SOVEREIGN AND SUPRANATIONAL

CREDIT OPINION4 November 2020

Update

Analyst Contacts

Michael S. Higgins +65.6311.2655Analystmichael.higgins@moodys.com

Claire Long +65 6398 8323Associate Analystclaire.long@moodys.com

Gene Fang +65.6398.8311Associate Managing Directorgene.fang@moodys.com

Marie Diron +44.20.7772.1968MD-Sovereign/Sub Sovereignmarie.diron@moodys.com

Asian Development Bank – Aaa stableRegular update

SummaryThe Asian Development Bank's (ADB, Aaa stable) credit profile incorporates the bank’s amplecapital adequacy and robust asset performance, supported by preferred creditor status. ADBhas very strong access to funding markets and sufficiently large liquidity buffers that assurethe prompt repayment of ADB’s growing financial obligations from the ongoing expansionof its development activities. More specifically, we expect ADB's deployment of additionalresources to finance countercyclical spending for borrowing countries in response to thecoronavirus pandemic to further increase the size of ADB's balance sheet. The bank alsobenefits from a large buffer of callable capital and a very strong willingness and ability ofglobal members to provide extraordinary support.

Exhibit 1

ADB’s credit profile is determined by three factors

Capital adequacy Liquidity and funding

aa3 aa1

Qualitative adjustments

+1

Strength of member support

Very High

Preliminary intrinsic financial strength

aa2

Adjusted intrinsic financial strength

aa1

Rating range

Aaa-Aa2

Source: Moody's Investors Service

Credit strengths

» Large capital base relative to assets and strong access to funding markets

» Demonstrated preferred creditor status and robust asset performance

Credit challenges

» A concentrated loan portfolio, especially among top ten borrowers

» Larger exposures to riskier borrowers given recently enlarged mandate encompassingconcessional lending

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Rating outlook

The stable outlook reflects our view that ADB's ample capital adequacy, strong liquidity and funding, and solid shareholder support,augmented by its preferred creditor status and conservative risk management policies, will continue to support its Aaa rating.

ADB's credit profile also benefits from comprehensive risk management policies and a generally stable operating environment amongits borrowing member countries. Relatively stable development asset credit quality over the last few years reflects a combination ofoffsetting trends among a number of the bank's largest borrowers. While the coronavirus pandemic has precipitated a large globaleconomic shock, we expect Asia-Pacific to experience a faster economic recovery compared with other regions represented by otherlarge, regional multilateral development banks (MDBs), such as Latin America and Sub-Saharan Africa, which generally have moreconcentrated drivers of economic growth, including a greater reliance on commodities.

In the context of its concentrated loan portfolio, the linkages between ADB's top borrowing countries are not very strong, implying thatthe likelihood of a sustained economic shock precipitating a significant reduction in asset quality across many borrowing countries islow. Credit stress in the lowest rated borrowers in recent years has not impacted asset quality, reflecting in part ADB’s preferred creditorstatus.

Factors that could lead to a downgrade

Downward pressure on ADB’s rating could occur in the event of a substantial deterioration in capital adequacy. This could result from arapid expansion in leverage combined with a decline in asset quality in the event of sovereign credit stress among its largest borrowingcountries. In view of ADB's intrinsic financial strength derived from its prudent risk management, a deterioration in governance thatleads to a decline in financial performance or threatens its access to funding markets would be credit negative.

Key indicators

Asian Development Bank 2014 2015 2016 2017 2018 2019

Total Assets (USD million) 115,660.0 117,697.0 125,854.0 182,381.0 191,860.0 221,866.0

Development-related Assets (DRA) / Usable Equity [1] 335.3 360.2 397.1 203.5 211.7 223.9

Non-Performing Assets / DRA 0.0 0.0 0.0 0.0 0.1 0.1

Return on Average Assets 0.3 0.5 0.0 0.5 0.4 0.8

Liquid Assets / ST Debt + CMLTD 175.8 169.9 144.4 196.8 286.4 201.5

Liquid Assets / Total Assets 21.4 20.6 21.3 20.8 19.2 18.5

Callable Capital / Gross Debt 231.7 211.5 182.0 163.8 155.3 132.9

[1] Usable equity is total shareholder's equity and excludes callable capitalSources: Asian Development Bank and Moody's Investors Service

Detailed credit considerations

Our rating of ADB is concerned solely with its ordinary capital resources (OCR) because ADB's borrowings, together with equity, canonly be used to fund OCR lending and investment activities, and the bank's general operations. The borrowings are restricted fromfinancing activities related to ADB's Special Funds or trust funds under the bank's administration.

