Rating action

Scope Ratings GmbH (Scope) has today affirmed the Council of Europe Development Bank’s AAA long-term issuer and senior unsecured foreign-currency ratings and affirmed its short-term issuer rating of S-1+ in foreign currency. All Outlooks are Stable.

For the associated Rating Report, click here. 

Summary and Outlook

The Council of Europe Development Bank (CEB)’s AAA rating reflects the supranational’s ‘excellent’ intrinsic strength and ‘very high’ shareholder support. The CEB’s institutional profile benefits from a growing strategic role for its shareholder governments and excellent governance. Its social mandate has been strengthened in the context of the Covid-19 pandemic and the Ukraine crisis, underscoring the bank’s unique role among European supranational institutions. This is reflected in the large increase of paid in and callable capital approved in December 2022, effective since February 2024, alongside the bank’s new Strategic Framework for 2023-27, which includes direct lending to Ukraine.

The CEB’s financial profile benefits from excellent asset quality with no non-performing loans (NPLs) and high average borrower quality due to its focus on the public sector, predominantly in Europe. It also benefits from preferred creditor status (PCS) for its sovereign exposures and geographical diversification towards Central and Eastern Europe. The CEB’s liquidity profile is exceptionally strong. The bank’s funding profile benefits from strong market access, especially for social inclusion bond issuances, accounting for about one third of its funding programme. Despite provisioning for credit risk exceeding the 10-year average, net profitability increased significantly in 2023 based on higher interest income, enabling the bank to strengthen its capital base, with net profit allocated to general reserve of EUR 89.2m. The bank benefits from robust asset performance and strong management of climate related exposure with all activities aligned with the Paris Agreement since January 2024. The Strategic Framework for 2023-27 set the average annual volume of loan approvals at EUR 4.3bn over the period. This includes a cautious and gradual path of activity in Ukraine (CC/Negative), and the strengthening of the CEB’s focus on Target Group Countries, mainly in Central and Eastern Europe. Ukraine became the 43rd member state of the bank in June 2023 and eligible for direct funding, with a first loan of EUR 100m approved in November. Implementation of the Strategic Framework is supported by the substantial capital increase of EUR 4.25bn approved in December 2022, of which up to EUR 1.2bn is to be paid in, demonstrating the importance and growing relevance of the CEB for its membership. The capital increase is effective since 29 February 2024 with a subscription period ending 30 June 2024. The key rating challenge is the CEB’s ongoing high leverage, although the capital increase should improve room to manoeuvre.

Finally, the CEB benefits from highly rated leading shareholders. The governments of Europe’s largest economies – Germany (AAA/Stable), France (AA/Negative), Italy (BBB+/Stable), Spain (A-/Positive), the Netherlands (AAA/Stable), Belgium (AA-/Negative) and Greece (BBB-/Stable) – make up the CEB’s principal shareholders along with Türkiye (B-/Stable), for a weighted average credit rating of A. This determines Scope’s assessment of very high shareholder support for the bank. However, at 12%, coverage of outstanding mandated assets by high-quality callable capital as of end-2023 is moderate compared with similar institutions and has continually declined over the past decade. Still, Scope expects this ratio to improve with the increase in callable capital provided by highly rated shareholders.

The Stable Outlook reflects Scope’s assessment of the CEB’s financial buffers against external and balance sheet-driven shocks. The rating could be downgraded if: i) the CEB recorded sustained losses, leading to a marked deterioration in the capital base; ii) its liquidity buffers were significantly reduced; and/or iii) its main shareholders were downgraded.

Rating rationale

The first driver of the CEB’s AAA rating is its very strong institutional profile.

This reflects the high and growing strategic importance of the bank for its shareholders. The Covid-19 pandemic, the Russia-Ukraine conflict and the 2023 earthquake in Türkiye have underlined the unique role of the CEB and its ability to rapidly adapt to crises and social challenges. These crises have demonstrated shareholder governments’ responsiveness to demand for the CEB’s financing and unique expertise. After record activity in 2020, with project approvals and disbursements up by 50% and 57% respectively from the previous year to support the bank’s response to the Covid-19 pandemic, the CEB’s loan activity normalised in 2021 and 2022. The volume of loans approved in 2023 dropped by more than 3% to EUR 4.1bn, but loans disbursed increased by more than 5% to EUR 3.7bn¹. This reflects the CEB’s lending activity that remains on a long-term upward trend, with disbursements doubling over a 10-year period. The Strategic Framework for 2023-27 plans a further increase in the volume of disbursements to EUR 3.9bn on average. As of end-2023, the volume of outstanding loans increased by about 8% to EUR 21.5bn¹.

