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International Bank for Reconstruction & Development – ‘QRTLYRPT’ for 12/31/13

On:  Monday, 2/10/14, at 4:24pm ET   ·   For:  12/31/13   ·   Accession #:  1193125-14-43250   ·   File #:  83-00003

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

 2/10/14  Int’l Bank for Reconstructio… Dev QRTLYRPT   12/31/13    1:2.8M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: QRTLYRPT    Quarterly Report by an International Development    HTML   1.65M 
                          Bank                                                   

Table of Contents

International Bank for Reconstruction and

Development

Management’s Discussion & Analysis

and

Condensed Quarterly Financial Statements

December 31, 2013

(Unaudited)

Table of Contents

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD)

CONTENTS

December 31, 2013

Table of Contents

Box 1: Selected Financial Data

In millions of U.S. dollars, except ratios and return data in percentages

1            IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013

Table of Contents

I. Introduction

This document should be read in conjunction with the International Bank for Reconstruction and Development’s (IBRD) Financial Statements and Management’s Discussion and Analysis (MD&A) issued for the fiscal year ended June 30, 2013 (FY 2013). IBRD undertakes no obligation to update any forward-looking statements. Box 1 provides IBRD’s selected financial data as of and for the six months ended December 31, 2013 and December 31, 2012, as well as for the fiscal year ended June 30, 2013. Certain reclassifications of prior year’s information have been made to conform to the current year’s presentation, see Note A—Summary of Significant Accounting and Related Policies in the Notes to the Condensed Quarterly Financial Statements for details.

Basis of Reporting

Financial Statements: IBRD prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) referred to in this document as the “reported basis”. Under the reported basis, all instruments in the investment, borrowing, and asset-liability management portfolios are carried at fair value with changes in fair value reported in the income statement, with the exception of the Available For Sale (AFS) portfolio. The securities in the AFS portfolio are carried at fair value with changes in fair value reported in equity. The loan portfolio is reported at amortized cost, with the exception of loans with embedded derivatives, which are reported at fair value. The financial statements provide a basis upon which Management derives its allocable income and analyzes fair value results.

Fair Value Results: IBRD makes extensive use of financial instruments, including derivatives, in its operations. The fair value of these financial instruments is affected by changes in the market environment such as interest rates, exchange rates and credit risk. Management uses fair value results to assess the performance of the investment trading portfolio, monitor the results of the equity management framework, and manage certain market risks including interest rate risk and commercial counterparty credit risk. Under the fair value basis, in addition to the instruments in the investment, borrowing and asset-liability management portfolios, all loans are reported at fair value.

Allocable Income: Management uses allocable income for making distributions out of its net income. Allocable income excludes unrealized mark-to-market gains and losses associated with instruments that are not held for trading purposes, as well as other adjustments for items such as Board of Governors-approved transfers and pension.

II. Summary of Operating Income and Income Allocation

Operating Income

The primary drivers of IBRD’s operating income are interest earned on the loan and investment portfolios (net of funding costs), income generated from IBRD’s equity, net non-interest expenses, and the provision for losses on loans and other exposures¹. Table 1 summarizes IBRD’s operating income and provides a reconciliation to allocable income.

Table 1: Condensed Statement of Operating and Allocable Income

In millions of U.S. dollars

IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013            2

Table of Contents

Operating income was $650 million for the first six months of the fiscal year ending June 30, 2014 (FY 2014), an increase of $185 million as compared to the same period in FY 2013 primarily due to the changes made to the equity management framework (See Section IV, Financial Risk Management, for details). As a result of these changes, IBRD realized gains from the termination of certain instruments in the portfolio, partially offset by a reduction in interest income commensurate with the decrease in the portfolio size.

The increase in operating income also resulted in an increase in IBRD’s return on average usable equity from 2.4% as of December 31, 2012 to 3.2% as of December 31, 2013.

Income Allocation

Allocable income was $968 million for FY 2013. Out of this amount, the Executive Directors approved the allocation of $147 million to the General Reserve and the Board of Governors approved the transfers of $621 million to the International Development Association (IDA) and $200 million to Surplus. The transfer to IDA was made on October 16, 2013.

III. Balance Sheet Analysis

IBRD’s condensed balance sheet is presented in Table 2.

Table 2: Condensed Balance Sheet

In millions of U.S. dollars

Lending Activities Highlights

IBRD’s principal assets are its loans to member countries.

