reflected in continued capital increases, as well as demonstrated
support from non-regional shareholders outside of regular capital increases.
Under our methodology, we assess the ability of shareholders to support an MDB by calculating the weighted average credit ratingof the shareholders (WASR). The presence of lower-rated sovereigns in its capital base limits AfDB’s WASR to Ba2, below investment
grade (see Exhibit 13); the only other two Aaa-rated supranationals to have a non-investment grade WASR are the IsDB and IADB.
Because of its regional nature, AfDB is somewhat limited in its capacity to secure highly rated sovereign shareholders. However, thebank has attracted a significant amount of non-regional shareholders who support the bank’s mandate in the region. As of the end of
2020, non-regional shareholders represented 45% of total shares (see Exhibit 14). The addition of non-regional members also serves toreduce the regional concentration of capital sources.
Exhibit 13

Exhibit 14

AfDB's shareholder rating remains below other Aaa-rated peers

Non-regional members provide a substantial share of AfDB's
capital(WASR, weighted average shareholder rating)
AfDB

IADB

IBRD

ADB

Aaa median

A3

Issuerrating% of Suscribed
capitalNon-regional members

Issuerrating% of Suscribed capital

Nigeria

B2

13.5

Japan

A1

7.9

MoroccoBa1

5.4

Germany

Aaa

6.0

Egypt

B2

3.8

United States of America

Aaa

4.4

Regional members

Libya

-

3.4

Italy

Baa3

3.5

Ba2

3.3

CanadaAaa

3.3

Algeria-

3.3

United Kingdom

Aa3

2.6

Others-22.1

Others

-

17.5

Total

-

54.8

Total

-

45.2

South Africa

Baa1
Baa2

Source: Moody's Investors Service

Baa3

Ba2

2013

2014

2015

2016

2017

2018

2019

2020

Source: Moody's Investors Service

AfDB has significant callable capital relative to debt
Although AfDB has a weaker WASR than most other Aaa-rated supranationals, the bank does have significantly more callable capitalin relation to its debt than most other Aaa-rated supranationals. This means that it has a significant debt-coverage buffer comparedwith other Aaa-rated supranationals. The agreement on GCI VII resulted in a sizable increase in AfDB's callable capital buffer. The bank's
callable capital to debt ratio increased to 374% in 2020, among the highest levels of contractual support for Aaa-rated MDBs. (seeExhibit 16).

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Exhibit 15

AfDB's debt coverage increased significantly in 2020
(Callable capital as % of outstanding debt)
25-75th percentiles of Aaa universe

Aaa universe

Median

AfDB

600
500
400

300
200
100
0
2012

2013

2014

2015

2016

2017

2018

2019

2020

AIIB excluded (short operational history), and EIF, EU, IDA, IFC excluded (ratio not applicable)
Source: Moody's Investors Service

AfDB has a history of consistent support from both regional and non-regional shareholders, which supports our “very high” assessmentof non-contractual support.
» On 5 March 2021, AfDB issued a Special Temporary Callable Capital Increase (STCCI) for an amount of UA28.6 billion (or about$41.2 billion) with a deadline of depositing instrument of subscription by 23 September 2023. As of September 2021, 11 members
including four Aaa-rated sovereigns (Sweden (Aaa stable), Germany (Aaa stable), Luxembourg (Aaa stable) and Denmark (Aaastable)) deposited their instruments. The callable capital would become effective in the event that AfDB's stock of Aaa-rated
callable capital declined by at least 30%, which increased the ratio of Aaa-rated callable capital to net debt above 100%.
» Support beyond ongoing involvement: Member support is supposed to capture support beyond ongoing member involvementin the MDB, which includes things like periodic capital increases to support operations. AfDB’s non-regional shareholders have a
track record of supporting the institution beyond what we consider to be their ongoing involvement. In 2019, Canada (Aaa stable)
pledged $1.1 billion in temporary callable capital to AfDB, illustrating the support of one of its largest non-regional shareholders.
» In October 2019, Sweden added a pledge of $492 million in temporary capital. In 2010, Canada and Korea (Aa2 stable) provided asimilar pledge of temporary callable capital to support AfDB’s financial position while the bank completed its previous GCI.

