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Asian Development Bank – ‘QRTLYRPT’ for 9/30/23

On:  Thursday, 12/21/23, at 6:02am ET   ·   For:  9/30/23   ·   Accession #:  1140361-23-58746   ·   File #:  83-00002

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

12/21/23  Asian Development Bank            QRTLYRPT    9/30/23    1:3.6M                                   Broadridge Fin’l So… Inc

Document/Exhibit                   Description                      Pages   Size 

 1: QRTLYRPT    Quarterly Report by an International Development    HTML   3.60M 
                Bank                                                             

INTERNAL

November 2023

Management’s Discussion and Analysis

and Condensed Quarterly Financial Statements:

30 September 2023

(Unaudited)

Distribution of this document is limited until it has been approved by the Board of Directors. Following such approval, this document will be reclassified as public and disclosed in accordance with ADB’s Access to Information Policy.

MANAGEMENT’S DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY

Under Strategy 2030, which sets the direction for the Asian Development Bank (ADB) to respond effectively to the changing needs of Asia and the Pacific, ADB continues to sustain its efforts to achieve a prosperous, inclusive, resilient, and sustainable Asia and the Pacific. This overarching corporate strategy lays out seven operational priorities and other focus areas such as expanding of private sector operations, catalyzing and mobilizing financial resources, and strengthening knowledge services.¹

During the first nine months of 2023, ADB delivered total commitments of $8.9 billion ($8.0 billion – 2022) and disbursements of $11.2 billion ( $12.3 billion – 2022).² As the development needs of DMCs become more demanding and the operating environment gets more complex, ADB continues to boost its capacity to deliver high-quality solutions and innovative initiatives efficiently and in a timely manner (footnote 1).

Financial Results: Ordinary capital resources (OCR) reported net income of $888 million ($1,561 million – 2022) and allocable net income of $1,106 million ($764 million – 2022) for the nine months ended 30 September 2023. The net income decreased mainly due to the unrealized losses from fair value changes of financial instruments. The allocable net income (non-GAAP measure) increased due to higher income from liquidity investments, release of provision for credit losses and lower administrative expenses.

The OCR balance sheet continued to grow in line with its growing lending operations. Loans outstanding balance at 30 September 2023 was $146.8 billion, a $2.5 billion increase from $144.3 billion at 31 December 2022. Liquidity investments after swaps increased by $8.2 billion from $47.5 billion at the end of 2022 to $55.7 billion as of 30 September 2023. Borrowings after swaps increased by $9.7 billion to $155.8 billion at 30 September 2023 from $146.1 billion at the end of 2022. For the nine months ended 30 September 2023, ADB issued $28.2 billion bonds ($34.8 billion – 30 September 2022).

Exposure Exchange Agreement: In July 2023, ADB and African Development Bank signed a $1 billion sovereign exposure exchange that aims to strengthen their capital adequacy levels and boost their lending capacity. As of 30 September 2023, ADB’s total amount of guarantee provided and received under its exposure exchange agreements with peer multilateral development banks amounted to $3.5 billion ($2.5 billion – 31 December 2022).

Capital Management Reforms: In September 2023, ADB’s Board of Directors approved the capital management reforms that unlock $100 billion in new funding capacity over the next decade to address the overlapping, simultaneous crises in Asia and the Pacific, including climate change. The reforms, which were introduced through an update of ADB’s Capital Adequacy Framework (CAF), expanded ADB’s annual new commitment capacity and ADB’s ability to support development efforts across Asia and the Pacific.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

 I. OVERVIEW

The Asian Development Bank (ADB), a multilateral development bank, was established in 1966 under the Agreement Establishing the Asian Development Bank (the Charter) .¹ ADB is owned by 68 members, 49 of which are regional members providing 63.4% of its capital and 19 nonregional members providing 36.6% of its capital.

ADB provides various forms of financial assistance to its developing member countries (DMCs). The main instruments are loans, technical assistance (TA), grants, guarantees, and equity investments. These instruments are funded through ordinary capital resources (OCR), Special Funds, and trust funds. The Charter requires that funds from each resource be kept and used separately. Trust funds are generally funded by contributions and administered by ADB as the trustee.

ADB also offers debt management products to its sovereign and sovereign- guaranteed borrowers and entities fully guaranteed by members such as interest rate swaps and cross currency swaps (including local currency swaps) for their third-party liabilities. In addition, ADB provides policy dialogue and transaction advisory services to its DMCs and private sector clients to promote public–private partnerships in the region, and mobilizes financial resources through its cofinancing operations, which access official and other concessional, commercial, and export credit sources to maximize the development impact of its assistance. Cofinancing for ADB projects can be in the form of external loans, grants for TA and components of loans, equity investments, and credit enhancement products such as guarantees and syndications.

