FY89 was a year of strong financial performance for the World Bank. It met its borrowing and investment objectives, while continuing to break new ground in asset and liability management. As a result, it is well-positioned to support an expanding program of lending to developing countries which is expected to exceed $20 billion a year in the 1990s. Changes in the Bank's financial policies have permitted it to reduce its exposure to market risks, to meet the needs of its borrowers better and to reduce costs to its borrowers.
The Bank's net income for FY89, which ended June 30, 1989, was $1,094 million compared to $1,004 million for FY88. This income is after provisions for countries in nonaccrual status. The return on assets equaled 1.09 percent and the reserves to loans ratio increased to 10.2 percent, up from 9.3 percent last year.
Because of its strengthened reserves position in relation to loans, the Bank was able to reduce the commitment fee charged on outstanding loan balances by two-thirds (from 0.75 to 0.25 percent) for the fiscal year which started July 1, 1989. The savings to its borrowers will be about $200 million for the year.
New Financial Policies
The Bank began implementation of a new financial management system that will reduce, and allow for better management of, interest and exchange rate exposure of the Bank and its borrowers. In January 1989 the Bank adopted a system for targeting the currency mix of the pool of currencies on loan through which all borrowers share exchange rate exposure. By the end of FY91, three major currency groups will account for 90-95 percent of the pool with other currencies making up the remainder. For each US dollar in the pool, there will be 125 yen and 2 Deutsche mark (or the equivalent in a composite of Deutsche mark, Swiss francs and Dutch guilders). Because this composition of the currency pool will be kept fixed, borrowers will be better able to project (and manage) their future debt service in these currencies. Also, since the US dollar will have more weight in the currency pool than in recent years the effective cost of World Bank loans in US dollar terms will be more stable.
Along with a more stable currency pool, a new variable interest rate system was approved. Under this system only the costs of currencies actually disbursed on loans will be counted in calculating the Bank’s interest rate. Under the previous system, the lending rate also was affected by the cost of the currencies borrowed to support the Bank’s liquid investment.
The third element of the revised financial management system is the decision to match the currency composition of reserves to that of loans. This will insulate the reserves to loans ratio from exchange rate risk, thereby substantially reducing the amount of net income which otherw1ss had to be allocated to reserves to compensate for possible negative exchange rate changes. Consequently, the use of a much larger part of the Bank's net income can be discretionary.
The new system will provide borrowers with a more stable and manageable set of liabilities, improve the Bank's capacity to manage interest rate risks in funding loans and liquidity and reduce the dependence of income policy on exchange rate changes.
The Bank borrowed $9.3 billion in 17 currencies. After swaps, 99 percent of the borrowing program was in four currencies - US dollars, Japanese yen, Deutsche mark and Swiss francs. Although the remaining 13 currencies accounted for only 1 percent of the after-swaps program, they represented 24 percent, or $2.2 billion, of the before-swaps program. Thus, the Bank continues to maintain diversified sources of funding.
The Bank completed its $9.3 billion borrowing program at an average cost of 7.73 percent and an average life of 7.8 years. In addition, the Bank refinanced $3.0 billion equivalent of earlier high coupon yen borrowings, at estimated savings of $217 million, in present value terms. Except for $505 million of incremental Central Bank Facility borrowings and $37 million equivalent of short-term borrowings of Swiss francs, all of the borrowing program, after swaps, consisted of fixed rate, medium-and long-term borrowings.
Currency swaps totaled $2.6 billion. The major thrust of the FY89 currency swap program was to swap into US dollars and such swaps accounted for $2.1 billion. Swaps into US dollars were completed at an average savings of 38 basis points relative to the prevailing cost of direct borrowings.
To take advantage of attractive cross-currency swap arbitrage without regard to the immediate level of US dollar interest rates or the concentration of transactions, the Bank swapped into floating rate US dollars at sub-LIBOR cost on a temporary basis, before using interest rate swaps to spread the rate fixing through a number of transactions over the year.
Innovations in the FY89 borrowing program included continued diversification of the sources of funding. The Bank became the first non-resident issuer in the Hong Kong domestic market and the first issuer of Swedish kroner in the Euromarket. It engaged in its first public issue of New Zealand dollars in the Euromarket. It also initiated short-term borrowings of Swiss francs through a program of continuously offered payment rights (COPS). At June 30, 1989, outstanding COPS borrowings totaled Swiss francs 62 million ($37 million equivalent).
