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International Bank for Reconstruction & Development – ‘QRTLYRPT’ for 3/31/23

On:  Friday, 5/12/23, at 2:22pm ET   ·   For:  3/31/23   ·   Accession #:  1193125-23-143267   ·   File #:  83-00003

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 1: QRTLYRPT    Quarterly Report by an International Development    HTML   2.41M 
                Bank                                                             

Table of Contents

International Bank for Reconstruction and Development

Management’s Discussion & Analysis

and

Condensed Quarterly Financial Statements

March 31, 2023

(Unaudited)

Table of Contents

International Bank for Reconstruction and Development (IBRD)

Management’s Discussion and Analysis

March 31, 2023

Contents

Table of Contents

This Management’s Discussion and Analysis (MD&A) reflects the results of the International Bank for Reconstruction and Development’s (IBRD’s) financial performance for the nine months ended March 31, 2023 (FY23 YTD). This document should be read in conjunction with IBRD’s Financial Statements and MD&A for the fiscal year ended June 30, 2022 (FY22). IBRD undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform with the current year’s presentation. For information relating to IBRD’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review.

Box 1: Selected Financial Data

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

Table of Contents

Section I: Executive Summary

With its many years of experience and its depth of knowledge in international development, IBRD plays a key role in achieving the World Bank Group’s (WBG¹) goal of helping countries achieve better development outcomes. IBRD contributes to both the WBG’s twin goals of ending extreme poverty and promoting shared prosperity by providing countries with loans, guarantees, advisory services, analytical support and other products.

IBRD and its affiliated organizations seek to help countries in reducing poverty and inequality, achieve improvements in growth, job creation, governance, the environment, climate adaptation, mitigation and resilience, human capital, infrastructure and debt transparency, among others. To meet its development goals, the WBG supports client countries’ efforts to implement programs to improve growth and development outcomes. Further, new and ongoing challenges continue to influence the global outlook. These include high inflation, the rise in food insecurity, growing inequality, global fragility, pandemic risk, Russia’s invasion of Ukraine and other geopolitical events, rising debt, climate change, and macroeconomic imbalances. In response, IBRD, as part of the WBG efforts, continues to work with partners at global and country levels to support its borrowing countries in addressing the impact of these multiple crises, to enhance resilience, and lay the groundwork for rebuilding better. To further enhance these efforts, the Board and Management have been discussing an Evolution Roadmap for the WBG to better address the scale of development challenges by adapting the WBG’s vision and mission, strengthening its operating model, and enhancing its financial capacity and model. In April 2023, the Board approved initial measures to scale up IBRD’s financial capacity. Other measures on the Evolution Roadmap will be explored with the Board and implemented in due course.

Table of Contents

Summary Financial Results

Net Income

IBRD recorded net income of $1,343 million for the first nine months of FY23, compared with net income of $1,781 million during the same period in FY22. The $438 million decrease was primarily due to lower unrealized mark-to-market gains on IBRD’s non-trading portfolios, partially offset by higher net loan interest revenue and a decrease in the provision for losses on loans and other exposures. Given IBRD’s intention to maintain its non-trading portfolio positions to maturity, unrealized mark-to-market gains and losses for these portfolios are not included in IBRD’s allocable income.

Allocable Income

Allocable income is the measure IBRD uses for making net income allocation decisions. During the first nine months of FY23, allocable income was $1,353 million, an increase of $941 million from the same period in FY22. The increase was primarily due to higher net loan interest revenue and a decrease in the provision for losses on loans and other exposures. The decrease in the provision for losses on loans and other exposures was mostly due to the reduction in the loss given default (severity) driven by the lower increase in the implied forward interest rates during the first nine months of FY23, compared with the same period in FY22 (see Section III and Section IV).

In millions of U.S. dollars – YTD

Lending Operations

IBRD’s lending operations during the first nine months of FY23 provided $16.1 billion of net commitments, $20.4 billion of gross loan disbursements, and $10.8 billion of net loan disbursements. Net loans outstanding were $239.6 billion as of March 31, 2023.

In billions of U.S. dollars

Net commitments were lower by $2.5 billion compared with the same period in FY22 (see Table 5). The regions with the largest share of commitments in the first nine months of FY23 were Latin America and the Caribbean with 33%, and Europe and Central Asia with 22%.

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Net Investment Portfolio

Borrowing Portfolio

Equity-to-Loans Ratio

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Section: II Overview

IBRD, an international organization owned by its 189 member countries, is one of the five institutions of the WBG. Each institution is legally and financially independent, with separate assets and liabilities. IBRD is not liable for the obligations of the other institutions.

IBRD is a Multilateral Development Bank (MDB) that combines knowledge services and financing with a global reach. IBRD’s value is derived from its ability to help eligible borrowing members address their development challenges and meet their rising demand for innovative products. IBRD provides loans, guarantees, and other financial products for development-focused projects and programs to creditworthy middle-income and low-income countries to support sustainable development. By operating across a full range of country clients, IBRD maintains a depth of development knowledge, uses its convening power to promote development and advance the global public goods agenda, and coordinates responses to regional and global challenges.

