Credit Fundamentals

It is the policy of ADB to place loans in non-accrual status for which principal, interest, or other charges are overdue by six months or in the case of loans that are not yet overdue, when there is expectation that interest and other charges will not be collected when they become due, at the point when such information is known. Interest and other charges on non-accruing loans are included in income only to the extent that payments have been received by ADB. Accordingly, loans are reinstated to accrual status when all the principal, interest and other charges due on the loan have been collected. ADB maintains a position of not taking part in debt rescheduling agreements with respect to sovereign loans. In the case of nonsovereign loans, ADB may agree to debt rescheduling only after alternative courses of action have been exhausted.

As of 30 June 2021, there were five nonsovereign loans in non-accrual status with a total outstanding amount of $240 million, of which $18 million was overdue by more than 180 days. There were no outstanding sovereign loans in non-accrual status as of 30 June 2021.

With a powerful balance sheet, backed by its 68 members, ADB's capital structure provides the greatest levels of security for fixed income investors.

Subscribed shareholder capital consists of paid-in capital and callable capital.

Paid-in capital constitutes the equity portion of capital available for ADB's OCR lending operations. This is supplemented by retained earnings and leveraged by the proceeds of ADB's borrowings.

Callable capital is available to protect ADB's creditors—mainly investors in ADB bonds and holders of ADB guarantees—in the unlikely event of a large-scale default by ADB's borrowers. ADB has never made a call on callable capital.

ADB’s shareholders consist of 49 developing and developed countries in the Asia and Pacific region, and 19 countries from outside the region. Each shareholder is represented on the Board of Governors, in which all of ADB’s powers are vested. As of 31 December 2020, ADB’s five largest shareholders are Japan and the United States (each with 15.6% of total shares), the People’s Republic of China (6.4%), India (6.3%), and Australia (5.8%).

Notice to readers: Nothing included in this web site or any materials shall be construed, implicitly or explicitly as containing any investment recommendation or advice, and constituting an offer of, or an invitation by or on behalf of, ADB to purchase or sell any securities. Please see "Terms of Use" for further details.

Conservative financial management

Two fundamental principles underpin ADB's strength:

• Lending limitation: ADB’s lending limitation policy limits the total amount of disbursed loans, disbursed equity investments and related prudential buffer, and the maximum amount that could be demanded from ADB under its guarantee portfolio, to the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus, exclusive of the special reserve.

ADB’s conservative financial management policies have consistently held its loans well within these limits.

Comprehensive risk management

ADB's risk management framework is built on three core components: governance, policies, and processes. Governance starts with the Board of Directors, which reviews and approves risk policies that define ADB's risk appetite. ADB maintains an independent risk management office and has various management committees with responsibility to oversee ADB-wide risk issues and endorse related decisions for approval by the Board of Directors and the President. ADB's risk management framework includes the Risk Committee, which provides high-level oversight of ADB's risks and recommends risk policies and actions to the President. 

ADB monitors the credit profile of existing transactions in the operations portfolio, conducts risk assessments of new nonsovereign transactions, and assumes responsibility for resolving distressed transactions when necessary. It also monitors market and credit risks in treasury operations, such as the credit quality of counterparties, interest rate risk, and foreign exchange risk. In addition, ADB has developed an operational risk management framework for the institution. For the aggregate portfolio, ADB monitors limits and concentrations, sets aside loan loss reserves, provide loan loss provisions including collective provision requirements, and assesses its capital adequacy.  

In carrying out its mission, ADB is exposed to various risks: (i) credit risk, (ii) market risk, (iii) liquidity risk, and (iv) operational risk.