ADB's aa3 Capital adequacy score reflects its ample capital coverage to buffer potential shocks to its assets – as represented by itsmodest leverage ratio, stable development asset credit quality (DACQ), and strong asset performance. The bank's capital position wasfortified by the 2017 merger of its OCR with the lending operations of the Asian Development Fund (ADF), which nearly tripled ADB'susable equity and consequently lowered its leverage ratio. Prevailing limitations on the amount of lending and borrowing will lead tomoderate increases.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 4 November 2020 Asian Development Bank – Aaa stable: Regular update

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DACQ has been on par with the median for Aaa-rated MDBs on account of conservative underwriting practices. ADB's stable weightedaverage borrower rating reflects improving credit profiles of a number of its largest borrowers over the last two years, offsetting thelarger exposures to smaller, lower-rated countries following the 2017 merger. However, as compared to other highly-rated MDBs, ADBhas a disproportionately large, albeit declining, exposure to its top ten borrowers.

Demonstrated preferred creditor status supports robust asset performance despite the ongoing increase in development activity andshifts in the underlying creditworthiness of its borrowing members. We expect ADB’s strong risk management culture to maintain non-performing loans at very low levels, even compared with other Aaa-rated MDBs. ADB has never experienced a loss of principal on itsregular sovereign loan operations, and has a long track record of sustaining operating income surpluses.

ADB's aa1 Liquidity and funding score incorporates its strong and lengthy track record of access to market funding, as well assufficiently large amount of liquidity available for debt servicing and operational requirements.

The bank fulfills most of its borrowing needs through frequent bond issuance in the international capital markets in major tradingcurrencies. Moreover, the bank issues in other, less liquid currencies, as well as in different thematic formats such as green andgender bonds, to help deepen and develop capital markets. ADB’s investor base is diversified by both geography and investor type,demonstrating global support for its development mandate and the Basel Committee’s classification of ADB’s securities as a highquality liquid asset with zero risk weight.

We expect ADB to adhere to its liquidity policy which calls for maintaining a prudential minimum amount of liquidity to cover its netcash requirements over the subsequent 12-month period. Consequently, ADB’s availability of liquid resources over a longer 18-monthperiod is mostly below the corresponding Aaa-rated median, although consistent with that for other large regional MDBs, such as theInter-American Development Bank (IADB, Aaa stable) and the African Development Bank (AfDB, Aaa stable).

ADB’s liquidity profile also reflects conservative asset/liability management policies, aided by the use of derivatives to manage itsexposure to interest and currency risks, as well as its maturity profile. The bank does not enter into derivatives contracts for speculativepurposes.

We have applied an upward adjustment to ADB's intrinsic financial strength on account of its strong Quality of management,consistent with assessments for other large, well-established MDBs, including the European Bank for Reconstruction and Development(EBRD, Aaa stable), IADB and the International Bank for Reconstruction and Development (IBRD, Aaa stable).

The adjustment reflects ADB's comprehensive policy framework and strong risk management culture, including its adoption of globalbest practices and adherence to its internal policy requirements. ADB's periodic review of its organizational effectiveness, culminatingmost recently in the implementation of its new long-term strategy through 2030, demonstrates its adaptability to the changingregional landscape and the consequent evolution of its members' financing needs.

Our assessment of ADB's aa1 intrinsic financial strength is complemented by “Very High” Strength of member support. At a3, theability of the bank’s membership to provide support—as proxied by the weighted average shareholder rating—is solid and unlikely tochange, reflecting the stable outlooks on the ratings of its largest shareholders.

ADB also benefits from the presence of a substantial callable capital buffer and the high likelihood of non-contractual support frommembers. Given the borrowing limitations articulated within ADB’s risk management framework, the amount of callable capital farexceeds outstanding debt; the corresponding ratio for callable capital coverage of debt is higher than the Aaa median.

