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International Bank for Reconstruction & Development – ‘ANNLRPT’ for 6/30/14

On:  Thursday, 8/7/14, at 2:48pm ET   ·   For:  6/30/14   ·   Accession #:  1193125-14-300457   ·   File #:  83-00003

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

 8/07/14  Int’l Bank for Reconstructio… Dev ANNLRPT     6/30/14    1:6.2M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: ANNLRPT     Annual Report by an International Development Bank  HTML   3.72M 

Table of Contents

International Bank for Reconstruction and

Development

Management’s Discussion & Analysis

and

Financial Statements

June 30, 2014

Table of Contents

Table of Contents

LIST OF BOXES, TABLES AND FIGURES

Table of Contents

International Bank for Reconstruction and Development

Management’s Discussion and Analysis

June 30, 2014

Table of Contents

Box 1: Key Financial Indicators, Fiscal Years 2010-2014

As of and for the fiscal years ended June 30

In millions of U.S. dollars, except ratios which are in percentages

This document provides Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations for the International Bank for Reconstruction and Development (IBRD) for the fiscal year ended June 30, 2014 (FY14). Box 1 summarizes key financial data. At the end of this document is a Glossary of Terms and list of Abbreviations and Acronyms. IBRD undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform to the current year’s presentation (For further details see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the year ended June 30, 2014).

Table of Contents

SECTION I: EXECUTIVE SUMMARY

IBRD is the largest multilateral development bank in the world with 188 member countries. As part of the World Bank Group (WBG)¹, its two main goals are to end extreme poverty and promote shared prosperity. To meet these goals, it provides loans and products and services related to other development activities for economic reform projects and programs. IBRD also provides or facilitates financing through trust fund partnerships with bilateral and multilateral donors. Its ability to intermediate the funds it raises in international capital markets to developing member countries is important in helping it achieve its development goals. IBRD’s financial goal is not to maximize profits, but to earn adequate income to ensure its financial strength and sustain its development activities.

IBRD’s financial strength derives from its capital base, through the support of its shareholders, as well as from its sound financial and risk management policies and practices, which have enabled it to build its equity. Shareholder support takes the form of capital subscriptions from members and their strong record in servicing their debt to IBRD. This shareholder support, combined with IBRD’s sound financial policies and practices, are the basis of IBRD’s financial strength and its triple-A credit rating.

IBRD’s primary business activity is providing loans to its borrowing member countries. These loans are financed through IBRD’s equity as well as borrowings raised through the capital markets. Investors view IBRD bonds as a safe investment, consistent with its financial strength and triple-A credit rating. Annual funding volumes vary from year to year, and for FY14 it reached $51 billion. Funds which have not been deployed for lending purposes are maintained in IBRD’s investment portfolio to provide liquidity for its operations.

IBRD’s primary source of income relates to the earnings on its equity, followed by the net interest margin on its loans which are funded by borrowings, and the modest margin earned on its investment portfolio. IBRD also earns income from other development activities, which include guarantees, risk management products, technical assistance (including through reimbursable advisory services) as well as trust fund partnerships. From its total revenues, IBRD pays for its operating expenses, retains amounts in reserves to strengthen its financial position, and provides support via income transfers to the IDA and to trust funds for other development purposes as decided by the shareholders.

The following is a graphical illustration of IBRD’s business model:

Figure 1: IBRD’s Business Model

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IBRD and the New World Bank Group Strategy

At the 2013 Spring Meetings, the WBG’s Board of Governors endorsed the twin poverty reduction goals. In addition, at the 2013 Annual Meetings that followed, the Governors endorsed the new WBG strategy envisaging a stronger, more selective and effective WBG in order to achieve the twin goals:

In support of this stronger role, and as part of the internal change process, the WBG has adopted a new financial sustainability framework to strengthen its financial position and expand its lending capacity.

In FY14, IBRD’s Executive Directors approved the following measures aimed at enhancing IBRD’s margins and capacity, in line with the new WBG strategy and as part of reshaping the WBG’s financial sustainability:

Together, these new measures are intended to gradually increase IBRD’s equity, lending capacity, and its ability to sustainably fund priorities that meet shareholder objectives while preserving its financial strength. In implementing these measures, Management will maintain consistent underwriting standards on the quality of its lending portfolio.

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Basis of Reporting

Audited Financial Statements

IBRD’s financial statements conform with accounting principles generally accepted in the United States of America (U.S. GAAP), referred to in this document as the “reported basis.” All instruments in the investment, borrowing, and asset-liability-management portfolios are carried at fair value, with changes reported in the income statement except for Available for Sale (AFS) securities. AFS securities are carried at fair value with changes reported in equity. The loan portfolio is reported at amortized cost, except for loans with embedded derivatives, which are reported at fair value. Management uses the audited financial statements to derive allocable income and analyze fair value results.

Fair Value Results

IBRD makes extensive use of financial instruments, including derivatives, in its operations. The fair value of these instruments is affected by changes in market variables such as interest rates, exchange rates, and credit risk. Management uses fair value results to assess the performance of the investment-trading portfolio; to monitor the results of the EMF, where IBRD mainly uses derivatives to stabilize its allocable income; and manage certain market risks, including interest rate risk and commercial counterparty credit risk.