During the first nine months of 2023, ADB continued to focus on implementing Strategy 2030, its long-term corporate strategy, to achieve a prosperous, inclusive, resilient, and sustainable Asia and the Pacific. ADB delivered total commitments of $8.9 billion ($8.0 billion – 2022) and disbursements of $11.2 billion ($12.3 billion – 2022).²

ADB has adopted a new operating model to accelerate its transformation and more effectively serve the rapidly changing needs of its DMCs in Asia and the Pacific. The new operating model will enable ADB to increase its capacity as the region’s climate bank; strengthen its work to develop the private sector and mobilize private investments in the region; provide a larger range of high-quality development solutions for its DMCs; and modernize ways of working to make it more responsive, agile and closer to clients. These four key shifts will help ADB deliver on the development goals of Strategy 2030.

Underpinning its role as Asia and the Pacific’s climate bank, ADB has placed combating climate change and its consequences at the top of its development agenda. ADB is scaling up support to address climate change, disaster risks, and environmental degradation, making headway toward its elevated ambition to deliver $100 billion in cumulative climate finance to its DMCs from 2019 to 2030.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

2

II.       ORDINARY CAPITAL RESOURCES

OCR provides financial assistance to sovereign and nonsovereign borrowers in DMCs in the form of loans, equity investments, and other debt securities. In addition to direct lending, OCR also provides guarantees to assist DMC governments and nonsovereign borrowers in securing commercial funds for ADB-assisted projects and provides transaction advisory services to sovereign and nonsovereign clients.

Funding of OCR lending, investment and other ordinary operations comes from three distinct sources: borrowings from the capital markets and private placements; paid-in capital provided by shareholders; and accumulated retained income (reserves). To fund its OCR operations, ADB issues debt securities in the international and domestic capital markets. ADB’s debt securities carry the highest possible investment ratings from three major international credit rating agencies. The funding strategy is aimed at ensuring availability of funds for operations at the most stable and lowest possible cost. Such strategy has enabled OCR to achieve cost-efficient funding levels for its borrowing members.

A.       Basis of Financial Reporting

ADB’s basis of financial reporting are (i) statutory reporting, which is in accordance with accounting principles generally accepted in the United States (US GAAP) reporting requirements, and (ii) management reporting, which is used as the primary measure to make financial management decisions and to monitor key financial ratios. The key financial performance indicator under these two bases is net income for statutory reporting and allocable net income for management reporting.

Statutory reporting. ADB prepares OCR financial statements in accordance with US GAAP. ADB manages its balance sheet by selectively using derivatives to minimize interest rate and currency risks associated with its financial instruments. Derivatives are used to enhance asset and liability management of individual positions and overall portfolios. ADB has elected not to define any qualifying hedging relationships, not because economic hedges do not exist, but rather because the application of hedging criteria under the accounting standards does not make fully evident ADB’s risk management strategies.

ADB reports all derivative instruments on the balance sheet at fair value and recognizes the changes in fair value for the year as part of net income. To apply a consistent accounting treatment between the borrowings and their related swaps, ADB elects to measure all borrowings that are swapped or are intended to be swapped in the future at fair value. All investments for liquidity purpose, other debt securities classified as available for sale, and equity investments (except for those accounted for under the equity method) are reported at fair value. ADB continues to report its loans, other debt securities classified as held-to-maturity, and the remaining borrowings at amortized cost.

Management reporting (non-GAAP measure). ADB also reports OCR financial results based on internal management reporting basis which is used as the primary measure to make financial management decisions and to monitor key financial ratios.

ADB reports allocable net income, which is defined as net income after appropriation of guarantee fees to special reserve and certain adjustments reported in the cumulative revaluation adjustments account.³ The cumulative revaluation adjustments account sets aside the impact of unrealized gains or losses from fair value changes associated with certain financial instruments

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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and from translation adjustments of non-functional currencies, and unrealized gains or losses from equity investments accounted for under the equity method.

ADB intends to hold most borrowings and swaps until maturity or call, hence interim net unrealized gains and losses reported under the statutory reporting basis will generally converge with the net realized income and expenses that ADB recognizes over the life of these financial instruments.

For equity investments, ADB generally holds its investments until ADB’s development role has been fulfilled. Any gains or losses from equity investments recorded at fair value are realized and are deemed available for allocation when ADB exits the investments. Therefore, the periodic net unrealized gains or losses are excluded from the allocable net income until the exit date.

