Société Tunisienne de Banque – LT FCR Downgraded; Outlook Revised to Negative from Stable

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has downgraded the Long-Term Foreign Currency Rating (LT FCR) of Société Tunisienne de Banque (STB) to ‘B’ from ‘B+’ and affirmed the Short-Term Foreign Currency Rating (ST FCR) at ‘B’. The Outlook for the LT FCR has been revised to Negative from Stable. At the same time, CI Ratings has affirmed STB’s Bank Standalone Rating (BSR) at ‘b’ but revised the BSR Outlook to Negative from Stable. The Bank’s Core financial Strength (CFS) rating of ‘b+’ and Extraordinary Support Level (ESL) of Moderate have both been affirmed.

The change in STB’s LT FCR and the revision of the Outlook to Negative follows the recent lowering of CI’s internal assessment of sovereign credit risk for Tunisia to reflect our view that sovereign risk has increased and that the already difficult operating environment has worsened. The downward adjustment in our internal assessment of the sovereign’s creditworthiness is primarily driven by elevated political risk and its adverse impact on the already fragile economic and fiscal situation in the country, as well as on Tunisian banks. It also takes into consideration the increase in refinancing risks, with the authorities having neither sufficient fiscal space to cover its financing needs nor the capacity to rapidly finalise a new financing agreement with the IMF. CI views that, without the support of the IMF, sovereign risk factors would substantially increase, aggravating the ongoing debt crisis, with the government unable to tap international markets for funding. In addition, CI’s internal assessment of sovereign credit risk for Tunisia reflects the weak fiscal strength and growing concern over the government’s capacity to service its outstanding debt in a timely manner if an agreement with the IMF is not reached soon. The elevated risks in the economy and operating environment have a direct impact on the outlook for the Tunisian banking sector.

The heightened risk of the sovereign has implications for all Tunisian banks, including STB, through the more challenging operating environment, as well as possible negative impact on banks’ asset quality, earnings, and liquidity. Along with the sector, STB’s asset quality would come under pressure, particularly if the economy weakened further and a credit event risk occurs. In turn, this would impact the Bank’s profitability as the cost of risk increases, funding costs rise, and loan growth deteriorates. In addition, although sector liquidity has improved noticeably over the past two years up to June 2021, increasing financing risks for the sovereign would have a knock-on negative impact on Tunisian banking sector liquidity.

The Bank’s ESL of Moderate balances the weak financial strength of the sovereign against the strong willingness of the government to assist the Bank in the event of need. The latter reflects the government’s majority ownership of the Bank and STB’s position as the fourth largest bank in the country, controlling a significant share of sector assets and customer deposits.

The BSR is derived from a CFS rating of ‘b+’ and an Operating Environment Risk Anchor (OPERA) of ‘b’ and incorporates CI’s assessment of STB’s capacity to withstand sovereign-linked economic and financial stress. The CFS is underpinned by the Bank’s significant market franchise in the Tunisian banking sector as one of the largest banks in the country, its majority ownership by the Tunisian government, an improved level of loan-loss coverage, and good operating profitability although the latter fell in 2020 as expected.

The ratings are constrained by a very high level of NPLs, a modest capital position, certain elements of tight liquidity (although the position has improved slightly to June 2021), and the lack of international accounting standards.

The Bank has several major challenges. NPLs are significant and the NPL ratio is very high against gross loans. Although provision coverage appears adequate and unprovided NPLs to equity has fallen consistently over the years, the ratio of unprovided NPLs to total equity remains fairly high. The large stock of NPLs reflects the weak economy and government-directed lending in the past, together with exposure to problematic sectors such as tourism. There remain significant challenges to the Tunisian economy, and these will continue to exert pressure on the Bank’s loan asset quality. The Tunisian government extended the deferral of loan repayments for the tourism sector hit by the crisis to the second half of 2021, and hence NPLs may see an increase in the short term. STB’s capital base is modest in CI’s view and provides a limited buffer. The CAR is only slightly above regulatory requirements.

The Bank’s liquidity and funding position has improved slightly but there remain challenges. The level of liquid assets is modest. Customer deposit growth has risen, with the Bank capitalising more on its majority government ownership and large banking franchise. As a result of the latter, STB’s reliance on central bank funding facilities fell in 2020 and further in June 2021 to a more moderate level. Nonetheless, central bank funding remains important. This is the case for most banks in Tunisia as overall liquidity in the sector is still low but has improved.

STB’s revenue and profitability strengthened considerably over the three years up to end 2019, driven by much higher net interest income and a better controlled cost base. Improvement also reflected the Bank’s progress in its transformation strategy implemented following its recapitalisation some years earlier. Returns at the operating level are above peer average. Net profitability weakened significantly in 2020, as expected, due to a much higher loan impairment charge, as well as extraordinary costs related to the country’s Covid-19 fund. Margins remain at a good level despite dipping slightly in 2020. The main challenge for STB is its cost of risk, reflecting its large portfolio of NPLs. Bank-only figures for end-June 2021 showed net profit falling by around 10% due to higher staff costs and provision charges. We expect credit conditions in H2 21 and into 2022 to remain challenging.

Rating Outlook

The Negative Outlook indicates that the ratings are likely to be lowered by one notch in the next 12 months and is in line with CI’s internal assessment of sovereign credit risk for Tunisia.

Rating Dynamics: Upside Scenario

There is limited upside to the Bank’s ratings as indicated by the Negative Outlook. A revision of the Outlook to Stable would need to be preceded by an upward revision of our internal assessment of sovereign credit risk for Tunisia, all other factors remaining unchanged.

Rating Dynamics: Downside Scenario

Although not our base case, the ratings could be downgraded by more than one notch in the next 12 months if the operating environment and/or economy deteriorates further, negatively impacting the Bank’s financial profile, or if the sovereign’s creditworthiness weakens by more than expected, resulting in a rating change of more than one notch over the period.

Contact

Primary Analyst: Darren Stubing, Senior Credit Analyst
Secondary Analyst: Karti Inamdar, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
 
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