For the first six months of FY 2014, loan commitments were $6,942 million, an increase of $898 million compared to the same period in FY 2013. Following the peak in FY 2010 of $44,197 million in new loan commitments in response to the 2008 global financial crisis, the declining commitment levels reflect the expected reversion to pre-crisis levels of approximately $15 billion annually.

As of December 31, 2013, on a reported basis, IBRD’s net loans outstanding totaled $151,332 million, an increase of $9,640 million from June 30, 2013, primarily due to $8,135 million in net loan disbursements made in the first six months of FY 2014 and currency translation gains of $1,556 million, consistent with the appreciation of the euro against the U.S. dollar during the period.

Gross disbursements during the first six months of FY 2014 were $12,794 million, of which $4,563 million relates to the Latin American and Caribbean region and $4,569 million relates to the Europe and Central Asia region.

3            IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013

Table of Contents

Investment Activities Highlights

As of December 31, 2013, the net investment portfolio totaled $30,624 million, of which $29,636 million represents the liquid asset portfolio (see Note C—Investments in the Notes to the Condensed Quarterly Financial Statements). The liquid asset portfolio is lower by $2,930 million from June 30, 2013 reflecting the high net loan disbursements during the period.

The objective of the liquid asset portfolio is to ensure the availability of sufficient cash flows to meet all of IBRD’s financial commitments, as reflected in the prudential minimum liquidity level. The prudential minimum liquidity level has been set at $24.5 billion for FY 2014, reflecting an increase of $2.5 billion from FY 2013. As of December 31, 2013, the liquid asset portfolio was at 119% of the prudential minimum liquidity level.

Borrowing Activities Highlights

To raise funds, IBRD issues debt securities in a variety of currencies to both institutional and retail investors. During the first six months of FY 2014, IBRD raised medium and long-term debt of $17,341 million in 14 currencies.

At December 31, 2013, the borrowing portfolio totaled $141,234 million, an increase of $4,226 million, as compared with June 30, 2013 (see Note E—Borrowings in the Notes to the Condensed Quarterly Financial Statements). This was primarily due to net new borrowing issuances of $3,355 million and currency translation losses of $1,160 million consistent with the appreciation of the euro against the U.S. dollar during this period, partially offset by net unrealized mark-to-market gains of $881 million.

Capital Activities Highlights

Following the Board of Governors’ approval of the General and Selective Capital Increase resolutions in the fiscal year ended June 30, 2011 (FY 2011), subscribed capital is expected to increase by $86.2 billion over a five year period, of which $5.1 billion will be paid-in. As of December 31, 2013, $38.3 billion has been subscribed (including shares subscribed under the Voice Reform for which no paid-in capital was required), resulting in additional paid-in capital of $2,245 million, of which $312 million was paid in during the first six months of FY 2014. In addition, since December 31, 2009, $1,377 million of members’ national currency paid-in capital which was subject to certain restrictions has become usable in IBRD’s operations, of which $49 million became usable during the first six months of FY 2014.

IV. Financial Risk Management

In an effort to maximize IBRD’s capacity to support the mandate of lending to its borrowing member countries, IBRD limits its exposure to market and counterparty credit risks. In addition, to ensure that the credit risks associated with its loans and other exposures do not exceed its risk bearing capacity, IBRD uses a strategic capital adequacy framework as a key medium-term capital planning tool. The following sections provide details on capital adequacy and the management of market and credit risks.

Capital Adequacy

IBRD’s capital adequacy is the degree to which its usable equity is sufficient to absorb unexpected credit shocks from its loan portfolio and continue to lend for development purposes. The Board monitors IBRD’s capital adequacy within a Strategic Capital Adequacy Framework, and uses the equity-to-loans ratio as a key indicator of IBRD’s capital adequacy.

At the beginning of the 2008 global financial crisis, IBRD’s equity-to-loans ratio, at 38%, significantly exceeded the capital requirements of the Strategic Capital Adequacy Framework, allowing IBRD to respond effectively to the borrowing needs of its member countries. Commitments from FY 2009 through FY 2012 amounted to $124 billion. To ensure that IBRD’s capital adequacy remains sufficiently robust to support its goals with regard to its medium-term lending plans, IBRD’s shareholders agreed in the fiscal year ended June 30, 2010 (FY 2010) to a package of financial measures, with the objective of keeping the equity-to-loans ratio aligned with the Strategic Capital Adequacy Framework. The package of financial measures included a capital increase effective over a five year period starting in FY 2011, and efforts by Management to work with shareholders to increase the usability of their national currency paid-in capital, which is subject to certain restrictions. (Refer to Section III, Balance Sheet Analysis, for further details of the amount of capital received during the period.)

IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013            4

Table of Contents

As presented in Table 3, while IBRD’s equity-to-loans ratio decreased from 26.8% at June 30, 2013 to 25.8% at December 31, 2013, it was within the current target risk coverage range of the Strategic Capital Adequacy Framework. The decrease was primarily a result of the greater increase in loan exposure as compared to the increase in usable equity during the period. The increase in loan exposure was mostly due to the net positive loan disbursements during the period, while the increase in usable equity was due to the receipt of paid-in capital and existing national currency paid-in capital becoming usable during the period.

Table 3: Equity-to-Loans Ratio

In millions of U.S. dollars, except ratio data in percentages

Management of Market and Credit Risks

Of the various types of market risks faced by IBRD, the most significant market risk is interest rate risk. IBRD’s exposure to currency and liquidity risks is minimal as a result of its risk management policies. In addition, IBRD faces two types of credit risk: country credit risk and counterparty credit risk. The following sections provide details on how IBRD manages interest rate and credit risks.

Interest Rate Risk

Under its current interest rate risk management strategy, IBRD seeks to match the interest rate sensitivity of its assets (loan and investment trading portfolios) and its liabilities (borrowing portfolio) through the use of derivatives such as interest rate swaps. These derivatives effectively convert IBRD’s financial assets and liabilities into variable rate instruments. While this strategy helps to manage IBRD’s interest margin on debt funded loans against interest rate volatility, the interest income on loans funded by equity, if left unmanaged, would be highly sensitive to fluctuations in short-term interest rates. To manage this exposure, IBRD implemented an equity duration extension strategy in the fiscal year ended June 30, 2008, with the objective of reducing the sensitivity of operating income to fluctuations in short-term interest rates. This strategy is currently being revised under the equity management framework, in response to the changes in the market environment. In the interim, certain measures have been undertaken to reduce the interest rate risk of IBRD’s equity. These include the liquidation of the AFS portfolio as well as the termination and the addition of certain derivative positions. As a result, the duration of IBRD’s equity has been reduced from 4.5 years as of June 30, 2013 to approximately one year as of December 31, 2013 (discussed in Section V, Summary of Fair Value Results). In addition, the liquidation of the AFS portfolio and the termination of certain derivative positions resulted in IBRD realizing net gains of $432 million (discussed in Section II, Summary of Operation Income and Income Allocation).

Country Credit Risk

This risk reflects potential losses arising from protracted arrears on payments from borrowers on loans and other exposures. IBRD manages country credit risk through the use of individual country exposure limits. These exposure limits take into account creditworthiness and performance of borrowers.

Portfolio Concentration Risk

Portfolio concentration risk, which arises when a small group of borrowers account for a large share of loans outstanding, is a key concern for IBRD. It is carefully managed, in part, through an exposure limit for the aggregate balance of loans outstanding, the present value of guarantees, and the undisbursed portion of DDOs that have become effective, to a single borrowing country. Under the current guidelines, IBRD’s exposure to a single borrowing country is restricted to the lower of an Equitable Access Limit or the Single Borrower Limit. As of December 31, 2013, the Single Borrower Limit was $17.5 billion for India and $16.5 billion for all other qualifying borrowers. The Equitable Access Limit at June 30, 2013 was $25 billion.

The eight countries with the highest exposures accounted for approximately 61% of IBRD’s total exposure. As of December 31, 2013, all exposures for these individual borrowers were below the Single Borrower Limit, (see Figure 7). IBRD’s largest exposure to a single borrowing country was Mexico at $15.1 billion as of December 31, 2013.

5            IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013

Table of Contents

Figure 7: Country Exposures at December 31, 2013

In billions of U.S. dollars

Probable Losses, Overdue Payments and Non-performing Loans

As of December 31, 2013, only 0.3% of IBRD’s loans were in nonaccrual status and all were related to Zimbabwe. Effective July 16, 2013, all loans made to or guaranteed by Iran were placed into nonaccrual status. Subsequently, on September 27, 2013, Iran cleared all of its overdue principal and charges due to IBRD and on that date, the loans to, or guaranteed by, Iran were restored to accrual status. IBRD’s total provision for losses on accrual and nonaccrual loans accounted for 1.1% of the total loan portfolio. For further information, see Notes to Financial Statements-Note D-Loans and Other Exposures.