The management reporting basis balance sheet reconciled from the statutory reporting basis balance sheet as of 30 September 2023 is provided in the Appendix.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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OCR reported net income of $888 million ($1,561 million – 2022) and allocable net income of $1,106 million ($764 million – 2022) for the nine months ended 30 September 2023. Table 1 presents the overall financial results for the nine months ended 30 September 2023 and 2022.

Table 1: Overall Financial Results for the Nine Months Ended 30 September 

($ million) 

( ) = negative, – = nil, ADB = Asian Development Bank, OCR = ordinary capital resources. 

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

5

Net income. Net income for the nine months ended 30 September 2023 decreased to $888 million, from $1,561 million reported in 2022, mainly due to the unrealized losses from fair value changes of financial instruments.

Allocable net income.⁴ OCR allocable net income for the nine months ended 30 September 2023 increased to $1,106 million, compared with $764 million in 2022, driven by the higher income from liquidity investments, release of provision for credit losses, and lower administrative expenses.

The change in net income and allocable net income were driven by the following factors.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 2: Details of Net Unrealized (Losses) Gains
for the Nine Months Ended 30 September 

($ million)

Selected Financial Data. Selected financial data are presented in Table 3. For the nine months ended 30 September 2023, under statutory reporting, return on earning assets and return on equity decreased because of the lower net income compared to the same period in 2022. Under management reporting basis, the return on earning assets and return on equity increased because of the higher allocable net income. Return on loans, return on investments for liquidity purposes, and cost of borrowings, under both reporting bases, increased because of the higher levels of short-term interest rates in 2023 compared to the same period in 2022.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 3: Selected Financial Data 

(%, unless otherwise stated) 

EI = equity investments, ODS = other debt securities. 

Note: All ratios are annualized and based on average monthly balances. Amounts and ratios are year-to-date figures except for outstanding balances and capital utilization ratio, which are as of period-end. 

Loans—operations. ADB’s OCR lending falls into two categories: sovereign and nonsovereign. Sovereign loans consist of sovereign regular OCR loans and sovereign concessional OCR loans. Sovereign regular OCR loans are available to sovereign and sovereign-guaranteed borrowers in ADB DMCs that have attained higher economic development and sovereign concessional OCR loans are available for the poorest and most vulnerable members of ADB. ADB also provides lending without sovereign guarantee to privately-held or state-owned or subsovereign entities. In its nonsovereign operations, ADB provides financial assistance based on market-based terms and conditions. ADB, as needed, will help mobilize additional debt from diverse institutions, such as private and public financial institutions and development partners.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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OCR offers lending products broadly in three modalities:

Table 4 shows OCR’s loans outstanding by modality.

Table 4: OCR Loans Outstanding by Modality
as of 30 September 2023 and 31 December 2022 

($ million)

– = nil, ( ) = negative, NSO = nonsovereign operations, OCR = ordinary capital resources.

Note: Numbers may not sum precisely because of rounding.

Expected credit loss. ADB measures expected credit losses for loans, guarantees, and held-to-maturity other debt securities. Credit losses are measured over the contractual term (lifetime) of the asset or commitment based on all available information: historical experience, current conditions, and macroeconomic forecasts. ADB is also exposed to credit risks to off-balance sheet exposures and records a liability for credit losses on undisbursed loan and held-to-maturity other debt securities commitments and guarantees.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

 9

As of 30 September 2023, total allowance for credit losses and liability for credit losses on off-balance sheet exposures decreased to $791 million ( $844 million – 31 December 2022), primarily attributed to the improved economic conditions and nonsovereign exposure decline. Allowance for credit losses and liability for credit losses on off-balance sheet exposures are summarized in Table 5.

Table 5: Summary of Allowance for Credit Losses and
Liability for Credit Losses on Off-Balance Sheet Exposures 

($ million) 

OCR = ordinary capital resources. 

Note: Numbers may not sum precisely because of rounding.

Status of loans. ADB places loans in non- accrual status when the principal, interest or other charges are overdue by more than 180 days or in case of loans that are not yet overdue by more than 180 days, when there is expectation that loan service payment will not be collected when they become due at the point when such information is known. Once a loan to a borrower is placed in non-accrual status, all other overdue loans to the same borrower will be placed in non-accrual status. On the date a borrower’s loan is placed into non-accrual status, unpaid interest and other charges accrued are deducted from the revenue of the current period. As of 30 September 2023, there was one sovereign concessional loan borrower with 11 loans in non-accrual status with outstanding amount of $519 million (one sovereign concessional loan borrower with 11 loans with outstanding amount of $525 million – 31 December 2022) and there were four nonsovereign borrowers with four loans in non-accrual status with outstanding amount of $134 million (seven nonsovereign borrowers with seven loans with outstanding amount of $180 million – 31 December 2022).