Member countries use IBRD’s technical advice and analysis and convening power to develop or implement better policies, programs, and reforms that help sustain development over the long term. The products delivered range from development data, to reports on key social economic and social issues at the local, country, regional and global levels. The products also include knowledge-sharing workshops focused on local issues, flagship events and fora to address the most pressing global development challenges.

Financial Business Model

IBRD’s objective is not to maximize profits, but to earn adequate income to ensure that it has the long-term financial capacity necessary to support its development activities. IBRD seeks to generate sufficient revenue to finance its operations as well as to be able to set aside funds in reserves to strengthen its financial position. It also seeks to provide support to IDA and trust funds through income transfers for other developmental purposes.

IBRD’s financial strength rests on the support it receives from its shareholders, and on its array of financial policies and practices. Shareholder support for IBRD is reflected in the capital backing it continues to receive from its members and in the record of its borrowing member countries in meeting their debt service obligations to IBRD. Sound financial and risk management policies and practices have enabled IBRD to maintain adequate capital, diversify its funding sources, hold a portfolio of liquid investments to meet its financial commitments, and limit its risks, including credit and market risks.

IBRD offers its borrowers, in middle income and creditworthy low-income countries, long-term loans with maturities up to 35 years. Borrowers may customize their repayment terms to meet their debt management or project needs in multiple currencies on variable spread and previously on fixed spread terms. Borrowers have generally preferred loans denominated in U.S. dollars and euros. IBRD also supports its borrowers by providing access to risk management products such as derivative instruments, including currency and interest rate swaps and interest rate caps and collars.

To meet its development goals, IBRD intermediates funds for lending from the international capital markets. IBRD’s loans are also financed through its equity. IBRD is rated triple-A by the major rating agencies and its bonds are viewed as high-quality securities by investors. IBRD’s funding strategy is aimed at achieving the best long-term value on a sustainable basis for its borrowing members. This strategy has enabled IBRD to borrow at favorable market terms and pass the savings on to its borrowing members. IBRD’s annual funding volumes vary from year to year, and funds raised are used to finance IBRD’s development projects and programs in member countries. Funds not deployed for lending are maintained in IBRD’s investment portfolio to supply liquidity for its operations.

IBRD uses derivatives to manage its exposure to various market risks from the above activities. These are used to align the interest and currency composition of its assets (loan and investment portfolios) with that of its liabilities (borrowing portfolio), and to stabilize earnings on the portion of the loan portfolio funded by equity. See Section IV: Risk Management for additional details on how IBRD uses derivatives.

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Management believes that these risk management strategies, taken together, effectively manage market risk in IBRD’s operations from an economic perspective. However, these strategies entail the use of derivatives, which introduces volatility in net income through unrealized mark-to-market gains and losses (particularly given the long-term nature of some of IBRD’s assets and liabilities). Accordingly, Management makes decisions on income allocation without reference to unrealized mark-to-market gains and losses on risk management instruments in the non-trading portfolios – see Basis of Reporting – Allocable Income.

Financial Performance

IBRD’s primary sources of revenue are from loans and investments, both net of funding costs (see Figure 1). This revenue is used for administrative expenses, provision for losses on loans and other exposures² (LLP), as well as transfers to Reserves, Surplus, and for other development purposes, including transfers to IDA.

In addition, other development activities generate non-interest revenue that is classified as Revenue from externally funded activities. These external funds include trust fund fees, reimbursable funds, and revenues from fee-based services to member countries. Non-interest revenue from externally funded activities provides additional capacity to support the development needs of client countries.

Figure 1: Sources and Uses of Revenue

Basis of Reporting

IBRD’s financial statements conform with accounting principles generally accepted in the United States of America (U.S. GAAP). All financial instruments in the investment and borrowing portfolios and all derivatives are reported at fair value, with changes in fair value reported in the Statements of Income, except for changes in IBRD’s own credit, which are reflected in Other Comprehensive Income. IBRD’s loans are reported at amortized cost, except for loans with embedded derivatives, if any, which are reported at fair value. Management uses net income as the basis for deriving allocable income, as discussed below.

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Allocable Income

IBRD’s Articles of Agreement (the Articles) require that the Governors determine the allocation of income at the end of every fiscal year. Allocable income, which is a non-GAAP financial measure, is an internal management measure that reflects income available for allocation. IBRD defines allocable income as net income after certain adjustments, that are approved by the Board at the end of every fiscal year. These adjustments primarily relate to unrealized mark-to-market gains and losses associated with the non-trading portfolios, as well as Board of Governors-approved and other transfers, which primarily relate to the allocation of the prior year’s net income.

See Financial Results Section (Section III) and Table 1, for details of the adjustments to reported net income to calculate allocable income.

The volatility in IBRD’s net income is often driven by the unrealized mark-to-market gains and losses on the derivative instruments in IBRD’s non-trading portfolios: loans, borrowings, and other asset/liability management (ALM). IBRD’s risk management strategy entails the use of derivatives to manage market risk. These derivatives are primarily used to align the interest rate and currency bases of IBRD’s assets and liabilities. IBRD has elected not to designate any hedging relationships for accounting purposes. Rather, all derivative instruments are reported at fair value on the Balance Sheets, with changes in fair values reflected in the Statements of Income.