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ESG considerations
How environmental, social and governance risks inform our credit analysis of AfDB
Moody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing supranational issuers’
credit profile. In the case of AfDB, the materiality of ESG to the credit profile is as follows:
Environmental and social considerations are not material for AfDB’s rating. Many of AfDB's borrowers in Africa are exposed toenvironmental risks, mostly because of their reliance on large agricultural sectors and thus exposure to extreme weather conditions,
including rising temperatures, as identified in our report on environmental risks and their impact on sovereigns. However, taking
into account AfDB’s diversified portfolio and capacity to absorb environmental or social risks materializing for some of its borrowers,
these considerations do not significantly affect AfDB's credit profile. The bank conducts environmental and social assessments (ESAs)
on sectorwide and regionwide programmes to determine the environmental and social consequences. The ESAs allow the bank toincorporate these findings in its assessment of the climate impact of its lending activity.
Governance considerations are material for the rating. AfDB adheres to very robust and conservative risk management practices, which
we believe limit the risks associated with its development-related assets. AfDB’s risk management framework incorporates limits on
non-sovereign credit risk, which includes both loans and equity.
All of these considerations are further discussed in the “Credit profile” section above. Our approach to ESG is explained in our crosssector methodology General Principles for Assessing ESG Risks. Additional information about our rating approach is provided in ourSupranational Rating Methodology.

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Rating range
Combining the scores for individual factors provides an indicative rating range. While the information used to determine the grid
mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ fromthe ones implied by the rating range. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer
comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside
the indicative rating range. For more information please see our Supranational Rating Methodology.
Exhibit 16

Supranational rating metrics: AfDB
Capitaladequacy
Scale

aaa

aa1

How strong is the capital buffer?
Sub-Factors: Capital position, development asset credit quality, asset performance
aa2

aa3

a1

a2

a3

+

Liquidity andfunding
Scale

aaa

+

baa1 baa2 baa3 ba1

ba2 ba3

b1

b2

b3

caa1 caa2 caa3

ca

c

-

Assigned

aa1

How strong are the institution's liquidity buffers?

Preliminary intrinsic
financial strengtha1

Sub-factors: Liquid resources, quality of funding

aa2

aa3

a1

a2

a3

baa1 baa2 baa3 ba1

ba2 ba3

b1

b2

b3

caa1 caa2 caa3

ca

c

-

Assigned

Qualitative
adjustments

What other elements can affect the intrinsic financial strength?

Adjusted intrinsic
financial strengthaa3

Adjustment factors: Operating environment, quality of management

Scorecardindicatedoutcome range:

0+1Operating environment
Quality of management

Aaa-Aa2

Strength ofmember support
Scale

+

How strong is members' support of the institution?
Sub-factors: Ability to support, willingness to support (contractual and non-contractual)

Very HighHigh

Assigned

Adjusted

MediumLow

Very Low-

Assigned rating:
Aaa

Source: Moody's Investors Service

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Comparatives
This section compares credit relevant information regarding AfDB with other supranational entities that we rate. It focuses on a comparison with supranationals within the samerating range and shows the relevant credit metrics and factor scores.
AfDB is significantly smaller than the Aaa-rated median in terms of total assets. AfDB's development related assets as a percentage of usable equity of around 296% is in line with
the Aaa-rated median of around 278%. AfDB benefits from high liquidity with liquid assets making up about 32% total assets, similar to IBRD at 29% and EIF at 27%. AfDB's callable
capital to total debt is among the highest in the MDB portfolio, significantly above its rated peers.
Exhibit 17

AfDB key peers
Year

AfDB

IBRD

EBRD

ADB

EIF

CEB

Aaa/STA

Aaa/STA

Aaa/STA

Aaa/STA

Aaa/STA

Aa1/STA

50,552296,804

85,617

271,741

3,995

34,309

baa1

a1

a3

a1

a2

a3

2020

295.5

513.8

196.6

259.8

329.0

572.1

277.6

2020

baa

aa

baa

a

aa

aa

baa

2020

2.6

0.2

5.1

0.2

0.0

0.0

0.6

2020

0.4

0.0

0.4

0.6

4.1

0.3

0.4

2020

1.2

0.7

1.3

0.9

0.8

0.6

0.9

aa1

aa1

aaa

aa1

aaa

aa2

Rating/Outlook
Total assets (US$ million)

