(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 Société Tunisienne de Banque (STB) 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 STB’s Bank Standalone Rating (BSR) by one notch to ‘c’, from ‘b-’, and the Core Financial Strength (CFS) rating to ‘b’, from ‘b+’. STB’s Extraordinary Support Level (ESL) of Moderate has been affirmed.
The change in STB’s FCRs and BSR follows a lowering in CI’s internal assessment of sovereign risk for Tunisia and also reflects 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. The sovereign assessment takes into consideration elevated political risk and its adverse impact on the already fragile fiscal and external balances.
The downgrade of STB’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 the 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. STB’s BSR of ‘c’ (CI does not append ‘+/-’ modifiers to BSRs in the ‘c’ category) incorporates CI’s assessment of STB’s capacity to withstand sovereign-linked economic and financial stress. In a sovereign event, the Bank’s liquidity position would be impacted.
STB’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 third largest bank in the country, controlling a significant share of sector assets and customer deposits.
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, full level of loan-loss reserve (LLR) coverage, and good operating profitability with adequate bottom-line returns.
The ratings are constrained by a very high level of NPLs, a modest capital position, elements of tight liquidity, and the lack of international accounting standards and disclosure.
The Bank’s NPLs remain significant, and the NPL ratio is very high against gross loans. However, loan-loss reserves provide full coverage of NPLs. The large stock of NPLs reflects the weak economy and government-directed lending in the past, together with the Bank’s exposure to problematic sectors such as tourism. There remain significant challenges to the Tunisian economy, and these will continue to exert pressure on STB’s loan asset quality due to continued stress on the Tunisian economy, higher interest rates and inflation, 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, as well as both individuals and business cash flow. In addition, it is targeted that Tunisian banks will finally move to IFRS (and IFRS 9, although a phase-in on capital requirements and provisions is likely to be adopted) from 2023. Accordingly, more NPLs may be booked, and provisions may rise.
STB’s capital base is modest in CI’s view and provides only a limited buffer given the challenging operating environment. The government last injected significant capital into STB in 2015. Internal capital generation has been reasonable over the past few years due to better profitability and the absence of dividend payouts for many years.
The Bank’s liquidity and funding position remains challenging. The level of liquid assets is low and the loans to customer deposits ratio remains elevated. That said, two-thirds of the balance sheet is funded by customer deposits and the latter’s growth has been satisfactory over the last few years. STB’s central bank funding facilities – a source most Tunisian banks utilise – remains significant and was around 10% of assets at end-2022.
STB’s earnings strength in terms of operating income is sound. The net interest margin is reasonable and operating income has grown consistently for some years and is at a solid level against average assets. Operating profitability is sound but net profitability has seen some volatility due to variability in impairment charges.
Rating Outlook
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 STB’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 deteriorate further, negatively impacting STB’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: ...
Secondary Analyst: Karti Inamdar, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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