In line with its financial risk management policies, for the non-trading portfolios, unrealized mark-to-market gains and losses from instruments carried at fair value (borrowing portfolio, and derivatives in the loans and Other ALM portfolios) are excluded from allocable income.

For the trading portfolio (investment portfolio), allocable income includes both realized and unrealized mark-to-market gains and losses. In some cases, the unrealized mark-to-market gains and losses on certain trades are excluded from allocable income when the underlying item is a physical asset held at amortized cost.

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Section III: Financial Results

Financial Results and Portfolio Performance

The following is a discussion of the key drivers of IBRD’s financial performance, including a reconciliation between IBRD’s net income and allocable income.

Table 1: Condensed Statements of Income

In millions of U.S. dollars										Impact on income
For the nine months ended March 31,		2023				2022				Decrease    Increase
Revenue on interest earning assets, net of funding costs
Loan interest revenue, net		$	2,818			$	1,338
Other ALM derivatives, net			(481	)			490
Investment revenue, net a			140				(9	)
Total revenue on interest earning assets, net		$	2,477			$	1,819
Provision for losses on loans and other exposures b			(246	)			(623	)
Net non-interest expenses (Table 7)			(1,055	)			(1,050	)
Net pension cost, other than service cost (Table 7)			151				206
Net other revenue (Table 6)			166				123
Board of Governors-approved and other transfers			(221	)			(354	)
Non-functional currency translation adjustment (losses) gains, net			(15	)			84
Unrealized mark-to-market gains on non-trading portfolios, net c			86				1,576
Net income		$	1,343			$	1,781
Adjustments to reconcile net income to allocable income:
Pension d and other adjustments			(140	)			(63	)
Board of Governors-approved and other transfers			221				354
Non-functional currency translation adjustment losses (gains), net			15				(84	)
Unrealized mark-to-market gains on non-trading portfolios, net c			(86	)			(1,576	)
Allocable income		$	1,353			$	412

Table 2: Condensed Balance Sheets

In millions of U.S. dollars

As of			March 31, 2023				June 30, 2022			Decrease   Increase
Investments and due from banks		$	80,122			$	82,299
Net loans outstanding a			239,573				227,092
Derivative assets, net			177				804
Other assets			9,565				7,347
Total Assets		$	329,437			$	317,542
Borrowings			236,483				235,173
Derivative liabilities, net			25,389				20,041
Other liabilities			9,168				7,008
Equity			58,397				55,320
Total Liabilities and Equity		$	329,437			$	317,542

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The main drivers of the change in the Balance Sheet items are below:

Net Income

IBRD’s net income was $1,343 million for the first nine months of FY23, compared with net income of $1,781 million during the same period in FY22. The $438 million decrease was primarily due to lower unrealized mark-to-market gains on IBRD’s non-trading portfolios, partially offset by higher net loan interest revenue and the decrease in the provision for losses on loans and other exposures (see Table 1).

Results from Lending activities

Loan Interest Revenue, net

Under IBRD’s pricing policy, the lending rates for all loans are based on the underlying cost of the borrowings funding these loans. After the effect of related derivatives, the loan and borrowing portfolios are based on variable interest rates. The portion of the loan portfolio funded by equity is sensitive to changes in interest rates.

For the first nine months of FY23, IBRD’s loan interest revenue, net of funding costs was $2,818 million, an increase of $1,480 million compared with the same period in FY22 (Figure 3). Other ALM derivatives moderate the impact of interest rate changes on the portion of the loan portfolio that is sensitive to interest rate movements, thereby partially stabilizing the net interest revenue earned from these loans (see Figure 3). Other ALM derivatives comprise interest rate swaps, which are used to convert the variable rate cash flows from these loans to fixed rate cash flows. The combined effect of the increase in loan interest revenue, net of $1,480 million and the decrease in interest revenue from Other ALM derivatives, net of $971 million from FY22 YTD to FY23 YTD, resulted in a total increase in net loan interest revenue of $509 million. The increase was primarily due to the higher average loan balance and the interest rate reset lag between the SOFR-based loans and the mixed 6-month LIBOR and SOFR based borrowing portfolio in a rising interest rate environment.

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Provision for losses on loans and other exposures

IBRD recorded a provision for losses on loans and other exposures of $246 million in FY23 YTD, $377 million lower than the same period in FY22. This decrease was primarily driven by the decrease in the loss given default (severity) due to the lower increase in the implied forward interest rates in FY23 YTD compared to FY22 YTD. The severity reflects the expected losses from delays in receiving interest payments since IBRD does not charge interest on overdue interest. As the majority of IBRD’s loans carry a variable interest rate, changes in forward interest rates impact the expected losses that are recorded through the provision for losses on loans and other exposures in the statements of income.

As of March 31, 2023, 82% of IBRD’s total loans outstanding, after derivatives, were denominated in U.S. dollars, and 18% were denominated in euro. For the regional presentation of loans outstanding, see Notes to Condensed Quarterly Financial Statements, Note D: Loans and other exposures, Table D6.