Summary of loan activities. Table 6 shows the summary of loan commitments and Table 7 shows the disbursements and repayments for sovereign regular OCR, sovereign concessional OCR and nonsovereign loans. For the nine months ended 30 September 2023, the total OCR loan commitments was $6,766 million ($5,127 million – 2022). The $1,639 million or 32% increase in commitments was mainly due to the increase in sovereign regular OCR policy-based loan commitments and sovereign concessional loan commitments. The total loan disbursements during the nine months ended 30 September 2023 decreased to $10,689 million from $11,556 million due to lower sovereign regular and concessional OCR loan disbursements, during the same period in 2022.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 6: OCR Loan Commitments
for the Nine Months Ended 30 September 

($ million) 

– = nil, ( ) = negative, OCR = ordinary capital resources 

Note: Amounts are based on exchange rates at loan signing date. Numbers may not sum precisely because of rounding.

^a Commitments for sovereign loans and nonsovereign project loans are counted based on the number of loans committed.

Table 7: OCR Loan Disbursements and Repayments
for the Nine Months Ended 30 September 

($ million) 

OCR = ordinary capital resources

Note: Numbers may not sum precisely because of rounding.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 8: OCR Loans Outstanding by Product
as of 30 September 2023 and 31 December 2022 

($ million)

– = nil, n/a = not applicable, ( ) = negative, FLP = Flexible Loan Product, LIBOR = London interbank offered rate, LBL = LIBOR-based loan, OCR = ordinary capital resources, PSCL = Pool-based single currency loan 

Note: Numbers may not sum precisely because of rounding. 

Sovereign regular OCR loans. The Flexible Loan Product (FLP) is the primary loan product for sovereign regular OCR. The cost-base rate⁵ used for FLP loans are the Secured Overnight Financing Rate (SOFR) compounded in arrears for US dollar-denominated loans and the Tokyo Overnight Average Rate (TONA) for yen-denominated loans. FLP loans have a lending rate consisting of the cost-base rate, lending spread, rebates or surcharges, and maturity premiums, if applicable (Table 9). If the lending rate calculated for any 6-month interest period is negative, the interest rate floor of zero will apply.

The FLP is designed to meet demand by borrowers for loan products that suit project needs and effectively manage their external debt. ADB provides sovereign regular OCR borrowers of FLP loans with options to manage their interest rate and exchange rate risks, while providing low intermediation risk to ADB. Borrowers may request a conversion of all or any portion of the principal amount of the loan through: (i) conversions to any standard currency or changes to the loan currency of all or part of the disbursed or undisbursed loan amounts; (ii) conversions to any nonstandard currency in which ADB can effectively intermediate (other than for conversions to a local currency) or changes to the loan currency of all or a part of the disbursed or undisbursed loan amounts; (iii) an interest rate conversion from floating to fixed or vice- versa of all or part of the disbursed or undisbursed loan amounts at the time of disbursement; and (iv) an establishment of an interest rate cap or an interest rate collar on a floating rate. During the nine months ended 30 September 2023, ADB executed one interest rate conversion amounting to $107 million (five interest rate and currency conversions totaling $2 billion – 2022).

Local currency loans (LCLs) are offered to sovereign borrowers in different local currencies which ADB can intermediate. ADB responds to the evolving financial needs of borrowers to reduce their currency mismatch in DMCs.

LCLs may be made on a fixed or floating rate basis with an effective contractual spread. Floating rate LCLs typically reset every three or six months. The cost-base rate of an LCL is determined

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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by its financing mode. Table 9 shows the summary of charges on sovereign regular OCR FLP loans and LCLs as of 30 September 2023.

Table 9: Summary of Charges on Sovereign Regular OCR

Flexible Loan Product and Local Currency Loans as of 30 September 2023 

(basis point) 

( ) = negative, CSF = Countercyclical Support Facility, EURIBOR = Euro Interbank Offered rate, FLP = Flexible Loan Product, LCL = local currency loan, OCR = ordinary capital resources, SOFR = Secured Overnight Financing Rate, SPBL = special policy-based loan, TONA = Tokyo Overnight Average Rate, US = United States. 

Sovereign concessional OCR loans. ADB offers sovereign concessional OCR loans to eligible DMCs. Concessional loans represent the concessional financing to DMCs with (i) per capita gross national income below the International Development Association (IDA) operational cutoff; (ii) least developed countries with per capita gross national income above the IDA operational cut-off; and (iii) per capita gross national income above the IDA operational cut-off with limited or lack of creditworthiness.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 10: Sovereign Concessional OCR Loan Terms

as of 30 September 2023 

COVID-19 = coronavirus disease, OCR = ordinary capital resources. 

