Global rating firm Moody's Investors Service, has affirmed East African Development Bank's credit score at medium grade, with some speculative elements and moderate credit risk in the long term investment grading.

Affirmed at Baa3 rating, the grading also means the bank has acceptable ability to repay short term debt and maintain a stable outlook.

The rating reflects the lender’s strong capital position, offset by low development asset credit quality and a legacy of high non-performing assets(NPAs).

Moody's assessment of strength of member support balances a large cushion of callable capital with the limited ability of shareholders to provide support given the low ratings of the bank’s four main shareholders.

The shareholders, Kenya, Rwanda, Tanzania and Uganda were rated B3 negative, B2 stable, B2 positive and B2 negative, respectively.

The stable outlook further reflects a balance of upside and downside risks, Moody’s says in part.

“Notwithstanding the risks associated with a challenging operating environment and the elevated concentration of the EADB's portfolio, the potential for capital erosion is mitigated by the Bank's currently very low leverage ratio and cautious approach to new lending," Moody's says.

It further assumes that the bank will continue to develop its risk management framework, which is not as advanced as other rated peers while maintaining robust capital adequacy, and prudent liquidity levels.

Although Moody's expect the lender's loan portfolio growth to gradually accelerate under the impulse of a new medium-term strategic plan,leverage will remain relatively low as the bank continues to proceed prudently toward new loan disbursements.

Considering factors that could lead to a future downgrade or upgrade, Moody's says it would consider upgrading the bank's  rating should it become clear it is supported by improvements in risk management.

"The lender's capability to expand its balance sheet and reduce concentration risks, while at the same time preserving a high capital buffer and a moderate level of non performing assets would also be a remedy for upgrading," Moody's says.

"A diversification of its investor base, accompanied by sustained improvements in the liquidity position, could also exert upward pressure on the rating."

Factors that could result to a downgrade include continued decline in  the bank's loan portfolio size in coming years despite its strategic ambitions to grow its lending.

Such a contraction could point to difficulties in fulfilling the bank's mandate and could overtime, lead to reduced shareholder support, the rating firm says.

"A renewed and sustained deterioration in asset quality would also exert negative pressure on the rating."

It says this could happen if the growth in EADB's assets leads to a marked increase in credit risk, without a commensurate strengthening in governance and risk management.