(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) and Short-Term Foreign Currency Rating (ST FCR) of Banque Internationale Arabe de Tunisie (BIAT) to ‘C+’ and ‘C’, respectively, from ‘B-’ and ‘B’. The Outlook for the LT FCR remains Negative. At the same time, CI Ratings has lowered BIAT’s Bank Standalone Rating (BSR) by one notch to ‘c’, from ‘b-’, and the Core Financial Strength (CFS) rating to ‘bb-’ from ‘bb’. The Extraordinary Support Level (ESL) of Moderate has been affirmed.
The change in BIAT’s FCRs and BSR follows a lowering in CI’s internal assessment of sovereign risk for Tunisia, reflecting the more challenging operating environment and weaker economy. The downward adjustment of our internal assessment of the sovereign’s creditworthiness is primarily driven by Tunisia’s increased external refinancing risks, aggravated by large external financing needs, as well as impaired shock absorption capacity in view of the modest level of foreign exchange reserves and limited replenishing revenues. Moreover, CI views that the absence of an agreement with the IMF translates into decreasing investor confidence, as well as growing risks to the country’s capacity to honour its external obligations in a timely manner. Fiscal strength is weak, marred by high central government debt and chronic budget deficit. CI’s internal assessment of sovereign credit risk also takes into consideration elevated political risk and its adverse impact on the already fragile fiscal and external balances.
The downgrade of BIAT’s ratings reflects our view that downside risks for the banking sector have risen significantly and pressure on banks’ credit profiles has increased due to rising financial stability risks and persistent macroeconomic vulnerabilities. Consequently, we have revised our Operating Environment Risk Anchor (OPERA) assessment for Tunisian banks to ‘c+’ (from ‘b-’), indicating significant risk. The banking sector remains weak, with increased vulnerability to sovereign-induced shocks and unsatisfactory key financial metrics in certain areas. BIAT’s BSR of ‘c’ (CI does not append ‘+/-’ modifiers to BSRs in the ‘c’ category) is constrained by the LT FCR which is at ‘C+’, and incorporates CI’s assessment of BIAT’s capacity to withstand sovereign-linked economic and financial stress. In a sovereign event, the Bank’s liquidity position would be impacted.
The ESL of Moderate balances the weak financial strength of the sovereign against the strong willingness of the government to support the Bank, particularly since it is the largest in the country with a substantial customer deposit base. Ownership is diverse but the main reference shareholder is the well-known Tunisian group Mabrouk.
The CFS is underpinned by the Bank’s strong domestic franchise, good revenue stream and high profitability, as well as relatively sound loan asset quality compared to the sector and peer group. BIAT is the largest bank in Tunisia, with a solid and defendable franchise, and its market share of customer deposits is the highest by some margin. Credit challenges are a very difficult operating environment, and credit and profitability conditions, low capital buffer and inadequate financial disclosures. IFRS 9 adoption in 2023 could weaken asset quality ratios.
BIAT’s earnings strength in terms of revenue is good as is profitability. The Bank has the highest operating profitability ratio and the second highest ROAA in the peer group. Operating income on average assets is at a strong level and is also the highest in the sector. BIAT’s cost of funds is low, margins are adequate and operating efficiency is satisfactory. Net profit for bank-only in H1 23 was 7% higher and operating income was up by 16%, boosted by interest income from loans, fee income, and both gains and interest income from its investment portfolio. However, cost of risk rose in H1 23 as NPLs increased in the period.
BIAT’s level of NPLs is low by Tunisian standards and well below the sector and peer averages. The Bank’s credit loss absorption capacity has improved, with loan-loss reserve coverage increasing sharply in 2022, maintaining an upward trend over the past four years. There may be some pressure on the Bank’s loan asset quality metrics this year and next due to challenges facing the Tunisian economy, higher interest rates, inflationary pressure, and the impact of global (particularly European) economic factors. Higher interest rates and lower growth will likely impact borrowers’ ability to service loans in the already weak Tunisian economy and impact both individuals and business cash flow. In addition, Tunisian banks will finally move to IFRS for full year 2023 accounts. Although credit management is improving, more NPLs may be booked, and provisions may rise. BIAT generates a good level of operating profits that has the capacity to absorb more provisioning expenses if needed.
BIAT’s capital ratios are satisfactory in CI’s view and have strengthened consistently over the years. Capital ratios are amongst the highest in the peer group. That said, the overall capital position of the Bank currently provides a fairly limited capacity to absorb shocks. Due to good profitability, internal capital generation has been satisfactory in most years although this has fallen more recently.
Liquidity and funding are viewed as satisfactory. Liquidity improved in 2022, aided by the rise in liquid assets and steady growth in customer deposits. BIAT’s LCR is very good and loan-based funding ratios are satisfactory. The Bank has the largest share of customer deposits in the market. BIAT has not accessed central bank funding over the past three years, including to June 2023, unlike most peer banks. The liquidity position for bank-only balance sheet at end-June 2023 remained sound. The loans to customer deposits ratio was lower at 68% in H1 23, and liquid assets increased further.
The Negative Outlook indicates that the LT FCR is 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 LT FCR 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 LT FCR could be downgraded by more than one in the next 12 months if CI’s internal assessment of the sovereign’s creditworthiness weakens by more than expected, resulting in a rating change of more than one notch over the period, or if the operating environment and/or economy deteriorate further, negatively impacting BIAT’s financial profile.
Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Karti Inamdar, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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