Note: Sovereign concessional OCR loans under the COVID-19 pandemic response option have the same lending terms as those for standard policy-based loans. 

The borrowers of sovereign concessional OCR loans may choose a currency of liability in special drawing rights (SDR) or a currency that is available under ADB’s FLP and in the SDR basket, subject to ADB’s confirmation of the availability of such currency. As of 30 September 2023, about 97% (96% – 31 December 2022) of the sovereign concessional OCR loans were in SDR (64%) and US dollars (33%).

Nonsovereign loans. The FLP is the primary loan product for nonsovereign operations. Similar with the regular sovereign loans, the cost- base rate is the SOFR compounded in arrears for US dollar-denominated loans and the TONA for yen- denominated loans. Nonsovereign LBLs are expected to complete the transition to FLP loans in 2023.

ADB applies market -based pricing to determine the lending spread, front-end fees, and commitment charges, and other fees for each loan. The lending spread is intended to cover ADB’s risk exposure to specific borrowers and projects and the front-end fee to cover the administrative costs incurred in loan origination. Front-end fees are typically 1% to 1.25% depending on the transaction. ADB applies a commitment fee (typically 0.50% to 1.0% per year) on the undisbursed loan balance.

LCLs are also offered to nonsovereign borrowers in different local currencies which ADB can intermediate. ADB responds to the evolving financial needs of borrowers to reduce their currency mismatch in DMCs. LCLs are priced based on relevant local currency funding benchmarks or ADB’s funding costs and a credit spread.

Private Sector Programs. ADB’s private sector programs include the Trade and Supply Chain Finance (TSCFP) and Microfinance programs (MFP). The TSCFP has two main streams of activity: (i) It provides guarantees and loans through partner banks to close market gaps for trade finance, including among small and medium-sized businesses, to generate the trade-led growth and jobs that underpin development; and (ii) It delivers knowledge products, services, and

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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solutions to make global trade and supply chains green, resilient, inclusive, transparent and socially responsible. The MFP provides risk participation on revolving basis for loans made by commercial financial institutions to microfinance institutions in ADB’s DMCs. Table 11 shows the commitments under the private sector programs.

Table 11: OCR Commitments under Private Sector Programs
for the Nine Months Ended 30 September 

($ million)

Exposure Exchange Agreement. The exposure exchange agreement (EEA) provides for the simultaneous exchange of credit risk coverage for potential non-accrual events on the exchanged sovereign exposures. In case of non-accrual events, the party providing protection would pay the other counterparty principal or interest for any period the covered exposure is in nonaccrual. The EEA transaction is treated as an exchange of two separate financial guarantees (guarantee provided and guarantee received). In July 2023, ADB signed an additional $1.0 billion sovereign EEA with the African Development Bank. As of 30 September 2023, ADB’s total amount of guarantee provided and received under its EEA with peer multilateral development banks amounted to $3.5 billion ($2.5 billion – 31 December 2022).

The OCR liquidity investment portfolio after swaps including securities purchased under resale arrangements and securities transferred under repurchase agreements amounted to $55,681 million as of 30 September 2023 ($47,490 million – 31 December 2022). ADB’s liquidity investment portfolio primarily consists of high-quality liquid fixed income investments. For the nine months ended 30 September 2023, the overall rate of return under the management reporting basis increased to 4.4% from 1.7% during the same period in 2022.

OCR borrowings after swaps as of 30 September 2023 amounted to $155,766 million ($146,053 million – 31 December 2022). The average cost of borrowings after swaps for the nine months ended 30 September 2023 was 5.1% under the management reporting basis (1.3% – 2022). For the nine months ended 30 September 2023, ADB issued $28,160 million bonds ($34,788 million – 2022) and $6,289 million in short-term funds under its Euro-Commercial Paper Programme ($10,727 million – 2022).

As of 30 September 2023, ADB’s total authorized capital of 10,639,083 shares valued at $139,902 million was fully subscribed, which consisted of $7,011 million paid-in and $132,891 million callable capital. The details of ADB’s equity as of 30 September 2023 and 31 December 2022 are shown in Table 12.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Table 12: Details of Equity

 as of 30 September 2023 and 31 December 2022

($ million)

Callable capital. Callable capital can be called only if required to meet ADB’s obligations incurred on borrowings or guarantees under OCR. No call has ever been made on ADB’s callable capital.

Paid-in capital. ADB’s paid-in capital may be freely used in its ordinary operations, except that DMCs have the right under the Charter to restrict the use of a portion of their paid-in capital to make payments for goods and services produced and intended for use in their respective territories.