Gross disbursements were $20.4 billion in FY23 YTD, a $1.2 billion decrease compared with the same period in FY22 (Table 4). The decrease is primarily driven by the decrease in Investment Project Financing (IPF) disbursements.

Table 4: Gross Disbursements by Region

  In millions of U.S. dollars

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Net commitments were $16.1 billion in FY23 YTD, a $2.5 billion decrease compared with the same period in FY22 (Table 5). In FY23 YTD, lower Development Policy Financing (DPF) and Program for Results (PforR) commitments were partially offset by higher IPF commitments.

Table 5: Net Commitments by Region

  In millions of U.S. dollars

Results from Investing Activities

Net Investment Portfolio

IBRD’s net investment portfolio was $77.4 billion as of March 31, 2023 ($82.1 billion as of June 30, 2022). Of this amount, $73.7 billion related to the liquid asset portfolio ($78.8 billion as of June 30, 2022). See Notes to Condensed Quarterly Financial Statements, Note C: Investments. The decrease in the liquid asset portfolio is primarily due to the net loan disbursements during the period and in line with the lower target liquidity level in FY23.

Net Investment Revenue

IBRD’s net investment revenue increased by $149 million in FY23 YTD compared to FY22 YTD. This was primarily due to higher net interest revenue due to the increase in average interest rates and higher unrealized mark-to-market gains on forward contracts due to foreign currency changes.

Figure 5: Net Investment Portfolio		Figure 6: Investment Revenue, net
In billions of U.S. dollars		In millions of U.S. dollars, YTD

Results from Borrowing Activities

As of March 31, 2023, the borrowing portfolio was $263.7 billion, a $6.8 billion increase compared with June 30, 2022 (see Notes to Condensed Quarterly Financial Statements, Note E: Borrowings). The increase was primarily due to net new debt issuances. New issuances of medium-and long-term debt of $27.2 billion during the first nine months of FY23 were highly diversified by investor profile and location, with an average maturity of 6.4 years. The funds raised financed development lending operations and satisfied the liquidity requirements.

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Figure 7: Borrowing Portfolio (original maturities)

In billions of U.S. dollars

Net Other Revenue

Net non-interest revenue was higher by $43 million in FY23 YTD, compared with the same period in FY22. The increase was mainly due to the higher investment earnings from the PEBP, consistent with prevailing market conditions.

Table 6: Net Other Revenue

In millions of U.S. dollars

Net Non-Interest Expenses

As shown in Table 7, IBRD’s net non-interest expenses are primarily comprised of administrative expenses, net of revenue from externally funded activities. IBRD and IDA’s administrative budget is a single resource envelope that funds the combined work programs of both entities. The allocation of net administrative expenses between IBRD and IDA is based on an agreed cost and revenue-sharing methodology, approved by their Boards, which is primarily driven by the relative level of lending, knowledge services, and other services between the two entities. The administrative expenses shown in Table 7 include costs related to IBRD-executed trust funds and other externally funded activities.

Figure 8: Net Non-Interest Expenses (GAAP basis)

In millions of U.S. dollars, YTD

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The increase in net non-interest expenses on both a GAAP basis and allocable income basis from FY22 YTD to FY23 YTD was primarily driven by higher staff costs and higher travel expenses (see Table 7). Travel expenses have been gradually increasing since the easing of the COVID-19-related travel restrictions and office closures and are now approximately 80% of the pre-COVID level for the World Bank.

Table 7: Net Non-Interest Expenses

In millions of U.S. dollars

Unrealized mark-to-market gains and losses on non-trading portfolios

Unrealized mark-to-market gains and losses associated with the non-trading portfolios are excluded from reported net income to arrive at allocable income. As a result, from a long-term financial sustainability perspective, income allocations are generally based on amounts that have been realized (except for the Investments-Trading portfolio, as previously discussed). For the first nine months of FY23, $86 million of net unrealized mark-to-market gains ($1,576 million net unrealized mark-to-market gains for same period in FY22) were excluded from reported net income to arrive at allocable income (see Table 1).

Table 8: Unrealized Mark-to-market Gains and Losses on Non-trading Portfolios ^a

In millions of U.S. dollars

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Loan Portfolio

Loans are reported at amortized cost on the balance sheet and therefore the mark to market effect on loans is not reflected in reported net income. However, the derivatives used to convert the loans from fixed-rate to variable-rate instruments, for asset / liability management purposes, are reported at fair value. From an economic perspective, IBRD’s loans after the effect of derivatives carry variable interest rates and have a low sensitivity to interest rates. The unrealized mark to market gains on loan related derivatives were $1,172 million for the first nine months of FY23, primarily due to the increase in interest rates during this period. The lower unrealized mark to market gains in FY23 YTD were primarily due to the less prominent increase in interest rates compared to the same period in FY22. See Section IV: Risk Management for additional details on how IBRD uses derivatives in the loan portfolio.

