Union Bancaire pour le Commerce et I’Industrie – Outlook Revised to Negative from Stable

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Union Bancaire pour le Commerce et I’Industrie (UBCI) at ‘B’ and ‘B’, respectively. However, the Outlook for the LT FCR has been revised to Negative from Stable. At the same time, CI Ratings has affirmed UBCI’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 ‘bb-’ and Extraordinary Support Level (ESL) of Uncertain have both been affirmed.

The revision of the Outlook attached to both the Bank’s LT FCR and BSR to Negative follows the recent lowering of CI’s internal assessment of sovereign credit risk for Tunisia and reflects our view that sovereign risk has increased, and that the already difficult operating environment has worsened. The adjustment is primarily driven by Tunisia's elevated political risk and its adverse impact on the already fragile economic and fiscal situation, as well as on Tunisian banks. It takes into consideration the increase in refinancing risks, with the authorities neither having sufficient fiscal space to cover their financing needs nor rapidly finalising 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 and, in turn, with repercussions for domestic banks. In addition, CI’s internal assessment of sovereign credit risk reflects the weak fiscal strength and growing concern over the Tunisian 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 of 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 UBCI, through the more challenging operating environment, as well as possible negative impact on banks’ asset quality, earnings, and liquidity. Along with the sector, UBCI’s asset quality would come under pressure, particularly if the economy weakened further and an event risk occurs. In turn, this would impact the Bank’s profitability as the cost of risk increases, funding costs rise, and growth deteriorates. In addition, although sector liquidity has improved 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.

UBCI’s BSR is derived from a CFS rating of ‘bb-’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. The CFS reflects funding and liquidity challenges, as well as other financial challenges going forward, vis-à-vis the absence of support UBCI previously received under the majority ownership by BNP Paribas (BNPP). The CFS is underpinned by the Bank’s currently sound loan asset quality. UBCI’s level of NPLs is relatively low and well below both the sector and peer averages, although high by international standards. Loan loss coverage is also currently very good.

The ESL is assessed as Uncertain. In CI’s opinion, there is an uncertain likelihood of the Bank receiving timely and sufficient extraordinary support from reference shareholder, the Carte Group. Although Carte Group may be willing to support the Bank in case of need, CI assesses its capacity to provide sufficient and timely support as uncertain. As only the eleventh largest bank in Tunisia, we do not consider UBCI to be of systemic importance to the sector. Thus, the likelihood of support from authorities is also uncertain.

Following the change in reference shareholder, there were a number of changes at the Board level and senior management in H1 21, with BNPP personnel departing and Carte Group appointing personnel and representatives. UBCI is also required to implement work to replace its information system with a new system completely independent from that of the BNPP Group.

CI expects some pressure on UBCI’s loan asset quality metrics this year (as well as other Tunisian banks) due to Covid-19 implications, as well as the weak Tunisian economy. NPLs are expected to rise as borrowers who have been affected by the pandemic are classified as non-performing following the expiration of deferment relief. The Central Bank of Tunisia extended the deferral of loan repayments until September 2021. Certain forbearance measures extend to year end-2021. The true impact on the Bank’s loan portfolio will not be evident until end-2021 and further into 2022. The latter is relevant given that Tunisian banks will move (this is the intention) to IFRS (and particularly IFRS 9, although a phase-in on capital requirements and provisions is likely to be adopted) from year end-2021.

UBCI’s profitability is satisfactory, and the Bank has adequate returns at both the operating and net levels – although the ROAA has fallen due to a higher cost of risk and increased expenses. Operating income on average assets is at a high level and margins are good. Margins are aided by UBCI’s low cost of funds; traditionally, UBCI has recorded amongst the lowest cost of funds in the peer group.

The Bank’s H1 21 net profit was lower by 31% at TND12.2mn, with an annualised ROAA of 0.8%. Although operating income was up slightly, higher provision charges, as well as increased personnel and operating expenses impacted the bottom line. The weaker net profit was recorded despite the absence of one-off costs seen in H1 20 related to UBCI’s contribution to the country’s Covid-19 fund. We expect returns to be lower for full year 2021.

The liquidity position is satisfactory and the funding profile comfortable. UBCI’s utilisation of central bank funding was nil at end-June 2021 and has long been the lowest in the peer group. The Bank may face slightly more challenges going forward following the change in majority ownership.

Another major constraint on the CFS is UBCI’s modest capital position. The CAR, at around 12.5%, does not provide a significant buffer in our view.

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; E-mail: darren.stubing@ciratings.com
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst

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