Allocation of OCR net income. In accordance with Article 40 of the Charter, the Board of Governors annually approves the allocation of the previous year’s net income to reserves and/or surplus. In addition, to the extent feasible, it approves the transfer of part of net income to Special Funds to support development activities in the DMCs. In May 2023 and 2022, the Board of Governors approved the allocation of OCR’s net income for 2022 and 2021, respectively, as shown in Table 13.

Table 13: Allocation of OCR Net Income

 ($ million)

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Headrooms. ADB’s lending limitation policy limits the total amount of disbursed loans, disbursed equity investments, disbursed other debt securities, related prudential buffer, and the maximum amount that could be demanded from ADB under its guarantee portfolio, to the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve. The Charter allows the use of OCR for equity investments up to 10% of ADB’s unimpaired paid-in capital actually paid up at any given time together with reserves and surplus, excluding special reserves.

As of 30 September 2023, ADB’s lending headroom was $37,393 million, representing 80% utilization of the lending authority ($41,690 million representing 78% utilization – 31 December 2022). Equity investment headroom was $3,296 million, representing 33% utilization of the ceiling ($3,263 million representing 33% utilization – 31 December 2022).

ADB’s capital adequacy framework (CAF) aims to ensure that large risk events will not lead to a downgrade of ADB’s AAA rating or to an erosion of investor confidence. The framework is designed to protect the risk-bearing capacity of ADB without relying on callable capital, and to maintain ADB’s ability to lend even during crises.

ADB reviews its CAF every three years to ensure it is benchmarked against best practices and aligned with the evolution of ADB’s operations. In September 2023, the Board of Directors approved the proposed enhancements to three aspects of the CAF: risk appetite, risk measurement and financial planning following the review of ADB’s CAF. The enhancements to the CAF are significant given the challenges faced both in Asia and the Pacific and globally, including climate change, pandemic impacts, and others.

Under the CAF, ADB holds capital to protect against eight risk types: credit risk in the operations portfolio, equity investment risk, interest rate risk, treasury credit risk, operational risk, pension risk, currency risk, and countercyclical lending buffer. ADB uses a capital utilization ratio (CUR) as the key metric in measuring capital adequacy. The CUR is the ratio of the total economic capital used (numerator) to usable equity (denominator).

As of 30 September 2023, ADB was adequately capitalized and reported CUR of 69.1% (83.9% – 31 December 2022).

Organizational resilience. ADB’s organizational resilience framework establishes the governance structure and optimizes the use of key resources—people, workplace, information technology, business data and processes, and supply chain—to enable ADB to prepare for and respond to disruption-related risks and strengthen its capacity to adapt to complex and changing circumstances without compromising its ability to fulfill its core mission. Its business continuity plans are reviewed and tested regularly to ensure the continuity of critical operations, systems, and processes during disruptions.

III.       SPECIAL FUNDS

ADB is authorized by its Charter to establish and administer Special Funds. These are the ADF, Technical Assistance Special Fund (TASF), Japan Special Fund (JSF), Asian Development Bank Institute (ADBI), Regional Cooperation and Integration Fund (RCIF), Climate Change Fund (CCF), Asia Pacific Disaster Response Fund (APDRF), and Financial Sector Development Partnership Special Fund (FSDPSF). Financial statements for each Special Fund are prepared in accordance with US GAAP.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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The ADF was established as ADB’s concessional financing window for DMCs with per capita gross national income below the IDA operational cutoff and lack of and limited creditworthiness. It provides a multilateral source of concessional assistance dedicated to support the poorest and most vulnerable countries in Asia and the Pacific. The ADF 13 has received contributions from 32 donors (regional and nonregional). Cofinancing with bilateral and multilateral development partners complements ADF resources. With the termination of the ADF lending operations and its transfer to OCR on 1 January 2017, the ADF became a grant-only operation.

ADF 13 Replenishment. In November 2020, the Board of Governors adopted a resolution for the 12th replenishment of the ADF (ADF 13) and the seventh regularized replenishment of the TASF. The $4.1 billion replenishment provides grant financing to eligible recipients from 2021 to 2024.⁶ The ADF 13 became effective on 8 June 2021. As of 30 September 2023, ADB received all instruments of contributions from 32 donors totaling $2,361 million including qualified contributions amounting to $317 million. Donors agreed to allocate $517 million to TASF out of the total replenishment.⁷

Contributed resources. The balance of the commitment authority available for commitment as of 30 September 2023 was $1,319 million ($770 million – 31 December 2022) equivalent.⁸

In May 2023, the Board of Governors approved the transfer of $292 million to the ADF as part of OCR’s 2022 net income allocation ($292 million – 2022).

