(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 or the Bank) at ‘C+’ and ‘C’, respectively. The Outlook for the LT FCR has been revised to Stable from 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. The Outlook for the BSR has been revised to Stable.

STB’s LT FCR is constrained by CI’s internal assessment of sovereign credit risk for Tunisia. The Stable Outlook for the LT FCR is in line with CI’s internal assessment of sovereign risk for Tunisia, reflecting tentative signs of stabilising sovereign risk factors, albeit still at a very high level. These signs reflect the government’s capacity to honour in a timely manner its domestic and external debt service despite limited financing venues and low foreign exchange reserves. The outlook takes into consideration the narrowing current account deficit, supported by the increase in agricultural exports and tourism receipts. However, external refinancing risks remain high, aggravated by still large, albeit declining, external financing needs and limited financing venues given the absence of direct access to capital markets. Political risk remains elevated and public finances weak. The operating environment and economy remain very challenging for the banking sector, but there has been some improvement.

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 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, adequate revenue and operating profitability, and a satisfactory capital position with improved liquidity. The ratings are constrained by a very high level of NPLs, significant concentration risk in sovereign securities equivalent to 1.7x equity, the challenging operating environment, 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. Loan-loss reserve coverage is satisfactory. NPLs have long been a problem for STB, as they have for other Tunisian government banks. STB carries a large overhang of historical bad loans together with more recent NPLs from the post-COVID crisis and economic slowdown. NPLs are mainly connected to the real estate development and manufacturing sectors. The Bank has its own recovery unit, and management states that there is progress being made. The banking regulator has announced that banks will need to comply (theoretically) with an NPL ratio of 7% by end-2026. Banks in Tunisia do not report to IFRS 9 Stage loan classification, but Stage 2 loans could be high due to the amount of loan restructuring in Tunisia.

Tunisian government securities were a higher 20% of total assets at end-2024, and thus there is concentration exposure to the low-rated sovereign. The share of government claims in total banking assets rose to 21.0% at end-2024 (up from 13.5% in 2023), as the banking sector increased its lending to the government and the sovereign-bank nexus rose in Tunisia.

STB’s capital base is satisfactory, in CI’s view, but provides only a small buffer given the challenging operating environment. STB’s CAR of 15% is comfortably above the regulatory minimum of 10% in Tunisia. The CAR is supported by favourable credit risk weights, particularly Tunisian government securities. 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.

The Bank’s liquidity and funding position has improved noticeably over the past two years, driven by higher customer deposit growth together with negative loan growth, as management focused on improving the quality of the lending portfolio. Nearly three-quarters of the balance sheet are funded by customer deposits. The level of liquid assets has increased significantly alongside the rise in government securities. STB’s central bank funding facilities – a source most Tunisian banks utilise – has also fallen to only 3% of total assets, although increasing slightly in H1 25. Further growth in customer deposits in H1 25 resulted in the loans-to-deposits ratio falling to 84%, and the liquidity coverage ratio remains very high.

STB’s earnings strength in terms of operating income is adequate. Net profitability has fluctuated over the years due to variability in impairment charges. STB’s ROAA was higher in 2024, rising to 0.9% due to a lower cost of risk. The impairment charge remains high, however. Operating income to average assets has been fairly consistent for some years. Bank-only results for H1 25 were stronger, with net profit higher by 55%, driven by interest income from government securities. We expect satisfactory results for full-year 2025. However, certain Central Bank of Tunisia rules introduced may create some headwinds. These regulations include interest rate reductions for certain existing customers and the requirement to provide interest-free loans amounting to 8% of a bank’s 2024 net profit to micro, small and medium-sized enterprises. Additionally, the tax rate for banks has been lifted to 40%, from 35%, from January 2025. Improved GDP growth should also lift credit demand, albeit modestly.

Rating Outlook

The Outlook for LT FCR is Stable and in line with CI’s internal assessment of sovereign credit risk for Tunisia. CI expects STB to maintain its overall financials commensurate with its current ratings.

Rating Dynamics: Upside Scenario

A revision of the Outlook to Positive, or a rating upgrade, 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

The Outlook could be revised to Negative or the ratings reduced by one notch in the next 12 months if the operating environment and/or economy deteriorate beyond our base line scenario, negatively impacting the Bank’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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