The purpose of the Bank is to accelerate development and promote co-operation among its shareholder countries. BSTDB supports regional trade and investment, providing financing for commercial transactions and projects in order to help Member States to establish stronger economic linkages.
BSTDB’s vision is to be recognized globally, and by its shareholders in particular, as a prominent development finance institution for the Black Sea Region providing well-focused development assistance and solutions.
The majority of the Bank’s outstanding activities are in the private sector (around 89.5% at end-May 2012). The Bank’s products include: medium- to long-term loans; credit lines via financial intermediaries; convertible debt and other quasi-equity; equity investments, both direct and via investment funds; and guarantees.
In practice, the Bank’s two main lines of business are project/corporate finance and trade finance and its two main types of operations are direct via financial intermediaries. Equity financing comprised 4.5% of operations at end-May 2012, bringing it closer to management’s target of 5.0%-7.5% by year-end 2014.
Almost 60% of the Bank’s activity is in the financial and manufacturing sectors at present. This marks a shift, as the transport and public utilities sector previously held the second-largest share of the total portfolio.
Governance and Risk Management
The Bank sets exposure limits to help diversify its risk by country and by sector, in light of its geographically concentrated portfolio. The Bank has three levels of concentration limits with (1) the first (institutional) limit coming from the establishing agreement; (2) the second (operational) limit from the portfolio risk management and investment policy, which can be amended by the Board of Directors; and (3) the third limit coming from the Credit Committee, which cannot be in conflict with the institutional or operational limits. The limits are similar to other MDBs and include:
» A gearing ratio of 150% institutionally and 100% operationally7
» An individual sector risk exposure targeted at 40% of approved commitments
» Single project limits of 33% for equity exposure, 35% for greenfield project finance and 100% for corporate or trade finance
» Operationally, equity investments cannot be above 50% of paid-in capital.
Around two-thirds of the Bank’s total loan portfolio is collateralized
The Bank has a liquidity policy in place that sets the minimum level of liquid assets held at 50% of the next 12 months net cash requirements. This is not the strongest policy in the MDB universe as many require holding 100% of net cash needs over the next 12 or more months.
The Bank’s liquid assets are maintained in short-term placements and negotiable securities. Deposits have to be invested with institutions having a long-term rating of at least A2 and euro commercial paper (ECP) holdings must be rated at least P-2 (short term). Currently, most of the liquid assets are in ECP from core European banks.
At the end of 2011, liquid assets amounted to 18% of total assets and 57% of total borrowings, down from 22% and 59%, respectively, in 2010. Exhibit 4 shows how BSTDB’s position compares favourably to its peers.
The Bank’s lending does not include program or concessional lending, although profit maximisation is not one of its mandates. As all MDBs have a primarily development-related mandate instead of profits.
Profitability has been a concern in the past, but one that has been mitigated by the Bank’s very good performance in recent years, even during the 2008-09 global crisis. The Bank posted net losses in 2001-04, mostly due to provisioning charges (income before general provisions was positive except in 2001). It posted its first solid net profit in 2005 and profitability continued with solid growth until the Lehman crisis in 2008. Difficult conditions meant that income before provisions and net income fell 45% and 24%, respectively, in 2009. Nevertheless, the Bank did make a profit, helped by tight control of expenses.