Borrowing Portfolio

IBRD’s bonds and the related derivatives are reported at fair value. IBRD recorded $142 million of net unrealized mark-to-market losses on IBRD’s bonds and associated derivatives, due to the increase in interest rates for the nine months ended March 31, 2023. The losses on the bond-related derivatives exceeded the gains on the bonds. The net unrealized mark-to-market gains on IBRD’s bonds exclude changes in IBRD’s own credit, referred to as the DVA on Fair Value Option elected liabilities, which is instead recorded in Accumulated Other Comprehensive Income (AOCI). For the first nine months of FY23, the DVA was $241 million of unrealized mark-to-market gains, resulting mainly from the widening of IBRD’s credit spreads relative to the applicable reference rate during the period. As of March 31, 2023, IBRD’s Condensed Balance Sheets included a cumulative DVA of $605 million of mark-to-market gains reflected in AOCI (see Notes to the Condensed Quarterly Financial Statements, Note K – Fair Value Disclosures).

Other ALM Portfolio

IBRD uses derivatives to stabilize its interest revenue from the portion of loans that is sensitive to changes in short-term interest rates. The Other ALM portfolio consists of derivatives which convert variable rate loan cash flows to fixed rate loan cash flows. In the first nine months of FY23, IBRD recorded unrealized mark-to-market losses of $946 million on this portfolio primarily due to the increase in interest rates for the nine months ended March 31, 2023. The lower unrealized mark-to-market losses in FY23 YTD were primarily due to the less prominent increase in interest rates compared to the same period in FY22. As of March 31, 2023, the duration of this portfolio was 4.5 years, within the Board established limit of 5 years.

Board of Governors-approved Transfers

On August 2, 2022, IBRD’s Board of Governors approved a transfer of $80 million from Surplus to the Trust Fund for Gaza and the West Bank. The transfer was made on August 17, 2022.

During the nine months ended March 31, 2023, $24 million was utilized out of the cumulative transfers of $85 million to the IBRD Fund for Innovative Global Public Goods Solutions (GPG Fund). Accordingly, an expense was recognized and Other reserves was reduced, as the conditions specified for use by the beneficiaries had been met. As of March 31, 2023, the unutilized balance of the cumulative transfers to the GPG Fund was $61 million.

Since 1964, IBRD has made transfers to IDA out of its net income, upon approval by the Governors. Under a formula-based approach for IBRD’s income support to IDA, the amount of income transfer recommended for IDA is a function of IBRD’s financial results. On October 14, 2022, the Board of Governors approved a transfer of $117 million to IDA out of FY22 allocable income, which was made on October 20, 2022.

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Section IV: Risk Management

Risk Governance

IBRD’s risk management processes and practices evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The Board, particularly the Audit Committee, periodically reviews trends in IBRD’s risk profiles and performance, and any major developments in risk management policies and controls. Management believes that effective risk management is critical for its overall operations. Accordingly, the risk management governance structure is designed to manage the principal risks IBRD assumes in its activities.

Risk Oversight and Coverage

The Vice President and WBG Chief Risk Officer (CRO) oversees both financial and operational risks. These risks include (i) country credit risks in the core sovereign-lending business, (ii) market and counterparty risks, including liquidity risk, and (iii) operational risks relating to people, processes, and systems, or from external events.

The risk of IBRD’s operations not meeting their development outcomes (development outcome risk) in IBRD’s lending activities is monitored at the corporate level by Operations Policy and Country Services (OPCS). Where fraud and corruption risks may impact IBRD-financed projects, OPCS, the regions and practice groups, and the Integrity Vice Presidency jointly address such issues.

For a detailed discussion of the risk governance and risk oversight and coverage, see IBRD’s MD&A for the fiscal year ended June 30, 2022, Section IX: Risk Management.

Management of IBRD’s Risks

IBRD assumes financial risks in order to achieve its development and strategic objectives. IBRD’s financial risk management framework is designed to enable and support the institution in achieving its goals in a financially sustainable manner. IBRD manages credit, market, and operational risks in its financial activities, which include lending, borrowing and investing. The primary financial risk to IBRD is the country credit risk inherent in its loan portfolio. IBRD is also exposed to risks in its liquid asset and derivative portfolios, where the major risks are interest rate, exchange rate, commercial counterparty credit, and liquidity risks. IBRD’s operational risk management framework is based on a structured and uniform approach to identify, assess and monitor key operational risks across business units.

In an effort to maximize IBRD’s capacity to lend to member countries for development purposes, IBRD limits its exposure to market and counterparty credit risks. In addition, to ensure that the financial 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.

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Geopolitical Events and Global Outlook

Russia’s invasion of Ukraine that began in February 2022 negatively impacted regional and global financial markets and economic conditions. It also created significant needs for humanitarian and other critical support. From the outbreak of the conflict, through March 31, 2023, IBRD committed $2.2 billion to Ukraine. Over the same period, IBRD disbursed $2.6 billion (including commitments made prior to the start of the invasion) to help the government of Ukraine provide critical services.

As of March 31, 2023, IBRD’s loans outstanding to Ukraine were $8.6 billion, with $2.2 billion guaranteed by third parties. In addition, IBRD provided $0.7 billion of guarantees to Ukraine that were outstanding as of March 31, 2023. As of March 31, 2023, there were no loans outstanding to the Russian Federation.