Counterparty Credit Risk

Commercial Counterparty Credit Risk

The effective management of commercial counterparty credit risk is vital to the success of IBRD’s funding, investment, and asset/liability management activities. The monitoring and managing of this risk is a continuous process due to the changing market environment. Commercial counterparty credit risk is managed through the application of eligibility criteria, volume limits for transactions with individual counterparties, and the use of mark-to-market collateral arrangements for swap transactions. Table 4 summarizes IBRD’s commercial counterparty credit risk exposure.

Table 4: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating^a

In millions of U.S. dollars

IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013            6

Table of Contents

IBRD’s overall commercial credit exposure decreased during the first six months of FY 2014, commensurate with the overall decrease in liquidity levels, with most banking counterparties at the AA and A rating categories. Sovereign exposure to the BBB rating category increased at December 31, 2013 as compared to June 30, 2013, as Management broadened the universe of investment assets to achieve greater diversification and better risk-adjusted investment performance.

The credit quality of IBRD’s portfolio continues to remain concentrated in the upper end of the credit spectrum with 81% of the portfolio rated AA or above, reflecting IBRD’s continued preference for highly rated securities and counterparties across all categories of financial instruments. Total commercial counterparty credit exposure, net of collateral held, was $32.3 billion as of December 31, 2013. Of this amount, $6.3 billion (20%) related to countries in the eurozone; of which $5.7 billion (90%) was rated AA or above and none was rated below A.

Non-Commercial Counterparty Credit Risk

In addition to the derivative transactions with the commercial counterparties discussed above, IBRD also offers derivative intermediation services to borrowing member countries, as well as affiliated and non-affiliated organizations, to help meet their development needs or to carry out their development mandates.

Borrowing Member Countries: Currency and interest rate swap transactions are executed between IBRD and its borrowers under master derivative agreements. As of December 31, 2013, the notional amounts and net fair value exposures under these agreements were $9,700 million and $627 million, respectively. Probable losses inherent in these exposures due to country credit risk are incorporated in the fair value adjustment on non-trading portfolios.

Non-Affiliated Organizations: IBRD has a master derivatives agreement with the International Finance Facility for Immunisation (IFFIm), under which several transactions have been executed. As of December 31, 2013, the notional amounts and net fair value exposures under this agreement were $8,422 million and $1,135 million, respectively. IBRD has the right to call for collateral above an agreed specified threshold. As of December 31, 2013, IBRD has not exercised this right, but reserves its right under the existing terms of the agreement. Rather than calling for collateral, IBRD and IFFIm have agreed to manage IBRD’s exposure to its derivative transactions with IFFIm, by applying a risk management buffer to the gearing ratio limit. The gearing ratio limit represents the maximum amount of net financial obligations of IFFIm less cash and liquid assets, as a percentage of the net present value of IFFIm’s financial assets.

Affiliated Organizations: Derivative contracts are executed between IBRD and IDA, under an agreement allowing IBRD to intermediate derivative contracts on behalf of IDA. As of December 31, 2013, the notional amounts under this agreement were $4,841 million and IBRD has no net fair value exposure to IDA. Under its derivative agreement with IBRD, IDA is not required to post collateral as long as it maintains liquidity holdings at pre-determined levels that are a proxy for AAA credit rating. As of December 31, 2013, IDA had not posted any collateral with IBRD.

Credit Valuation Adjustment (CVA)

IBRD calculates a CVA that represents the fair value of its commercial counterparty credit risk and non-commercial counterparty credit risks from IFFIm and IDA in connection with swap intermediation activities. As credit risk is an essential component of fair value, IBRD includes a CVA in the fair value of derivatives to reflect counterparty credit risk. The CVA is a function of exposure, which is calculated by using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the Credit Default Swaps (CDS) spread and, where applicable, proxy CDS spreads. The CVA on IBRD’s balance sheet at December 31, 2013 and June  30, 2013 was $40 million and $67 million, respectively.

V. Summary of Fair Value Results

Fair Value Adjustments

IBRD’s financial objective is not to maximize profit, but to leverage its balance sheet to earn adequate income to ensure its financial strength and to sustain its development activities. An important element in achieving its development goals is IBRD’s ability to minimize its cost of borrowing from capital markets for lending to its developing member countries through the use of financial instruments, including derivatives. The fair value of these financial instruments is affected by changes in the market environment such as interest rates, exchange rates and credit risk.