Investments for liquidity purpose. The ADF investment portfolio totaled $4,722 million as of 30 September 2023 compared with $4,285 million at the end of 2022.⁹ As of 30 September 2023, about 15% of the portfolio was invested in time deposits (3% – 31 December 2022) and 85% in fixed-income securities (97% – 31 December 2022). For the nine months ended 30 September 2023, the rate of return on ADF investments, excluding unrealized gains and losses, was 2.6% (1.8% – 2022).

Operations. During the nine months ended 30 September 2023, 11 grants totaling $106 million were committed¹⁰ (11 grants totaling $484 million – 2022) while 22 grants totaling $272 million (16 grants totaling $552 million – 2022) became effective. Grant expenses amounted to $257 million ($535 million – 2022), net of $4 million ($17 million – 2022) undisbursed grants that were reversed as reduction in grant expenses.

The TASF provides technical assistance grants to borrowing members to help prepare projects and undertake technical or policy studies. The funds resources consist of regularized replenishments and direct voluntary contributions by members, allocations from the net income of OCR, and revenue from investments and other sources.

TASF Seventh Regularized Replenishment. In November 2020, as part of the ADF 13 replenishment, the donors agreed to allocate $517 million of the total replenishment size as the seventh regularized replenishment of TASF. The replenishment will cover TA financing for 2021 to 2024.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Contributed resources. As of 30 September 2023, $461 million donor contributions allocated to TASF under ADF 12 has been fully received. Total of $344 million donor contributions have been received out of the $517 million allocated to TASF under ADF 13.

As of 30 September 2023, cumulative TASF resources totaled $4,116 million, of which $3,775 million had been used, leaving an uncommitted balance of $341 million ($285 million – 31 December 2022). In May 2023, the Board of Governors approved the transfer of $90 million to the TASF as part of OCR’s 2022 net income allocation ($90 million – 2022).

Operations. For the nine months ended 30 September 2023, net TA expenses amounted to $82 million ($64 million net TA expenses – 2022), comprising $95 million for 46 TA projects and 50 supplementary TA ($80 million for 46 TA projects and 59 supplementary TA – 2022) made effective during the period, net of $12 million ($16 million – 2022) undisbursed amounts that were reversed as reduction in TA expenses. The undisbursed TA net of TA advances amounted to $647 million as of 30 September 2023 ($700 million – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio amounted to $799 million ($699 million – 31 December 2022). About 36% of the portfolio was invested in time deposits and 64% in fixed-income securities (23% in time deposits and 77% in fixed-income securities – 31 December 2022). For the nine months ended 30 September 2023, the rate of return on TASF investments was 3.7% (-3.6% – 2022).

The JSF was established in March 1988 when the Government of Japan and ADB entered into an agreement whereby the Government of Japan made an initial contribution of JPY 2.5 billion with ADB as the administrator. The purpose of JSF is to help ADB’s DMCs restructure their economies in light of changing global environment and to broaden their investment opportunities.

Contributed resources. As of 30 September 2023, the cumulative fund resources of JSF totaled $1,013 million, of which $901 million had been used, leaving an uncommitted balance of $112 million ($110 million – 31 December 2022).

Operations. During the nine months ended 30 September 2023, 1 TA project amounting to $2 million became effective (nil – 2022). The balance of undisbursed TA as of 30 September 2023 amounted to $6 million ($4 million – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio, which was in time deposits, amounted to $113 million ($109 million – 31 December 2022).

ADBI was established in 1996 as a subsidiary body of ADB, whose objectives are to identify effective development strategies and capacity improvements for sound development management in the DMCs. Its operating costs are met by ADBI, and it is administered in accordance with the Statute of the ADBI.

For the nine months ended 30 September 2023, there were $7 million ($7 million – 2022) committed contributions to ADBI and expenses of ADBI totaled $12 million ($9 million – 2022). The balance of uncommitted balance without donor restriction as of 30 September 2023 amounted to $21 million ($26 million – 31 December 2022).

As of 30 September 2023, the total investment portfolio, which was in time deposits, amounted to $10 million ($11 million – 31 December 2022).

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Established in February 2007 as a special fund under the Regional Cooperation and Integration Financing Partnership Facility, the RCIF aims to enhance regional cooperation and integration in Asia and the Pacific by financing TA projects that support greater and higher quality connectivity between economies, expand global and regional trade and investment opportunities, and increase and diversify regional public goods.

Contributed resources. As of 30 September 2023, cumulative RCIF resources totaled $105 million, of which $102 million had been used, leaving an uncommitted balance of $3 million ($4 million – 31 December 2022).

