Amen Bank – 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 Amen Bank (Amen) at ‘C+’ and ‘C’, respectively. The Outlook for the LT FCR remains Negative. At the same time, CI Ratings has affirmed Amen’s Bank Standalone Rating (BSR) of ‘c’, Core Financial Strength (CFS) rating of ‘b+’, and Extraordinary Support Level (ESL) of Uncertain.

Amen’s LT FCR and BSR are constrained by CI’s internal assessment of sovereign credit risk for Tunisia. The Negative Outlook for Amen’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.

Amen’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 Amen’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 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, it controls just over 9% of customer deposits and is regarded as systemically important by the Central Bank of Tunisia (CBT), we expect the first line of support to come from the Tunisian well-respected Amen Group. However, the capacity of Amen Group to provide timely and sufficient financial support is uncertain, in our view.

The CFS is underpinned by the Bank’s sound capital base and good profitability at both the operating and net levels. The Bank’s CAR (17.3%) is comfortably above regulatory requirements – and above most peer banks – and provides a reasonable buffer, together with loan loss reserves, for NPLs. The coverage ratio has consistently increased over the past few years. Capital was only slightly impaired by unprovided NPLs at end-2023 and we note that impairment levels have declined substantially over the years. Balance sheet leverage is solid. Internal capital generation has been sound over the past few years as profitability has been good, and the dividend payout reasonable.

Amen’s earnings strength in terms of operating income generation is considered solid. Interest income is at a sound level, although margins are slightly impacted by a higher than peer average cost of funds. The latter reflects a higher weighting of time deposits. The ROAA improved further in 2023 on the back of stronger operating income, particularly net interest income, and the ROAA is the second highest in the eight-bank rated peer group and comfortably above the average. The Bank’s operating expense base is low, and although the cost of risk is moderately high, the capacity to absorb provisioning expenses is satisfactory. Earnings quality is viewed as satisfactory. Operating profitability is sound at over 3% of average assets, and above the peer average. Bank-only figures for H1 24 showed sound results with net profit up by 10%.

The CFS rating is still constrained by the Bank’s high level of NPLs – although the NPL ratio has fallen sharply and consistently over the past few years. The Bank’s NPLs include non-performing contingent balances and its asset quality recognition policies are thought to be more conservative than most peers in Tunisia. Despite this conservatism, Amen’s NPL ratio is below the sector NPL ratio. 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 (ca. 5% of the portfolio) has been on a downward trend over the past few years. The introduction of some elements of IFRS 9 in Tunisia in 2023 has not led to any significant 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 partially moved to IFRS 9, disclosure of Stage 1, 2 and 3 loans is not provided. CI expects slight pressure on Amen’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.

The Bank’s liquidity and funding profile is considered satisfactory. Liquid assets are adequate and the liquidity coverage ratio is at a good level. The net loans to customer deposits ratio has fallen to a satisfactory level (89% at H1 24 due to customer deposit growth), and the level of stable funding to loans is viewed as comfortable. 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 was 6% of total assets at H1 24. Amen has a good base of medium and long-term special resource funding from European development and investment banks (such as EIB and KfW).

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 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 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 Amen’s financial profile.

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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