2020

Factor 1: Capital adequacy
DRA / Usable equity[1] [2] [4]Development assets credit quality score (year-end)
Non-performing assets / DRA
Return on average assets
Net interest margin (X)

[1]

[4]

[4]

Factor 2: Liquidity and funding

Aaa Median

90,709Quality of funding score (year-end)

2020

aaa

aaa

aaa

aaa

aaa

aa

aaa

Liquid assets / ST debt + CMLTD[3][4]

2020

193.9

167.3

204.1

181.0

0.0

255.2

203.8

Liquid assets / Total assets[4]

2020

29.3

31.6

29.0

45.4

18.0

27.1

30.0

Preliminary intrinsic financial strength (F1+F2)

a1

aa2

aa3

aa2

aa2

a1

Adjusted intrinsic financial strength

aa3

aa1

aa2

aa1

aa2

aa3

Factor 3: Strength of member support

VH

VH

H

VH

VH

M

Weighted average shareholder rating (year-end)

2020

ba2

baa2

a2

a3

aa1

baa1

baa1

Callable capital / Total debt

2020

373.8

111.0

48.8

112.1

0.0

21.4

112.1

Callable capital (CC) of Baa3-Aaa members/Total CC [4]

2020

46.9

81.0

94.9

91.6

98.6

87.3

90.9

Aaa-Aa2

Aaa-Aa2

Aaa-Aa2

Aaa-Aa2

Aaa-Aa2

Aa1-Aa3

Scorecard-indicated outcome range (F1+F2+F3)[1] Development related assets[2] Usable equity is total shareholder's equity and excludes callable capital[3] Short-term debt and currently-maturing long-term debt
[4] Ratio not used in Scorecard
Source: Moody’s Investors Service

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Rating history
Exhibit 18

African Development Bank[[1]Long-Term Ratings

Short-Term

Supranational

SeniorSubordinate

Ratings

Outlook

Date

African Development Bank (AfDB)

Aaa(P)Aa1

P-1

STA

10/25/2019

African Development Bank (AfDB)

Aaa(P)Aa1

P-1

STA

08/25/2017

African Development Bank (AfDB)

Aaa(P)Aa1

P-1

STA

08/29/2014

African Development Bank (AfDB)

Aaa(P)Aa1

P-1

STA

8/28/2010

African Development Bank (AfDB)

Aaa

Aa1

P-1

STA

11/15/2003

African Development Bank (AfDB)

Aaa

Aa1

P-1

-

03/15/2000

African Development Bank (AfDB)

Aaa

Aa1

-

-

1/13/1995

African Development Bank (AfDB)

Aaa

-

-

-

12/21/1994

African Development Bank (AfDB)

Aaa

-

-

-

03/23/1984

Notes: [1] Table excludes rating affirmations. Please visit the issuer page for AfDB for the full rating history.
Source: Moody's Investors Service

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Annual statistics
Exhibit 19