FY89 was the first full fiscal year in which the Bank's continuously offered longer-term securities (COLTS) were sold in the US dollar medium-term note market through 14 US regional agents and 3 Canadian agents in conjunction with its 5 New York-based primary agents. Consistent with the objective of broadening the distribution of its securities, the Bank effected 656 COLTS transactions totaling $824 million in FY89. Reflecting stronger emphasis of COLTS sales to smaller institutions and large retail investors, the average sale was $1.3 million in FY89, compared to $2.8 million in FY88 and $5.5 million in FY87.
In June, the Bank announced its intention to launch a global bond in US dollars and its selection of a management team for the issue. The bonds will be offered simultaneously in the US and the Euromarkets. The size and other features of the issue are expected to improve liquidity for investors and to reduce the Bank's cost of funding.
The Bank's actively managed liquidity, which stood at $19.4 billion on June 30, 1989, realized a yield on average investments of 8.20 percent, representing $1.6 billion of investment income.
Return on Earning Assets
The Bank's gross yield on average total earning assets – both disbursed and outstanding loans and liquid investments - was 8.20 percent in FY89, compared to 8.30 percent in FY88. The average yield on its disbursed and outstanding loans, which totaled $77.9 billion at June 30, 1989, was 7.86 percent compared to 7.94 percent in FY88. Its net income as a percentage of average earning assets was 1.09 percent, compared to 0.98 percent in the previous year.
The average cost of total funds, consisting of outstanding debt which averaged $85.3 billion and the Bank’s equity which averaged $14.4 Bank’s equity at June 30, 1989 consisted of $5.6 billion of usable paid-in capital plus $9.0 billion of reserves and accumulated net income, compared to $5.4 billion and $8.5 billion, respectively, at June 30, 1988.
Lending and Disbursements
New loan commitments by the Bank in FY89 totaled $16.4 billion compared to $14.8 billion last year. For current borrowers, disbursements were $11.3 billion and, excluding prepayments, repayments of principal were $6.7 billion and service payments were $13.4 billion. Prepayments totaled $2.6 billion, primarily from three countries - Korea, Romania and Thailand.
Member government continuing support for the Bank was evidenced by capital subscriptions. In FY89, the first year of a five-year subscription period to the $74.8 billion general capital increase approved at the end of April 1988, members had subscribed to 29 percent of the authorized shares. Together with other subscriptions to earlier capital increases, the Bank's subscribed capital at the end of FY89 reached $115.7 billion, compared to $91.4 billion at the end of the prior year. As a result of the additional subscriptions, the Bank's lending amounted to 62 percent of its legal lending limit, compared to 81 percent at the end of FY88.
The data in this release are preliminary and unaudited. Borrowing and swap data represent transactions settled in FY89.
World Bank Average Costs, Profitability and Returns
(Percentages, based on average balances during fiscal year)
Fiscal Year Costs
Average Cost of:
New Borrowings 1/
Total Debt Outstanding
Total Funds (Debt & Equity 2/)
Fiscal Year Returns
Average Returns on
Loans Disbursed and Outstanding 3/
Liquid Investment 4/
Total Earning Assets 5/
Spread Between Return on Total Earning
Assets and Cost of Total Funds
Net Income as a Percent of Average Equity 2/
Net Income as a Percent of Average
Liquid Assets and Loans (Return on Assets)
Leverage and Return on Capital
Ratio of Reserves to Loans
Ratio of Outstanding Loans to Equity 2/
Ratio of Outstanding Debt to Equity 2/
1/ Does not include $3.0 billion of refinancing of prepaid yen borrowings.
2/ Equity defined as usable paid-in capital, reserves and accumulated net income.
3/ Interest on loans as a percent of average disbursed and outstanding loans.
4/ Includes realized capital gains (losses).
5/ Includes $272 million and $263 million for FY89 and FY88, respectively, of commitment fees on undisbursed loan balances in addition to returns on liquid investments and from interest on loans disbursed and outstanding.
World Bank Borrowings
(Amount in US$ million, as of June 30, 1989)
Swaps a/ (amount)
Medium-and Long-term Fixed Rate Borrowing
Japanese yen b/
Central Bank Facility (US dollars)
COPS (Swiss francs) d/
Note: Figures may not add to totals due to rounding.
a/ Swap transactions totaled $2,570 million.
b/ Does not include $3.0 billion of refinancing of prepaid borrowings.
c/ Represents borrowings in Australian dollars ($119.2 million), Canadian dollars ($209.7 million), ECU ($232.1 million), Finnish markkaa ($140.7 million), French francs ($146.9 million), Hong Kong dollars ($64.0 million), Italian lire ($218.7 million), Luxembourg francs ($25.5 million), Netherlands guilders ($285.0 million), New Zealand dollars ($45.4 million), Pound sterling ($231.9 million), Spanish pesetas ($373.6 million) and Swedish kronor ($156.2 million).
d/ Continuously offered payment rights (COPS).