While the bank’s operations primarily focus on socially oriented investment projects as per its mandate, it also pursues a climate-social nexus approach as climate change has disproportionate consequences for lower income and vulnerable groups. The bank defined a dedicated approach to align its social mandate and business model with the Paris Agreement, with all activities aligned since January 2024. The bank also fully endorses the MDB’s collective climate ambitions, as reiterated during COP28, although climate finance still accounts for a modest share of activities. The bank approved financing of almost EUR 900m in 2022 for climate change mitigation and adaptation, compared with about EUR 500m in 2021, EUR 800m in 2020, and EUR 1bn in 2019^2,3. As a result, Scope assesses the CEB’s potential environmental risk exposure and its environmental policies. This includes the risk of stranded assets and the reputational risk of pursing activities, either directly or through counterparties, that are contradictory to the CEB’s mandate and environmental objectives. Scope assesses these risks as low compared with similar institutions. This is due to: i) the comparatively low to moderate transition and physical risk scores of the CEB’s main countries of operation based on Scope’s internal assessment; and ii) the CEB’s screening efforts within project analysis and counterparty assessment regarding their alignment with sustainable development goals and their environmental impact.

The Strategic Framework for 2023-27 consolidates the bank’s core areas of operation by responding to social development and inclusion challenges, invest in the assistance and integration of refugees and migrants, and support the reconstruction of Ukraine. This is expected to result in additional financing volume to meet growing demand for social loans among its membership. Greater cooperation with the European Union (AAA/Stable), the European Investment Bank (AAA/Stable) and the European Bank for Reconstruction and Development (AAA/Stable) further strengthens the bank’s role in European policymaking. This includes fiduciary and grant-financing activities, such as the Instrument for Pre-Accession Assistance for Türkiye and the Western Balkans, the Facility for Refugees in Türkiye and the Disaster Prevention and Recovery Fund set up in response to the February 2023 earthquake. Moreover, the CEB is an implementing partner for the social arm of the European Commission’s InvestEU Programme, which provides partial guarantees for eligible projects from the CEB, with up to EUR 500m in loan financing. This further enhances European cooperation and the bank’s strategic importance. Specifically, while the CEB pursues a cautious and gradual path regarding Ukraine, the bank is expected to continue playing a critical role in the European response, both in terms of crisis management and, in the longer run, the development of new social infrastructure.

The second factor underpinning the CEB’s AAA rating is its excellent financial profile.

The CEB’s credit profile is supported by its excellent asset quality. Its loan book is characterised by zero NPLs, high average borrower quality, clear benefits from the PCS on its sovereign and public sector exposures, additional protections on private sector exposures, low geographical concentration and low top-10 loan book concentration, in line with its prudent lending policies. The bank’s main lending areas are, among others, aid to displaced persons and other vulnerable groups, social housing, regional infrastructure, health, and small- and medium-sized enterprises. The bank lends directly to sovereigns and sub-sovereigns via its Public Sector Finance Facility and via on-lending to commercial and state-owned banks. The bank may also offer guarantees in the form of securities or signed commitments, and it does not invest in equities.

The bank benefits from a loan book with high average borrower quality, which Scope estimates to be in the high ‘bbb’ category before credit enhancements (guarantees and collateral). This is based on Scope’s estimate of the geographical and sectoral distribution of aggregate loans outstanding and Scope’s sovereign ratings. The relatively stable operating environment reflects that around 40% of outstanding loans are in Spain, Poland, France, Germany and Italy, with a recent shift to relatively lower-rated countries. Türkiye (B-/Stable) represents the riskiest near-term exposure in the CEB’s loan portfolio, accounting for around 7% of total loans in 2023, up from around 6% in 2022, which is explained by the bank’s response to the February 2023 earthquake. In the longer run, the bank intends to strengthen its focus on Target Group Countries, mainly in Central and Eastern Europe, but also on non-investment grade countries. The formalisation of Ukraine’s membership could moderately weigh on the quality of the portfolio, although the risks are mitigated by the bank’s excellent risk management practices, strong PCS underpinned by a selective approach, lending exclusively to the sovereign, and close coordination with other development partners. Overall, public sector exposure amounts to more around 82% of the CEB’s total loan book after credit enhancements, reflecting the bank’s mandate to lend mostly to sovereigns, sub-sovereigns and state-owned financial institutions. The overall share of investment-grade exposure, as reported by the bank, stood at around 87% after credit enhancements.

The CEB’s loan book benefits from a high degree of credit protection, with no defaults or late payments in 2023. The bank benefits from PCS as shown most recently during Greece’s default episode. Scope thus expects the CEB to benefit from PCS on its high share of public sector exposure. Looking at private sector exposure, about 18% of the loan book comprises on-lending to commercial banks. Furthermore, counterparties provided collateral or guarantees amounting to EUR 6.4bn at end-2023, equalling around 30% of the total loan book. In sum, Scope estimates that over 80% of the total loan book benefits from PCS or other credit enhancements.