Operations. During the nine months ended 30 September 2023, two TA projects amounting to $2 million became effective (eight TA projects amounting to $5 million – 2022), and $0.5 million undisbursed amounts were reversed as reduction in TA expense ($1 million – 2022). The balance of undisbursed TA, net of TA advances as of 30 September 2023 amounted to $23 million ($30 million – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio, which was in time deposits, amounted to $24 million ($31 million – 31 December 2022).

The CCF was established in April 2008 to facilitate greater investments in DMCs to effectively address the causes and consequences of climate change. CCF supports investments on (i) adaptation; (ii) clean energy; and (iii) reducing emissions from deforestation and forest degradation (REDD+) and land use management by providing resources through technical assistance, grant components of investment projects, and direct charges.

Contributed resources. As of 30 September 2023, cumulative CCF resources totaled $103 million, of which $88 million had been used, leaving an uncommitted balance of $15 million ($15 million – 31 December 2022).

Operations. During the nine months ended 30 September 2023, two supplementary TA amounting to $1 million became effective (one TA project amounting to $0.2 million – 2022), and $0.4 million undisbursed amounts were reversed as a reduction in TA expense ($0.9 million – 2022). The balance of undisbursed grants and TA, net of advances as of 30 September 2023 amounted to $17 million ($21 million – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio, which was in time deposits, amounted to $30 million ($34 million – 31 December 2022).

The APDRF was established in April 2009 to provide timely incremental grant resources to DMCs affected by disasters triggered by natural hazards. In May 2020, the Government of Japan (GoJ) contributed $75 million―valid for 2 years―to APDRF which was earmarked for ADB’s response to the COVID-19 pandemic. Any balance remaining after the 2-year term will be used in accordance with the agreement between ADB and the GoJ.

In July 2023, the GoJ requested ADB to transfer the unused remaining balance of its contributions from the $75 million contribution earmarked for ADB’s responses to the COVID-19 pandemic in May 2020 to the Japan Fund for Prosperous and Resilient Asia and the Pacific (JFPR). ADB will facilitate the requested fund transfer to JFPR.

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

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Contributed resources. As of 30 September 2023, cumulative fund resources totaled $183 million, of which $133 million had been used, leaving an uncommitted balance of $50 million ($49 million – 31 December 2022). The net assets without donor restrictions as of 30 September 2023 amounted to $23 million ($21 million – 31 December 2022).

Operations. During the nine months ended 30 September 2023, one grant totaling $1 million (four grants totaling $7 million – 2022) became effective, and $12 thousand undisbursed amounts were reversed as a reduction in grant expenses ($0.2 million – 2022). During the period, two grants totaling $4 million (four grants totaling $6 million – 2022) were committed . The balance of undisbursed grants, net of grant advances as of 30 September 2023 amounted to $2 thousand ($12 thousand – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio, which was in time deposits amounted to $36 million ($34 million – 31 December 2022).

The FSDPSF was established in January 2013 to strengthen regional, subregional, and national financial systems in Asia and the Pacific. With the approval of the Finance Sector Directional Guide on 22 November 2022, the FSDPSF will support the six operational focus: (i) enhancing support to emerging areas such as sustainable development goal aligned financing, including green and blue financing; (ii) promoting long-term finance and quality infrastructure; (iii) leveraging digital technology to deliver financial services for financial inclusion; (iv) expanding financing to micro, small and medium enterprises and women; (v) establishing frameworks for disaster and epidemic risk financing; and (vi) strengthening the finance sector foundation.

Contributed resources. As of 30 September 2023, cumulative fund resources totaled $29 million, of which $25 million had been used, leaving an uncommitted balance of $4 million ($5 million – 31 December 2022).

In December 2022, the Government of Luxembourg committed contribution equivalent to $3 million which was transferred to the FSDPSF in February 2023.

Operations. During the nine months ended 30 September 2023, six supplementary TA projects amounting to $2 million became effective (six TA projects totaling $1 million – 2022), and $0.3 million undisbursed amounts were reversed as reduction in TA expense ($0.6 million – 2022). The balance of undisbursed TA, net of TA advances as of 30 September 2023 amounted to $7 million ($7 million – 31 December 2022).

Investments for liquidity purpose. As of 30 September 2023, the total investment portfolio, which was in time deposits, amounted to $8 million ($6 million – 31 December 2022).

ADB MANAGEMENT’S DISCUSSION AND ANALYSIS: 30 SEPTEMBER 2023

Appendix             21

ORDINARY CAPITAL RESOURCES

 CONDENSED MANAGEMENT REPORTING BALANCE SHEETS

as of 30 September 2023 and 31 December 2022
($ million)