Allocable Income

Management uses allocable income as a basis for making distributions out of its net income. Allocable income excludes unrealized mark-to-market gains and losses associated with instruments not held in the investment portfolio; it also excludes other adjustments for items such as Board of Governors-approved transfers and pension.

Balance Sheet Analysis

Table 1: Condensed Balance Sheet

In millions of U.S. dollars

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Lending Highlights (Section III)

IBRD’s principal assets are its loans to member countries. In FY14, loan commitments (including guarantees) totaled $18.6 billion, 22% above FY13 (Figure 3). This year’s commitments mainly consist of $4.7 billion to the Europe and Central Asia region, $4.6 billion to the Latin America and the Caribbean region, and $4.2 billion to the East Asia and Pacific region.

Investment Highlights (Section V)

The maturity profile of IBRD’s liquid asset portfolio reflects a high degree of liquidity, with $27.3 billion (or more than 65% of total volume) maturing within six months, of which $19.3 billion is expected to mature within one month.

Borrowing Highlights (Section VI)

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Capital Highlights (Section VII)

As a result of the Board of Governors’ approval of the General and Selective Capital Increase (GCI/SCI) resolutions in FY11, subscribed capital is expected to increase by $87 billion over a five-year period, of which $5.1 billion will be paid-in. As of June 30, 2014, $42.6 billion was subscribed (including shares subscribed under the Voice Reform for which no paid-in capital was required), resulting in additional paid-in capital of $2.5 billion, of which $571 million was received during the fiscal year.

Financial Risk Management (Section VIII)

IBRD’s risk management processes and practices continually evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The primary financial risk to IBRD is the country credit risk inherent in its loan portfolio. IBRD uses a strategic capital adequacy framework as a medium-term capital planning tool to ensure that the financial risks associated with its loans and other exposures do not exceed its risk-bearing capacity.

Credit Risk

IBRD’s credit risk exposure mainly consists of country and counterparty credit risk.

Management also uses risk models to estimate the size of a potential non-accrual shock that IBRD could face over the next three years at a given confidence level. The shock estimated by this risk model is used in IBRD’s capital adequacy stress testing to determine the impact of potential non-accrual events on equity and income earning capacity.

Market Risk

IBRD is exposed to three main types of market risks: interest rate, foreign exchange rate, and liquidity risks. Of the various types of market risks faced by IBRD, the most significant is interest rate risk. IBRD’s exposure to currency and liquidity risks is minimal because of its risk management policies. Various strategies are used to minimize these risks, as follows:

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Operational Risk

IBRD recognizes the importance of operational risk management activities, which are embedded throughout its financial operations. While the day-to-day operational risk management lies with the business functions, a new Operational Risk Department under the WBG Chief Risk Officer was created in May 2014 to assist business units in identifying, assessing, and managing operational risks. The department aims to improve operational risk awareness, management and reporting across the IBRD. It is also responsible for developing and maintaining the operational risk management framework for finance, risk and technology functions.

IBRD’s approach to managing operational risk includes reporting relevant key risk indicators, monitoring internal and external events, and identifying emerging risks that may impact business units. IBRD will make use of its operational risk framework to further advance business decision-making and to improve the efficiency of its financial operations.

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SECTION II: ALLOCABLE INCOME AND INCOME ALLOCATION

IBRD’s financial model comprises leveraging shareholder funds with borrowings from the capital markets in order to provide long-term loans to borrowing member countries. The interest rate charged on these loans is based on a Board-determined contractual spread and IBRD’s actual or projected borrowing cost (Table 5).

Net Interest Revenue

IBRD earns its net interest revenue (revenues less cost of borrowings) from the following main sources (Figure 9):

Lending spread: Earnings from lending spreads account for 44% of IBRD’s net interest revenue in FY14 (37% - FY13). This income is the difference between the lending rate charged to borrowers and the rate at which IBRD borrows (Figure 8). IBRD’s weighted average lending spread (WAS) has remained at around 60 basis points.

Figure 8: Derived Spread

Equity contribution: Equity contribution is comprised of the borrowing costs saved from funding loans with equity instead of borrowings, as well as income from the EMF. This accounted for 55% of IBRD’s net interest revenue in FY14 (55% - FY13).

Spread on liquid assets: Income from the spread on liquid assets accounts for 1% of IBRD’s net interest revenue in FY14 (8% - FY13). IBRD holds liquid assets as insurance against disruptions in access to the capital markets. In line with this purpose, its investment objective prioritizes principal protection by restricting its liquid assets to high-quality investments.

Figure 9: Net Interest Revenue

In billions of U.S. dollars

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Net Income

IBRD had a net loss of $978 million in FY14 compared to net income of $218 million in FY13 (Table 2). The major differences between the years are explained below:

Table 2: Condensed Statement of Income

In millions of U.S. dollars

FY14 versus FY13

The decrease of $1,196 million in net income in FY14 is explained by the following:

FY13 versus FY12

The increase of $894 million in net income in FY13 is explained by the following:

Offset partly by:

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Table 3: Net Non-Interest Expenses

In millions of U.S. dollars

Income Allocation

Management recommends distributions out of net income to augment reserves and support developmental activities at the end of each fiscal year. Net income allocation decisions are based on allocable income, which is derived by adjusting the reported net income to exclude certain items, in order to arrive at amounts realized during the year and available for use (Table 4).