In addition, the CEB’s loan portfolio is well diversified across member states. In 2023, the largest aggregated exposures were in Spain (around 12% of total loans), Poland (10%), France (8%), Türkiye (7%), Germany (6%) and Italy (6%). In terms of sectoral concentration, the loan portfolio is concentrated among sovereigns and sub-sovereigns, and, to a lesser degree, financial institutions, in line with the nature of the CEB’s lending. The CEB actively manages large exposure risks. It has imposed a limit of 25% of prudential equity for any non-sovereign counterparty or connected group of counterparties, equalling around EUR 880m at end-2023, and a limit of 800% of prudential equity for the cumulative total of large exposures, standing around EUR 28.2bn at end-2023. No non-sovereign exposure exceeded that limit at end-2023, and the sum of large exposures to non-sovereign borrowers was EUR 3.9bn, or around 18% of gross loans. Overall, these factors improve Scope’s assessment of the CEB’s portfolio quality after credit enhancements to the highest category of ‘very strong’. The bank’s excellent portfolio quality is also reflected in a track record of recording no NPLs since 2009 and only one NPL in its entire history.

The CEB’s financial profile is further underpinned by conservative liquidity management and high liquid asset buffers. Internal liquidity guidelines stipulate, among other things, a self-sufficiency period of at least six months, while the bank stood at nine months at end-2023. This assesses the bank’s ability to cover expected net cash outflows in a severe stress scenario, given full operationality without access to funding markets and without selling or repo-ing its financial assets. In addition, the bank monitors short-term liquidity ratios over different time horizons of up to one year, for which the limit is set at 100%. All ratios were above the minimum level at end-2023. The same guidelines apply to its liquidity coverage ratio and net stable funding ratio. Finally, the bank stress-tests its contingent liquidity requirements deriving from two-way margin requirements for its derivative contracts. In addition, the CEB hedges all foreign exchange and interest rate risks stemming from its lending, treasury and funding operations.

The CEB’s prudent liquidity policies result in high and stable levels of liquid assets, providing a substantial cushion in the context of higher lending volumes resulting primarily from the bank’s response to the Covid-19 pandemic and the Ukraine crisis. This enables the CEB to fulfil its mandate, particularly in times of heightened activity and uncertainty. Specifically, Scope estimates total liquid assets at around EUR 11bn for end-2023. Conversely, total liabilities maturing in one year or less at end-2023 and disbursements in 2024, estimated at around EUR 3.9bn, amount to around EUR 9.0bn. Scope uses this as a basis to calculate the bank’s liquid asset ratio, which stood at around 116% in 2023 (on a three-year weighted average basis). This ratio implies that the bank’s available liquid assets cover all outstanding liabilities and loan disbursements within 12 months without the need to access capital markets. This is one of the strongest liquidity cushions among other development banks.

Another credit strength is the CEB’s strong market access. The bank’s bond issuance is designated as Level 1 high-quality liquid assets, which are granted a 0% risk weight under the Basel Framework and are eligible for the ECB’s asset purchase programmes. This preferential regulatory treatment, along with an established track record on capital markets and a strong shareholder and capital base, underpins the CEB’s market access for its annual issuance volumes of EUR 5.9bn on average between 2021-23. Furthermore, the bank’s prudent funding strategy is reflected in the roughly five-year average maturity of its 2023 issuances, which limits refinancing and maturity mismatch risks. Its diversification in terms of instruments and currencies is shown by bond issues in nine different currencies during 2023, up from six in 2022. Since 2017, the CEB has issued multiple social bonds that follow the bank’s social inclusion bond framework, aligned with the ICMA’s social bond principles. These include bonds issued to fund the bank’s pandemic response after it added the health sector to its social bond framework, further underscoring its unique social mandate^4,5. Despite being a relatively small issuer on capital markets compared to other development banks with AAA ratings, the CEB operates under equally favourable funding conditions.

The third driver of the CEB’s AAA rating is its high level of shareholder support.

The CEB’s key shareholder group comprises some of Europe’s largest economies – Germany (AAA/Stable), France (AA/Negative), Italy (BBB+/Stable), Spain (A-/Positive), the Netherlands (AAA/Stable), Belgium (AA-/Negative) and Greece (BBB-/Stable) – as well as Türkiye (B-/Stable). This results in a weighted average credit rating of A based on Scope’s sovereign ratings, signalling deep shareholder capacity to support the CEB. However, exceptional support in the form of the bank’s callable capital, if ever needed, is assessed as relatively moderate compared with similar institutions. High-quality callable capital of shareholders rated AA- or higher amounts to around EUR 2.5bn, or around 12% of outstanding mandated assets as of end-2023. Still, this ratio is expected to improve following the large capital increase approved in December 2022, that became effective on 29 February 2024, and which the subscription period ends on 30 June 2024.