At the same time, ADB’s track record of general capital increases and periodic replenishment of its special funds imply a strongwillingness of support that has not been negatively affected by the emergence of new MDBs in the Asia Pacific region. ADB has co-financed projects with both the Asian Infrastructure Investment Bank (AIIB, Aaa stable) and the New Development Bank (NDB),and expect continued cooperation given complementary aspects of each MDB’s strategy and capabilities. ADB’s role in facilitatingeconomic development continues to be an important part of shareholders' overarching foreign policy goals, especially for its largestshareholders, Japan (A1 stable) and the US (Aaa stable).

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ESG considerationsHow environmental, social and governance risks inform our credit analysis of the Asian Development Bank

Moody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing supranational issuers’credit profile. In the case of the Asian Development Bank, the materiality of ESG to the credit profile is as follows:

Environmental risks are not significant for ADB's rating. The ADB's operations are increasingly focusing on environmental objectives, asADB has set “climate change, disaster resilience and environmental sustainability” as one of the seven operational priorities of Strategy2030. ADB aims to achieve 75% of the number of its committed operations to support climate change mitigation and adaptation by2030, with its own resources for climate financing reaching $80 billion cumulatively from 2019-30.

In 2019, ADB more than doubled its annual climate investments to $6.55 billion in climate-related financing from $3.0 billion in 2014,one year ahead of schedule. However, ADB's credit profile is unlikely to be affected despite generally high environmental risks in theregion. Moreover, considering ADB's high target for its operations on environmental initiatives, it is unlikely that ADB will be seen aslacking in environment responsibility.

Social risks are not significant for ADB's rating, amid the relative social and political stability in the region and the diversification of itsportfolio. We regard the coronavirus pandemic as a social risk under our ESG framework because of the substantial implications forpublic health and safety. We expect that the outbreak of the coronavirus will lead to a temporary weakening of economic and fiscalstrength across Asia-Pacific, which could lead to a temporary deterioration in asset quality and performance. However, we do not seethe impact as significant to the ADB's credit profile for now.

ADB's sound governance framework is illustrated by its prudent risk-management policies, and high standard governance principles

All of these considerations are further discussed in the “Detailed credit considerations” section above. Our approach to ESG isexplained in our cross-sector methodology General Principles for Assessing ESG Risks. Additional information about our ratingapproach is provided in our Supranational Rating Methodology.

Recent developments

Profitability affected by lower interest rate environment, higher provision for credit losses

During the first half of 2020, ADB's operating income decreased 36.6% over the same period last year to $355 million, primarily drivenby higher provisioning for credit losses, while the drop in borrowing expenses offset the reduction in revenues from loans and liquidinvestments due to the declining interest rate environment.

Revenue from sovereign regular OCR loans decreased to $878 million, compared to $1.2 billion over the same period last year, dueto lower US dollar Libor, the rate used for ADB's primary lending facility. The return on sovereign regular OCR Libor-based dollar-denominated loans declined to 2.1% in the first half of 2020, compared with 3.2% for the same period of 2019.

However, lower interest rates also led to a reduction in borrowing expenses, which declined to $948 million in the first half of 2020from $1.3 billion over the same period of 2019, despite a 14% increase in average outstanding borrowings from the first half of 2019.

Net provisions for credit losses increased substantially to $191 million in the first half of 2020, compared with $19 million in the sameperiod of 2019, given the adoption of provisioning based on expected losses, which utilizes forward-looking macroeconomic projectionsincorporating the impact of the coronavirus pandemic and its effects on borrowing countries.1

Overall, net income declined to $584 million over the first half of 2020 from $699 million in the same period of 2019 due to loweroperating income, which was partially offset by favorable fair value changes of certain derivatives. Net unrealized gains increased inthe first half of 2020 ($243 million) versus 2019 ($119 million), mainly driven by a $459 million fair value gain on loan related swapsresulted from declining interest rates.

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COVID-19 response package accelerates loan commitments and disbursements, increase in borrowings

In March 2020, ADB announced an initial $6.5 billion response package to the pandemic, which was subsequently tripled to $20 billionas the severity and impact of the coronavirus pandemic on Asia-Pacific economies worsened in the second quarter of 2020.

The bank also streamlined administrative measures to enable quicker and more flexible delivery of assistance to developing membercountries (DMCs). Most of the response entails mobilizing additional resources through regular OCR lending, as well as reprogrammingand reallocation of existing and ongoing projects.

Within the response package, ADB also established a “COVID-19 Pandemic Response Option” under its Countercyclical Support Facilityto support DMCs countercyclical spending efforts to mitigate the effects of the pandemic, about $2.5 billion in concessional and grantresources, and $2 billion for private sector operations.

