Societe Tunisienne de Banque – Ratings Affirmed

(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 Societe Tunisienne de Banque (STB) at ‘C+’ and ‘C’, respectively. The Outlook for the LT FCR remains Negative. At the same time, CI Ratings has affirmed STB’s Bank Standalone Rating (BSR) of ‘c’, Core financial Strength (CFS) rating of ‘b’ and Extraordinary Support Level (ESL) of Moderate.

STB’s LT FCR is constrained by CI’s internal assessment of sovereign credit risk for Tunisia. The Negative Outlook for STB’s FCRs is in line with CI’s internal assessment of sovereign risk for Tunisia, reflecting the continued very challenging operating environment and economy. The Outlook also reflects very high external refinancing risks, aggravated by still large external financing needs and limited financing revenues given the absence of direct access to capital markets. It also takes into consideration elevated political risk and weak public financing, as well as increased monetisation of the central government budget deficit by the central bank amid declining capacity of the banking system to lend to the government. External strength is low due to high external financing needs and the modest – albeit resilient – level of foreign exchange reserves. Downside risks for the banking sector remain high and pressure on the banks’ credit profiles is elevated due to financial stability risks and macroeconomic vulnerabilities.

STB’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 is derived from a CFS rating of ‘b’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’ with the latter indicating significant risk. The BSR incorporates CI’s assessment of STB’s capacity to withstand sovereign-linked economic and financial stress. In a sovereign event, the Bank’s liquidity, capital and asset quality would be negatively impacted.

The 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, satisfactory loan-loss reserve (LLR) coverage, and adequate revenue and operating profitability.

The ratings are constrained by a very high level of NPLs, a modest capital position, and the lack of international accounting standards and disclosure (only certain elements of IFRS 9 were adopted in 2023). Previously tight liquidity was also a ratings constraint, but overall liquidity has improved over the past eighteen months to H1 24.

The Bank’s NPLs remain significant, and the NPL ratio is very high against gross loans at 20%. LLR coverage appears satisfactory, although we note that coverage declined in 2023 amid increased pressures on asset quality. The growth in NPLs in 2023, as well as the large stock of total NPLs, reflects the weak economy and government-directed lending in the past, together with the Bank’s exposure to problematic sectors such as tourism. The introduction of parts of IFRS 9 in Tunisia has led to some increase in NPLs (Stage 3) for most banks, but Stage 2 loans could be high due to the amount of loan restructuring in Tunisia. Although banks have moved to elements of IFRS 9, disclosure of Stage 1, 2 and 3 loans are not provided. We expect most Tunisian banks have a large stock of Stage 2 loans. CI expects pressure on STB’s loan asset quality metrics this year due to continued weakness in the Tunisian economy, high interest rates, and the impact of lacklustre global (particularly European) economic growth. The CBT increased its key interest rate to 8% in 2023 and it remains at this level. High interest rates and the challenging economy will likely result in anaemic loan growth.

STB’s capital base appears adequate in CI’s view but provides only a limited buffer given the challenging operating environment. STB’s CAR of 13.6% is comfortably above the regulatory minimum of 10% in Tunisia. The CAR is based on Basel I methodology for credit risk hence favourable risk weights, and Basel II standardised for market and operational risks. The central bank is working (progress is very slow) on introducing elements of Basel III. Internal capital generation has been reasonable over the past few years due to profit retention as the Bank has not paid any dividends for some years. However, internal capital generation slowed substantially in 2023 due to weak earnings.

The Bank’s liquidity and funding position has improved but some aspects remain challenging. The level of liquid assets doubled in 2023 but remains moderate. 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 – has also fallen to 6% (from around 10% two years ago) of total assets at H1 24. In H1 24, customer deposits grew by 5%, whilst the loan portfolio declined slightly. The loans to deposits ratio fell to 95%, the first time it has been below 100% for many years.

STB’s earnings strength in terms of operating income is just adequate. Operating profitability is sound but net profitability has seen volatility due to variability in impairment charges. STB’s ROAA was weaker in 2023, falling to a modest 0.5% due to the decline in net interest income, a narrower net interest margin, higher expenses and a continued large impairment charge. Both operating income and operating profit to average assets have been quite consistent for some years but both were weaker last year. Bank-only results for H1 24 were weaker with net profit at TND14.4mn against TND40.5mn in H1 23. Net interest income was lower, and the provision charge also increased.

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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