Despite these credit strengths, the CEB also faces the following credit challenges:

The CEB’s capitalisation relative to its outstanding assets is low compared with similar institutions. Scope expects marginal change in the coming years given the high stock of approved projects to be financed, worth EUR 9.3bn at the end of 2023, although the ongoing capital increase could provide additional room to manoeuvre. Scope estimates the CEB’s equity and reserves at around EUR 3.5bn. The CEB’s operational gearing ratio – which limits total loans after swaps and guarantees to 2.6 times its own funds (subscribed capital, reserves and net profits) – acts as an operational target that is credibly enforced. This limit stood at EUR 22bn as of end-2023. The bank has a capitalisation ratio of about 16%, below that of peers, but still higher than the 10% observed for the European Investment Bank (AAA/Stable), assuming maximum operations under the gearing ratio limit and the CEB’s current capitalisation. The CEB’s actual capitalisation ratio, based on disbursed gross loans, is slightly higher at 18%, signalling that the bank operates close (2.54) to the gearing ratio limit as of end-2023.

At the same time, Scope acknowledges several factors that compensate for the CEB’s low capitalisation. First, the capital base is strengthened by the ongoing capital increase approved in December 2022, driving Scope’s one-notch positive adjustment under the trend adjustment. The capital increase of EUR 4.25bn, of which up to EUR 1.2bn will be paid in, is effective since at least 67% of the participating certificates have been subscribed as of end-February 2024, reflecting the growing importance of the bank for its shareholders. The subscription period runs until end-June 2024. At the end of the four-year payment period, in 2026, the CEB’s paid-in capital would be multiplied by around three, increasing from EUR 0.6bn currently to EUR 1.8bn, while the bank’s callable capital is expected to increase by about EUR 3.0bn, from EUR 5.0bn to EUR 8.0bn. Overall, Scope expects the CEB’s leverage ratio to improve thanks to the gradual rise in paid-in capital that is likely to exceed the increase in mandated assets given excellent financial management. Under the Strategic Framework 2023-27, the average annual volume of loan approvals is expected to stand at EUR 4.3bn in the coming years.

Furthermore, the CEB’s record of ensuring high asset quality protects its capital base and stable levels of profitability – averaging EUR 104m over the past 10 years in a low-yield environment – enable the bank to continuously retain earnings and build up reserves and its capital base. The CEB’s net income of EUR 109.2m in 2023, or 3.1% of equity, was significantly above that of 2022 (around 37%) thanks to a significant rise in interest income, multiplied by more than five in the context of higher interest rates.

In addition, the bank’s prudential framework ensures strong capital adequacy. The bank’s reported capital adequacy ratio, which measures its prudential equity (paid-in capital, reserves and net profit) versus risk-weighted assets, stood at 29% at end-2023. This is significantly above the internal floor of 10.5% and above the CEB’s comfort zone of over 25%, which is intended to ensure a sufficient buffer. In addition, the bank set the prudential framework floor for the leverage ratio (i.e. prudential equity as a share of the value of all exposures, including off-balance sheet items) at 7%, against 9.7% as of end-2023.

Finally, Türkiye (B-/Stable) is the fourth largest exposure, which signals heightened credit risks given highly speculative investment grade. However, these risks are mitigated by Türkiye’s moderate share of total loans compared to its 10-year average (6.5% in 2023 against 8.5%), the PCS on the direct sovereign exposures, the public guarantees granted to state-owned banks that comprise the remaining exposure in Türkiye and the absence of any impairments during previous Turkish financial crises. Overall, Scope thus assesses this exposure as manageable.

Factoring of environment, social and governance (ESG)

Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. ESG factors are explicitly captured in Scope’s assessment of the institutional profile, which Scope assesses as ‘very strong’ for the CEB.

Scope’s supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative AAA rating for the CEB. This indicative rating includes a one-notch positive adjustment under the trend adjustment for the capitalisation assessment based on the capital increase approved in December 2022, effective since February 2024 and which the subscription period ends in June 2024.

Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect an issuer’s creditworthiness. For the CEB, no additional considerations have been identified.

A rating committee has discussed and confirmed these results.

For further details, please see the Rating Report.

Rating committee
The main points discussed were: i) institutional profile; ii) financial profile, including capitalisation, asset quality, liquidity and funding; iii) shareholder support; iv) additional considerations; and v) consideration of peers.

Rating-driver references
1. CEB, Financial Report 2023 
2. CEB, Strategic Framework 2023-27 
3. CEB, Sustainability Report 2022 
4. CEB, Report of the Governor 2023
5. CEB, Social Inclusion Bond Report 2023

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Supranational Rating Methodology, 3 August 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation    YES
With access to Internal Documents                                 YES
With access to Management                                            NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or rating Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 2 October 2020. The Credit Ratings/Outlooks were last updated on 19 May 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.