With the Board’s approval, the following adjustments were made to reported net income to arrive at allocable income:

Management believes the allocation decision should be based on IBRD’s administrative budget allocation as it defines the appropriate pension expense for the purpose of income allocation. As a result, PEBP and PCRF investment income are excluded from the allocation decision, since this income is only available to meet the needs of the pension plans.

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Table 4: Income Allocation

In millions of U.S. dollars

Allocable income in FY14 was $769 million. Of this amount, on August 7 2014, the Executive Directors recommended that the Board of Governors transfer $635 million to IDA and $134 million to Surplus.

Allocable income in FY13 was $968 million. Of this amount, the Executive Directors approved an allocation of $147 million to the General Reserve, and the Board of Governors approved the transfer of $621 million to IDA and $200 million to Surplus. The transfer to IDA was made on October 16, 2013.

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SECTION III: LENDING ACTIVITIES

All of IBRD’s loans are made to, or guaranteed by, member countries. IBRD may also grant loans to IFC, without any guarantee. IBRD does not currently sell its loans, nor does Management believe there is a market for loans comparable to those made by IBRD.

IBRD borrowers include middle-income and creditworthy lower-income countries. Effective July 1, 2014, countries with 2013 per capita Gross National Income of $1,215 or more are eligible to borrow from IBRD. Low-income countries are also eligible to receive concessional loans and grants from IDA. Since 1946, IBRD has extended, net of cumulative cancellations, approximately $536 billion in loans.

During FY14, IBRD implemented several measures to enhance its ability to support client countries. These included revised loan terms, lowering the minimum equity-to-loans ratio to 20% to reflect improvements in portfolio credit quality, and raising the SBL for certain borrowers (Section VIII).

Lending commitments (including guarantees) increased in FY14 relative to the year earlier by 22% (Figure 10), the largest annual gain in 14 years (excluding the global financial crisis years of FY09-10). Annual commitments averaged $13.5 billion in the three years preceding the global financial crisis, peaked in FY10 at $44.2 billion, and have declined since bottoming out at $15.2 billion in FY13. Commitments rose in FY14 to $18.6 billion led by lending to Brazil, India, and China.

Gross disbursements reached $18.8 billion for FY14, compared with $16.0 billion in FY13, led mainly by higher disbursements under development policy loans. Gross disbursements for development policy loans in FY14 were 64% higher than in FY13, due to higher lending to the Europe and Central Asia and Latin America and the Caribbean regions.

Figure 10: Commitments and Gross Disbursements

In billions of U.S. dollars

During FY10-14, the Latin America and the Caribbean and Europe and Central Asia regions, combined, accounted for the largest share of commitments (Figure 11).

Figure 11: Commitments by Region

In billions of U.S. dollars

Table of Contents

Under IBRD’s Articles of Agreement (the Articles), as applied, total outstanding IBRD loans outstanding, including participation in loans and callable guarantees, may not exceed the statutory lending limit of $260 billion. As of June 30, 2014, outstanding loans and callable guarantees totaled $154 billion, or 59% of the statutory lending limit.

All loans are approved by the Board. The process of identifying and appraising a project, and approving and disbursing a loan, can often take several years. However IBRD has shortened the preparation and approval cycle for countries in emergency situations (e.g., natural disasters) and in crises (e.g., food, fuel, and global economic crises).

Loan disbursements must meet the requirements set out in loan agreements. During implementation of IBRD-supported operations, IBRD staff reviews progress, monitors compliance with IBRD policies, and helps resolve any problems that may arise. The Independent Evaluation Group, an IBRD unit whose director reports to the Board, evaluates the extent to which operations have met their major objectives.

Lending Instruments

Most of IBRD’s lending generally falls under two categories: investment project financing and development policy operations. A third lending instrument, Program-for-Results, was introduced in January 2012². To date, however, this instrument has only been selected for a small number of loan commitments (Figure 12).

Investment Project Financing

Investment project financing³ is generally used to finance goods, works, and services in support of economic and social development projects and programs across a broad range of sectors; including agriculture, urban development, rural infrastructure, education and health. Such lending typically disburses over 5-10 years. FY14 commitments under this lending instrument amounted to $10.1 billion (compared with $8.1 billion in FY13).

Development Policy Operations

Development policy operations provide quick-disbursing funds to support government policy and institutional reforms, including social and structural reforms. They typically disburse over 1-3 years. FY14 commitments under this lending instrument totaled $8.0 billion (compared with $7.1 billion in FY13).

Figure 12: Commitments by Instrument

In FY14, IBRD’s commitments for investment project financing accounted for 55% of total IBRD commitments, development policy operations 43%, and Program-for-Results 2%. (FY13: 53%, 46%, and 1%, respectively.)