Banque de Tunisie – Ratings Lowered; LT FCR Outlook Remains Negative

(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 de Tunisie (BT) 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 BT’s Bank Standalone Rating (BSR) by one notch to ‘c’, from ‘b-’, and the Core Financial Strength (CFS) to ‘bb-’, from ‘bb’. BT’s Extraordinary Support Level (ESL) of Moderate has been affirmed.

The change in BT’s FCRs and BSR follows a recent 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 takes into consideration elevated political risk and its adverse impact on the already fragile fiscal and external balances.

The downgrade of BT’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. BT’s BSR of ‘c’ (CI does not append ‘+/-’ modifiers to BSRs in the ‘c’ category) incorporates CI’s assessment of BT’s capacity to withstand sovereign-linked economic and financial stress. In a sovereign event, the Bank’s liquidity position would be impacted.

The ESL is assessed as Moderate. We expect the Bank’s private shareholders to be the first supporter in case of need. Shareholders comprise principally local private investors, although 34% is owned by France’s Crédit Industriel et Commercial de Paris Group. By assets, BT is the eighth largest bank in Tunisia. Accordingly, the Bank would not be regarded as systemically important in CI’s view.

The CFS is underpinned by the Bank’s relatively good loan asset quality. The level of NPLs is satisfactory and far below both the NPL ratio for the sector and peer averages, despite the increase in NPLs in 2022 largely due to the recognition of loans given classification relief in 2020 due to Covid. The Bank has strong loan loss coverage in place against NPLs. BT generates a very good level of operating profit and, in turn, has sound capacity to absorb more provisioning expenses if needed. The main area of NPLs is within the corporate and commercial loan books, including tourism (around one-third of NPLs), textiles, manufacturing, trading and machinery.

CI expects pressure on BT’s loan asset quality metrics this year 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. 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) this year. Although credit management is improving, more NPLs may be booked, and provisions may rise.

BT’s earnings strength in terms of revenue is good. The operating profit on average assets is the second highest in the peer group of eight CI-rated banks in Tunisia and the ROAA is the highest in the peer group. The Bank has long maintained amongst the best profitability ratios in the peer group and the sector. Operating income on average assets remains at a very high level. Margins are sound and operating efficiency is good. The Bank’s interest income is driven by its loan activities, with the loan book continuing to perform relatively well. BT has a diversified revenue stream channelled from various sources, including fee and commission income, and dealing securities income. We expect BT’s operating income and operating profit to remain well above peer average. This is also the case with the ROAA in full year 2023, barring any sovereign risk event.

BT’s capital ratios are considered solid with the total CAR comfortably above regulatory requirements, and the second highest in the peer group. The overall capital position of the Bank currently provides some capacity to absorb shocks. The ratio of total capital to total assets is very solid at above 17% and is the best in the peer group.

A constraint on the CFS is the Bank’s somewhat limited liquidity buffer. However, capital is a major funding support for the Bank. BT’s level of liquid assets is small, but the stable funds ratio is sound. Loan-based funding ratios are elevated, particularly net loans to customer deposits, although there has been some improvement following a good rise (highest in peer group) in customer deposits in 2022. Moreover, the Bank’s LCR was strong. As with most peer banks in Tunisia, BT has access to central bank funding, which represented a low 2.5% of total assets at end-2022, a level lower than many peer banks.

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 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 rating could be downgraded by more than one notch in the next 12 months if CI’s internal assessment of the sovereign’s creditworthiness weakens by more than expected, or if the operating environment and/or economy deteriorate further, negatively impacting BT’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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