African Development Bank
Balance Sheet, USD Millions

2014

2015

2016

2017

2018

2019

2020

589

1,683

1,757

1,660

2,855

2,928

3,335

Securities

10,823

11,694

14,31016,307

14,495

14,172

12,622Derivative Assets

1,657

2,016

1,659

1,015

907

1,471

2,209

Net Loans

18,105

17,832

20,295

24,95926,131

27,21329,811
1,340

AssetsCash & Equivalents

Net Equity Investments

865

975

967

1,106

1,174

1,375

Other Assets

1,212

924

976

1,061

1,151

1,228

1,234

Total Assets

33,25135,12439,963

46,10846,712

48,38750,552

Borrowings

21,45022,79427,75332,80333,18334,96335,881

Derivative Liabilities

1,237

1,504

1,158

1,488

1,444

883

1,321

Other Liabilities

1,756

1,846

2,172

1,777

2,145

2,416

2,208

Total Liabilities

24,443

26,14431,08336,06936,77338,26339,411

Liabilities

EquitySubscribed Capital

94,36690,741

88,03592,70790,05990,812

144,220

Less: Callable Capital

87,31883,97381,45185,65883,20384,016

134,132

Less: Other Adjustments

2,318

1,837

1,397

1,232

799

513

3,033

Equals: Paid-In Capital

7,055

4,729

4,931

5,187

5,818

6,057

6,283

Reserves

4,079

4,048

3,693

4,221

3,882

3,840

4,087

Total Equity

8,808

8,979

8,879

10,0389,940

10,124

11,141

Income Statement, USD Millions

2014

2015

2016

2017

2018

2019

2020

Net Interest Income

463

427

468

537

559

600

556

Interest Income

688

606

706

926

1,158

1,254

918

Interest Expense

224

178

238

389

599

654

362

Net Non-Interest Income

-53

-38

-58

71

-54

-18

76

Source: Moody’s Investors Service
Exhibit 20

African Development Bank

Income from Equity Investments

9

21

10

13

15

10

19

Other Income

-62

-59

-68

58

-69

-29

56

Other Operating Expenses

189

189

190

238

265

296

280

Administrative, General, Staff

178

169

175

209

229

246

227

Other Expenses

11

20

15

29

36

49

54

Pre-Provision Income

352

221

200

220

370

239

286

Loan Loss Provisions (Release)

1

71

59

4

67

113

68

Net Income (Loss)

46

-43

34

250

58

72

199

Other Accounting Adjustments and Comprehensive Income

-106

190

-268

83

-62

-85

-113

Comprehensive Income (Loss)

-60

147

-234

333

-5

-13

86

Source: Moody’s Investors Service

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Exhibit 21

African Development Bank
Financial Ratios

2014

2015

2016

2017

2018

2019

2020

217.9

219.4

249.3

267.8

285.0

298.6

295.5

--

--

--

--

baa

baa

baa

Non-Performing Assets / DRA

3.0

3.8

3.2

1.9

2.5

2.7

2.6

Return On Average Assets

0.1

-0.1

0.1

0.6

0.1

0.2

0.4

Net Interest Margin

1.6

1.4

1.3

1.3

1.3

1.4

1.2

Capital Adequacy, %DRA / Usable Equity
Development Assets Credit Quality (Year-End)

Liquidity, %Quality of Funding Score (Year-End)

--

--

--

--

aaa

aaa

aaa

Liquid Assets / ST Debt + CMLTD

610.6

259.0

295.8

245.3

325.4

287.7

193.9

Liquid Assets / Total Debt

53.2

58.7

57.9

54.8

52.3

48.9

44.5

Liquid Assets / Total Assets

34.3

38.1

40.2

39.0

37.1

35.3

31.6

Ba2

Ba2

Ba2

Ba2

Ba2

Ba2

Ba2

Callable Capital / Gross Debt

407.1

368.4

293.5

261.1

250.7

240.3

373.8

Callable Capital (CC) of Baa3-Aaa Members/Total CC

47.0

47.1

46.8

46.6

47.1

48.3

46.9

Strength of Member Support, %Weighted Average Shareholder Rating (Year-End)

Source: Moody’s Investors Service

20

16 November 2021

African Development Bank – Aaa stable: Annual credit analysis

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SOVEREIGN AND SUPRANATIONAL

Moody's related publications» Credit Opinion: African Development Bank – Aaa stable: Update following rating affirmation, outlook unchanged, 28 October
2021» Sector In-Depth: Supranationals – Global: Gains from MDB credit enhancement tools vary with scope, effectiveness and usage, 3March 2021
» Rating Methodology: Multilateral Development Banks and Other Supranational Entities, 28 October 2020
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All
research may not be available to all clients.

Related websites and information sources» Sovereign and supranational risk group web page
» Sovereign and supranational rating list
» African Development BankMOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services.
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Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on
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Authors

David Rogovic
Lead Analyst
Serra Battal
Associate Analyst

Endnotes
1 https://www.un.org/sustainabledevelopment/sustainable-development-goals/
2 https://www.un.org/millenniumgoals/
3 http://www.arei.org/
4 https://www.se4all-africa.org/

21

16 November 2021

African Development Bank – Aaa stable: Annual credit analysis

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REPORT NUMBER

22

16 November 2021

1279847

African Development Bank – Aaa stable: Annual credit analysis

This document has been prepared for the use of Mamadou Ouattara and is protected by law. It may not be copied, transferred or disseminated unlessauthorized under a contract with Moody's or otherwise authorized in writing by Moody's.