As of March 31, 2023, despite the broad impact of geopolitical events and other ongoing challenges to the global outlook, including high inflation, the rise in food insecurity, growing inequality, global fragility, pandemic risk, rising debt, climate change, and macroeconomic imbalances, IBRD had sufficient resources to meet its liquidity requirements and continues to have access to capital market resources. The liquid asset portfolio was above the Target Liquidity Level (see Table 13).

Management remains vigilant in assessing funding needs in the medium and longer-term to manage the effect of possible severe market movements.

IBRD’s capital adequacy, as indicated by the Equity-to-Loans ratio (Table 9) remains above the minimum level.

As of the reporting date, country credit risk and counterparty credit risk remain in line with the existing governance framework and established credit limits. The loan loss provisions include IBRD’s current assessment of country credit risk. The fair values of related financial instruments reflect counterparty credit risk in IBRD’s portfolios. Developments in the market continue to be closely monitored and managed.

Capital Adequacy

IBRD holds capital to cover the credit, market and operational risks inherent in its operating activities and financial assets. Country credit risk is the most substantive risk covered by IBRD’s equity.

IBRD’s capital adequacy is the degree to which its equity is sufficient to withstand unexpected shocks. IBRD’s Board monitors IBRD’s capital adequacy within a strategic capital adequacy framework and uses the Equity-to-Loans ratio as a key indicator of capital adequacy. The framework seeks to ensure that IBRD’s equity is aligned with the financial risk associated with its loan portfolio and other exposures over a medium-term capital-planning horizon.

As shown in Table 9, IBRD’s Equity-to-Loans ratio was 21.4% as of March 31, 2023, a decrease from 22.0% as of June 30, 2022, mainly due to the increase in loan exposure outpacing the increase in equity, and remained above the 20% minimum ratio under the strategic capital adequacy framework. In April 2023, as part of the Evolution Roadmap, the Board approved a reduction in the policy minimum Equity-to-Loans ratio from 20% to 19% based on IBRD’s review of the capital adequacy framework. The minimum Equity-to-Loans ratio policy continues to support IBRD’s triple-A rating and long-term financial sustainability. During the first nine months of FY23, IBRD received $894 million of paid-in capital subscribed under the 2018 GCI and SCI, bringing the cumulative amounts received to $4.9 billion, 66% of the $7.5 billion expected over the subscription period. In line with IBRD’s currency management policy, exchange rate movements during the period did not have an impact on IBRD’s Equity-to-Loans ratio. Under the currency management policy, to minimize exchange rate risk, IBRD matches its borrowing obligations in any one currency (after derivatives) with assets in the same currency. In addition, IBRD periodically undertakes currency conversions to align the currency composition of its equity with that of its outstanding loans, across major currencies.

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Table 9: Equity-to-Loans Ratio    

Table 10: Usable Paid-In Capital

Credit Risk

IBRD faces two types of credit risk: country credit risk and counterparty credit risk. Country credit risk is the risk of loss due to a country not meeting its contractual obligations, and counterparty credit risk is the risk of loss attributable to a counterparty not honoring its contractual obligations. IBRD is exposed to commercial as well as non-commercial counterparty credit risk.

Country Credit Risk

IBRD manages country credit risk by using individual country exposure limits and produces credit risk ratings for all its borrowing countries, which reflect country economic, financial, and political circumstances, and also considers Environmental, Social and Governance (ESG) risk factors. In addition, IBRD conducts stress tests of the effects of changes in market variables and of potential geopolitical events on its portfolio to complement its capital adequacy framework.

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Figure 9: Country Exposures as of March 31, 2023

In billions of U.S. dollars

Portfolio Concentration Risk

Portfolio concentration risk, which arises when a small group of borrowers accounts for a large share of loans outstanding, is a key risk for IBRD. The ten countries with the highest exposures accounted for 60% of IBRD’s total exposure as of March 31, 2023.

Concentration risk is carefully managed, in part, by applying an exposure limit to a single borrowing country for the aggregate balance of loans outstanding, the present value of guarantees, the undisbursed portion of DDOs, and other eligible exposures that have become effective. Under the current guidelines, IBRD’s exposure to a single borrowing country is restricted to the lower of an Equitable Access Limit (EAL) or the Single Borrower Limit (SBL).

The SBL framework reflects a dual-SBL system, which differentiates between countries below the Graduation Discussion Income (GDI) threshold and those above it. Under this system, the FY23 SBL is $28.0 billion for highly creditworthy countries below the GDI, and $21.2 billion for highly creditworthy countries above the GDI.

Accumulated Provision for Losses on Loans and Other Exposures

As of March 31, 2023, IBRD’s accumulated provision for losses on loans and other exposures was $2,441 million, including $375 million of accumulated provision related to loan commitments (see Notes to Condensed Quarterly Financial Statements, Note D: Loans and Other Exposures). This was less than 1% of the underlying exposures ($2,165 million as of June 30, 2022, less than 1% of total exposures).