• Credit risk – issuers: To mitigate issuer and counterparty credit risks, ADB only transacts with financially sound institutions with ratings from at least two reputable external rating agencies. Moreover, the treasury portfolio is generally invested in conservative assets, such as money market instruments and government securities. In addition, ADB has established prudent exposure limits for its corporate investments, depository relationships, and other investments.
• Market risk: ADB monitors and manages interest rate risks in the Treasury portfolio by employing various quantitative methods. It marks all positions to market, monitors interest rate risk metrics and employs stress testing and scenario analysis. ADB manages its currency risk by matching its loans and investments to the same currencies in which funds are received. Borrowed funds or funds to be invested may only be converted into other currencies provided that they are fully hedged through cross currency swaps or forward exchange agreements.
• Liquidity risks: ADB manages liquidity risks through its liquidity policy that ensures the availability of sufficient cash flows to meet all financial commitments despite uncertain conditions in the capital markets.
• Operational risk: ADB mitigates operational risks by maintaining a system of internal controls, monitoring procedures, and processes that are designed to keep operating risks within acceptable levels.

ADB has also strengthened business continuity, and particularly information technology, to reduce the impact of disruptions.

More on ADB's financial risk management in the Annual Report 2020.

Notice to readers: Nothing included in this web site or any materials shall be construed, implicitly or explicitly as containing any investment recommendation or advice, and constituting an offer of, or an invitation by or on behalf of, ADB to purchase or sell any securities. Please see "Terms of Use" for further details.

The liquidity portfolio helps ensure the uninterrupted availability of funds to meet loan disbursements, debt servicing, and other cash requirements; provides a liquidity buffer in the event of financial stress; and contributes to ADB’s earning base. ADB’s Investment Authority governs ADB’s investments in liquid assets. The primary objective is to maintain the security and liquidity of the funds invested.

Liquid investments are held in government and government-related debt instruments, time deposits, and other unconditional obligations of banks and financial institutions. To a limited extent, they are also held in corporate bonds that are rated at least A–.

ADB's liquid investments consist of 17 currencies managed in portfolios specific to a designated purpose. The purpose of the working capital portfolios (operational and cash cushion portfolios) is to manage ADB's short-term cash flow requirements and to hold the proceeds of the borrowing transactions pending disbursement. The discretionary liquidity portfolio is funded by debt and is intended to provide flexibility in executing ADB's funding program over the medium-term to opportunistically permit borrowing ahead of cash-flow needs, and to bolster ADB access to short-term funding through continuous presence in the market. The core liquidity portfolio is invested to ensure that the primary objective of a liquidity buffer is met. The portfolio has been funded by equity, and the average duration of the major currencies in the portfolio was about 3.0 years as of 31 December 2020.

The year-end balances of the portfolios and the returns on the liquidity portfolio in 2019 and 2020 are presented below:

Year-end balances and returns on liquidity portfolios

	Year-end Balance* (US$ Million)		Annualized Return on Liquity Portfolio** (%)
			Amortized Cost		Fair Value
	2019	2020	2019	2020	2019	2020
Core liquidity portfolio	19,011	19,331	2.1	2.0	4.0	4.2
Operational cash portfolio	205	245	2.2	0.4	2.2	0.4
Cash cushion portfolio	8,163	8,744	2.6	0.8	2.7	0.9
Discretionary liquidity portfolio	11,674	12,991	0.5***	0.4***	0.5***	0.4***
Ad hoc portfolio	745	848	3.2	2.5	7.4	6.8
Total	39,798	42,159

* Including securities purchased under resale arrangements, securities transferred under repurchase agreements, and investment-related swaps. The composition of the liquidity portfolio may shift from year to year as part of ongoing liquidity management.

** The amortized returns are based on income from investments and realized gains and losses reported in the Statement of Income and Expenses. The fair value return incorporate unrealized gains and losses that are reported as part of other comprehensive income loss and movements are dependent on prevailing market environment.

*** Spread over funding cost.

Note: Figures may not add up due to rounding. Nothing included in this web site or any materials shall be construed, implicitly or explicitly as containing any investment recommendation or advice, and constituting an offer of, or an invitation by or on behalf of, ADB to purchase or sell any securities. Please see "Terms of Use" for further details.

As of 31 December 2020, ADB's shareholders consist of 49 developing and developed members within Asia and the Pacific region, and 19 members from outside the region.

* Percent of Total Subscribed Capital as of 31 December. Totals may not add up because of rounding.