Amen Bank’s Ratings Affirmed; Outlook Revised to Negative

(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 Amen Bank (Amen) 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 Amen’s Bank Standalone Rating (BSR) at ‘b’ but revised the BSR Outlook to Negative from Stable. The Bank’s Core financial Strength (CFS) of ‘bb-’ and Extraordinary Support Level (ESL) of Uncertain have both been affirmed.

The change in the Outlook for both the Bank’s LT FCR and BSR to Negative from Stable 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 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 Amen, through the more challenging operating environment, as well as the possible negative impact on banks’ asset quality, earnings, and liquidity. Along with the sector, Amen’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.

The ESL is assessed as Uncertain. Approximately 60% of the Bank is owned by the Amen Group, a large and diversified domestic conglomerate with activities across food and hospitality, banking, insurance and health, trade of capital goods, and specialised financial services. Although the Bank is the sixth largest bank in Tunisia by assets, controls just over 9% of customer deposits and is regarded as systemically important by the Central Bank of Tunisia, we expect the first line of support to come from the Amen Group. The willingness and capacity of Amen Group to provide timely and sufficient financial support is, however, uncertain, in our view.

Amen’s BSR is derived from a CFS rating of ‘bb-’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. The CFS is underpinned by the Bank’s relatively sound capital base and good profitability at the operating level and satisfactory performance at the net level. The Bank’s CAR is comfortably above regulatory requirements – and above most peer banks – and provides a reasonable buffer. At end-2020, Amen’s capital buffer was TND374mn. The Bank’s CAR has continued to improve over the last few years. Balance sheet leverage is solid. However, the ratio of unprovided NPLs to equity is somewhat high due to the modest provisioning level, although it has been on a downward trend over the past three years.

Amen’s earnings strength in terms of operating income generation is considered sound. Interest income is at a good level, although margins are impacted by a higher than peer average cost of funds. The latter reflects a higher weighting of time deposits. As expected, the ROAA declined in 2020 but remained satisfactory, on the back of good and stable operating profit. The Bank’s operating expense base is low, but the cost of risk is high. Earnings quality is viewed as satisfactory.

Results for the bank-only figures for H1 21 showed much stronger results, with net profit up by 78% to TND69.2mn against TND38.9mn in H1 20. Operating income was higher by 20%, reflecting stable interest income and reduced interest expense. The loan loss provision charge was 10% higher at TND56mn.

The CFS rating is constrained by the Bank’s high level of NPLs and modest although improving loan-loss reserve (LLR) coverage. Loan asset quality has been negatively impacted by the difficult economic conditions, as well as exposure to sectors such as tourism. In regard to the latter, the Bank’s exposure to this sector has been on a downward trend over the past few years. Amen’s level of NPLs is above that of the peer group average.

In H1 21, the NPL ratio was a steady 14.7%. Coverage was similar to the end-2020 level at 78%. Amen’s loan asset quality metrics could weaken in H2 21 as borrowers who were impacted by the pandemic are classified as non-performing following the expiration of deferment relief. Certain forbearance measures have been extended 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 at least) to IFRS (and particularly IFRS 9, although a phase-in on capital requirements and provisions is likely to be adopted) from year end-2021. In addition, the heightened risk of the sovereign has implications for Tunisian banks. Along with the sector, Amen’s asset quality would come under pressure, particularly if the economy weakened further and an event risk occurs.

Amen’s liquidity and funding profile is considered satisfactory. Liquid assets are at a reasonable level and the liquidity coverage ratio was 146% at end-June 2021. As with almost all Tunisian banks, Amen utilises official central bank funding for liquidity purposes – as has been the case for some years. CBT funding represented 9.7% of Amen’s total assets at end-June 2021. Amen has a good base of medium and long-term special resource funding from European development and investment banks (such as EIB and KfW). This MLT funding represents 7% of total assets. The level of stable funding to loans is currently viewed as comfortable.

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.

About the Ratings

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The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2016-20 and H1 2021. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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