As of March 31, 2023, 0.6% of IBRD’s total loans outstanding were in nonaccrual status, all related to Zimbabwe and Belarus. During the first nine months of FY23, IBRD received $1.5 million as payments towards amounts overdue from Zimbabwe ($2.3 million for FY22 YTD). See Notes to Condensed Quarterly Financial Statements, Note D: Loans and Other Exposures.

Effective October 17, 2022, all loans made to or guaranteed by Belarus were placed in nonaccrual status. No loans to any borrowing country were restored to accrual status during the first nine months of FY23.

Counterparty Credit Risk

IBRD is exposed to commercial and non-commercial counterparty credit risk.

Commercial Counterparty Credit Risk

Commercial counterparty credit risk is the risk that counterparties fail to meet their payment obligations under the terms of the contract or other financial instruments. Effective management of counterparty credit risk is vital to the success of IBRD’s funding, investment, and asset/liability management activities. The monitoring and management of these risks is continuous as the market environment evolves.

As a result of IBRD’s use of collateral arrangements for swap transactions, its residual commercial counterparty credit risk is concentrated in the investment portfolio, in instruments issued by sovereign governments and non-sovereign holdings (including Agencies and Asset-backed securities, Corporates, and Time Deposits).

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As shown in Table 11, 62% of IBRD’s investment portfolio is rated AA or above, and the remainder predominantly rated A. The exposures with AAA and AA rated counterparties primarily relate to sovereign debt and time deposits. The A rated counterparties principally consist of financial institutions (limited to short-term deposits and swaps) and sovereign debt.

Table 11: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating

In millions of U.S. dollars

Non-Commercial Counterparty Credit Risk

In addition to its derivative transactions with commercial counterparties, IBRD offers derivative-intermediation and other services to borrowing member countries, as well as to affiliated and non-affiliated organizations, to help meet their development needs and fulfill their development mandates (see Table 12).

IBRD has a master derivatives agreement with the International Finance Facility for Immunisation (IFFIm), under which several transactions have been executed. IBRD has the right to call for collateral above an agreed specified threshold. As of March 31, 2023, IBRD had not exercised this right, but may do so under the existing terms of the agreement. Rather than calling for collateral, IBRD and IFFIm have agreed to manage IBRD’s exposure by applying a risk management buffer to the gearing ratio limit. The gearing ratio limit represents the maximum amount of IFFIm’s net financial obligations less cash and liquid assets, as a percentage of the net present value of its financial assets.

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Table 12: Non-Commercial Counterparty Credit Risk

In millions of U.S. dollars

Exposures as of March 31, 2023

Changes in Credit Spreads

The sensitivity of IBRD’s portfolios to credit represents the change in fair value corresponding to changes in credit spreads.

Market Risk

IBRD is exposed to changes in interest and exchange rates, and it uses various strategies to minimize its exposure to market risk.

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) with those of its liabilities (borrowing portfolio) by using derivatives, such as interest rate swaps. These derivatives effectively convert IBRD’s financial assets and liabilities into variable-rate instruments. After considering the effects of these derivatives, virtually the entire loan and borrowing portfolios are carried at variable interest rates.

Loans to borrowing countries

Under IBRD’s loan agreements, if an interest rate yields a negative rate, the interest rate charged is zero.

Liquid Asset Portfolio

IBRD’s existing guidelines allow for the investment in a wide variety of credit products in both developed and emerging market economies (see investment eligibility criteria in IBRD’s MD&A as of June 30, 2022). During the first nine months of FY23, IBRD’s liquid asset portfolio recorded unrealized mark-to-market gains, mainly from foreign currency forward contracts.

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The interest rate risk on IBRD’s liquid asset portfolio, including the risk that the value of assets in the portfolio will fluctuate in response to changes in market interest rates, is managed within specified duration-mismatch limits. The liquid asset portfolio has spread exposure because IBRD holds instruments other than the short-term bank deposits represented by the portfolio’s London Interbank Bid Rate (LIBID) benchmark. These investments generally yield positive returns over the benchmark but can generate mark-to-market losses if their spreads relative to LIBOR widen.

Fixed Spread Loan Refinancing Risk

Refinancing risk for funding fixed-spread loans relates to the potential impact of any future deterioration in IBRD’s funding spread relative to what was computed in the fixed-spread. IBRD does not match the maturity of its funding with that of its fixed spread loans as this would result in significantly higher financing costs for all loans. Instead, IBRD targets a shorter average funding maturity and manages the refinancing risk through two technical components of the fixed-spread loan pricing, both of which can be changed at Management’s discretion for new loan offers:

Effective April 1, 2021, IBRD’s offering of loans on fixed spread terms was suspended.

Other Interest Rate Risks

Interest rate risk also arises from other variables, including differences in timing between the contractual maturities or re-pricing of IBRD’s assets, liabilities, and derivative instruments. On variable-rate assets and liabilities, IBRD is exposed to timing mismatches between the reset dates on its variable-rate receivables and payables. IBRD monitors these exposures and may execute overlay interest rate swaps to reduce sizable timing mismatches.