Given IBRD’s intention to hold its primary assets and related funding to maturity (loan and borrowing portfolios), fair value results are not used for income allocation decision making purposes by Management. Rather, they are primarily used to assess the performance of the investment trading portfolio, monitor the results of the equity management framework, and manage certain market risks including interest rate and commercial credit risk for derivative counterparties.

7            IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013

Table of Contents

For the first six months of FY 2014, IBRD experienced net unrealized losses of $245 million, as discussed further below. Table 5 provides a summary of the fair value adjustment on the income statement, along with the sensitivity of each portfolio to the effect of interest rates and credit.

Table 5: Summary of Fair Value Adjustment, net

Effect of Credit

The positive fair value adjustments on the borrowing and loan portfolios mainly reflect changes in credit. For the first six months of FY 2014, IBRD experienced $244 million of unrealized gains on the borrowing portfolio from the widening of its credit spreads. In addition, IBRD experienced gains from the loan portfolio as a result of net tightening of CDS spreads for several of its borrowing member countries. A detailed discussion on how the credit risk of each portfolio is managed is included in the June 30, 2013 MD&A.

Effect of Interest Rates

IBRD uses derivatives in its loan and borrowing portfolios to arrive at LIBOR based floating rate instruments, as part of its risk management strategies. The sensitivity of these portfolios to interest rate movements is therefore low, resulting in relatively small fair value adjustments to income.

The negative fair value adjustment on equity management primarily relates to the reclassification to operating income of net realized gains associated with the liquidation of the AFS portfolio and the termination of certain derivatives in the portfolio. In line with changes made under the equity management framework, the dollar change in fair value corresponding to a one basis-point upward shift in interest rates decreased from $18 million at June 30, 2013 to $4 million at December 31, 2013 (See Table 5).

Figure 8: Sensitivity to Interest Rates as of December 31, 2013

Dollar change in fair value corresponding to a one basis point upward parallel-shift in interest rates

In millions of U.S. dollars

Changes in Accumulated Other Comprehensive Income

In addition to the fair value adjustments on the loan, borrowing and asset/liability management portfolios, IBRD’s fair value adjustment on the income statement also reflects changes in Accumulated Other Comprehensive Income (AOCI) as shown in Table 6.

Table 6: Summary of Changes to AOCI (Fair Value Basis)

In millions of U.S. dollars

IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013            8

Table of Contents

Fair Value Results

The following tables provide information on a fair value basis. As non-financial assets and liabilities are not reflected at fair value, IBRD’s equity is not intended to reflect fair value. Under the fair value basis, in addition to the instruments in the investment, borrowing and asset-liability management portfolios, all loans are reported at fair value and all changes in AOCI are also included in fair value net income.

Tables 7 and 8 provide a reconciliation from the reported basis to the fair value basis for both the balance sheet and income statement. Table 9 provides a reconciliation of all fair value adjustments.

Table 7: Condensed Balance Sheet on a Fair Value Basis

In millions of U.S. dollars

Table 8: Condensed Statement of Income on a Fair Value Comprehensive Basis

In millions of U.S. dollars

9            IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013

Table of Contents

Table 9: Reconciliation of Fair Value Adjustments, net

In millions of U.S. dollars

VI. Senior Management Changes

Effective February 17, 2014 Charles McDonough will retire as Vice President and Controller of IBRD and Bernard Lauwers will assume this position.

Effective June 30, 2013, Robert Kopech retired as Chief Risk Officer of IBRD, and will be replaced by Lakshmi Shyam-Sunder effective February 17, 2014.

Effective July 30, 2013, Sri Mulyani Indrawati, Managing Director of IBRD also assumed the position of Chief Operating Officer.

IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2013            10

Table of Contents

CONDENSED BALANCE SHEET

Expressed in millions of U.S. dollars

11            IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2013

Table of Contents

The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements.

IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2013            12

Table of Contents

CONDENSED STATEMENT OF INCOME

Expressed in millions of U.S. dollars

The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements.

13            IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2013

Table of Contents

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

Expressed in millions of U.S. dollars

CONDENSED STATEMENT OF CHANGES IN RETAINED EARNINGS

Expressed in millions of U.S. dollars

The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements.

IBRD CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2013            14

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CONDENSED STATEMENT OF CASH FLOWS

Expressed in millions of U.S. dollars