Grant-based funding will continue to be prioritized for providing medical and personal protective equipment supplies to DMCs in need.Among the $2 billion funds for private sector entities, ADB plans to make loans and guarantees to financial institutions to support tradeand supply chain movements, as well as additional loans and guarantee supports for small and medium-sized enterprises.

During the first half of 2020, ADB’s COVID-19 response totaled $7.0 billion in commitments and $5.2 billion in disbursements. The$7.0 billion in commitments included $6.7 billion in sovereign loans, $59 million in non-sovereign loans, and $266 million in grants andtechnical assistance under the Special Funds. Meanwhile, the $5.2 billion disbursements comprised of $5.0 billion for sovereign loans,$124 million for non-sovereign loans, and $82 million for grants and technical assistance under other non-OCR funds.

Overall, ADB's total loan commitments increased by 34% year-on-year to $10 billion through the first half of 2020. The increase inloan commitments led to the higher disbursements at $9.7 billion in the first half of 2020, which was nearly double the $5.2 billionover the same period in 2019. The total outstanding loan balance increased by $5.2 billion from $114.4 billion as of 31 December 2019to $119.6 billion as of 30 June 2020.

Amid the large increase in lending activity, ADB's borrowings increased significantly in the first half of 2020. Through the first sixmonths of the year, ADB borrowed $19.8 billion in medium- and long-term notes and $8.2 billion in short-term notes, compared with$11.1 billion and $5.2 billion, respectively, in the first half of 2019.

ADB's lending headroom and capital adequacy remained strong. As of 30 June 2020, ADB's lending headroom was $68.6 billion,comprising 64% utilization of its lending authority, while ADB's capitalization ratio increased to 66.9% as of 30 June 2020 from 62.1%at the end of 2019.

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Rating methodology and scorecard factors

Initial score Adjusted score Assigned score

Factor 1: Capital adequacy (50%) aa3 aa3

Capital position (20%) a3

Leverage ratio a3

Trend 0

Impact of profit and loss on leverage 0

Development asset credit quality (10%) a

DACQ assessment a

Trend 0

Asset performance (20%) aaa

Non-performing assets aaa

Trend 0

Excessive development asset growth 0

Factor 2: Liquidity and funding (50%) aa1 aa1

Liquid resources (10%) a2

Availability of liquid resources a2

Trend in coverage outflow 0

Access to extraordinary liquidity 0

Quality of funding (40%) aaa

Preliminary intrinsic financial strength aa2

Other adjustments 1

Operating environment 0

Quality of management +1

Adjusted intrinsic financial strength aa1

Factor 3: Strength of member support (+3,+2,+1,0) Very High Very High

Ability to support - weighted average shareholder rating (50%) a3

Willingness to support (50%)

Contractual support (25%) aaa aaa

Strong enforcement mechanism 0

Payment enhancements 0

Non-contractual support (25%) Very High

Scorecard-Indicated Outcome Range Aaa-Aa2

Rating Assigned Aaa

Rating factor grid - Asian Development Bank

Note: Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results are helpful in understanding patterns and trends of an issuer’s performance

as well as for peer comparisons. Additional considerations that may not be captured when historical metrics are used in the scorecard may be reflected in differences between the adjusted and assigned factor scores.

Furthermore, in our ratings we often incorporate directional views of risks and mitigants in a qualitative way. For more information please see our Multilateral Development Banks and Other Supranational Entities

rating methodology.

Source: Moody's Investors Service

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Moody's related publications

Issuer Research

» Asian Development Bank – Aaa stable: Annual credit analysis, July 2020

Sector Research

» Supranationals – Global: Stress-testing confirms broad resilience of MDB ratings, September 2020

» Supranationals – Global: Support to trade finance by large MDBs will benefit their smaller regional peers, July 2020

» Supranational issuers – Global: FAQ on MDB credit quality in the context of the coronavirus outbreak, May 2020

Methodology

» Multilateral Development Banks and Other Supranational Entities, October 2020

Endnotes1 Effective 1 January 2020, ADB's newly implemented accounting standard introduced the expected credit loss model. This requires the provision for credit

losses to be based on expected losses over the remaining lifetime of loans and certain debt securities, as well as off-balance sheet credit exposures such asundisbursed loan commitments and guarantees.

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