Alternative Reference Rates

The Financial Conduct Authority (FCA), the regulator of LIBOR, confirmed that effective December 31, 2021, all the LIBOR settings, except for certain USD LIBOR, which will be available until June 30, 2023, would cease to be provided by any administrator or were no longer representative.

In consideration of the regulatory guidance and in preparation for the global markets’ transition away from LIBOR, IBRD took the necessary steps to facilitate a smooth and orderly transition of its financial instruments to alternative reference rates. This transition started on January 1, 2022.

Out of the total loans outstanding as of March 31, 2023, approximately 58% have transitioned and 10% are still subject to transition to alternative reference rates. The remaining 32% of the total loans outstanding are not required to transition to alternative reference rates. The switch over of existing variable spread and non-USD fixed spread loans to alternative reference rates began in January 2022, at the loan reset dates, and was completed as of June 30, 2022. The USD fixed spread loans will begin transitioning in July 2023, as the loans reset, until the end of December 2023.

Out of the total derivative portfolio notional as of March 31, 2023, less than 1% have transitioned and 73% are still subject to transition to alternative reference rates. The remaining 27% of the total derivative portfolio notional is not subject to transition to alternative reference rates. For the vast majority of the derivative portfolio subject to transition, IBRD either has sufficient provisions in the derivative agreements with its counterparties, has adhered to the International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol (IBOR Protocol) or works bilaterally with counterparties, to ensure a smooth transition to alternative reference rates.

As of March 31, 2023, about 98% of IBRD’s borrowing portfolio either carries fixed interest rates or is not subject to transition to alternative reference rates.

IBRD will continue to work with key stakeholders, including internal subject matter experts, senior management, borrowers, industry groups and other market participants, to mitigate potential financial and operational risks to which IBRD is exposed, and to ensure an orderly transition to the alternative reference rates.

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Exchange Rate Risk

IBRD holds the majority of its assets and liabilities in U.S. dollars and euro. However, the reported levels of its assets, liabilities, income, and expenses in the financial statements are affected by exchange rate movements in all the currencies in which IBRD transacts, relative to its reporting currency, the U.S. dollar. While IBRD’s equity could be affected by exchange rate movements, IBRD’s risk management policies work to minimize the exchange rate risk in its capital adequacy, by immunizing the Equity-to-Loans ratio against exchange rate movements.

To minimize exchange rate risk, IBRD matches its borrowing obligations in any one currency (after derivatives) with assets in the same currency. In addition, IBRD undertakes periodic currency conversions to align the currency composition of its equity with that of its outstanding loans across major currencies. Together, these policies are designed to minimize the impact of exchange rate fluctuations on the Equity-to-Loans ratio; thereby preserving IBRD’s ability to better absorb unexpected losses from arrears on loan repayments, regardless of exchange rate movements. As a result, exchange rate movements during the period generally do not have an impact on the overall Equity-to-Loans ratio.

Liquidity Risk

Liquidity risk arises in the general funding of IBRD’s activities and in managing its financial position. It includes the risk of IBRD being unable to fund its portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price.

Under IBRD’s liquidity management guidelines, liquid asset holdings are kept at or above a specified Prudential Minimum to safeguard against cash flow interruptions.

The Target Liquidity Level represents twelve-months’ coverage as calculated at the start of every fiscal year. The Prudential Minimum is defined as 80% of the Target Liquidity Level. The maximum guideline of 150% of Target Liquidity Level continues to function as a guideline rather than a hard ceiling (see Table 13).

Table 13: Liquidity Levels for FY23

The FY23 Target Liquidity Level is $3.0 billion lower than the prior year, due to the lower projected debt service.

Operational Risk

Operational risk is defined as the risk of financial loss, or damage to IBRD’s reputation resulting from inadequate or failed internal processes, people and systems, or from external events.

IBRD recognizes the importance of operational risk management activities, which are embedded in its financial operations. As part of its business activities, IBRD is exposed to a range of operational risks including physical security and staff health and safety, data and cyber security, business continuity, and third-party vendor risks. IBRD’s approach to identifying and managing operational risk includes a dedicated program for these risks and a robust process that includes assessing and prioritizing operational risks, monitoring and reporting relevant key risk indicators, aggregating and analyzing internal and external events, and identifying emerging risks that may affect business units and developing risk response and mitigating actions.

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Section V: Governance

Senior Management Changes

On April 11, 2023, David Malpass informed the Board that he would resign as World Bank Group President, effective at the close of business on June 1, 2023. Ajay Banga was appointed as President of the World Bank Group effective June 2, 2023.

On March 1, 2023, Mari Pangestu retired as Managing Director for Development Policy and Partnerships.

Effective April 3, 2023, Axel van Trotsenburg became the Senior Managing Director for the World Bank’s Development Policy and Partnerships, and Anna Bjerde was appointed Managing Director for Operations, succeeding Axel van Trotsenburg in that role.

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List of Tables, Figures and Boxes

Tables

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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD)

CONTENTS

March 31, 2023

CONDENSED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

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CONDENSED BALANCE SHEETS

Expressed in millions of U.S. dollars

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