(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 Arab Tunisian Bank (ATB 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 ATB’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.

ATB’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 stabilising sovereign risk factors, albeit still at a 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 challenging for the banking sector, but there has been some improvement.

ATB’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 ATB’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, as would that of the banking sector.

Although the ESL is assessed as Moderate and is underpinned by the assumption of parent support from majority shareholder Arab Bank plc, this has not resulted in any rating uplift given the level of the BSR and our internal assessment of sovereign risk. ATB is a subsidiary of Arab Bank plc – a reasonably large financial institution in Jordan mainly operating across the MENA region. The Bank’s parent displays a satisfactory financial profile, and support for the smaller ATB would be expected.

The Bank’s CFS reflects the difficult operating and economic environment in Tunisia, low returns, a high NPL ratio, moderate loan-loss reserve coverage and a weak capital position in our view. The CFS is underpinned by the Bank’s relatively sound liquidity profile, supported by a good customer deposit base, and its majority ownership and management by Arab Bank plc. ATB’s loan-based liquidity ratios are satisfactory.

A stable customer deposit base is the main source of funding for ATB, representing over three-quarters of total assets, following good growth in 2024. Funding from the Central Bank of Tunisia (CBT) was immaterial at end-2024 and nil at H1 25. Funding diversification is aided by subordinated bonds issued in the local market, as well as other medium-term financing. ATB has a reasonably good franchise in Tunisia as the country’s eighth-largest bank. Its management and systems are supported by Arab Bank. Liquidity remained solid at H1 25, with broad liquid assets at a satisfactory level.

ATB’s stock of NPLs is large, although it declined in 2024, and the Bank’s NPL ratio is high and above that of leading private banks in Tunisia. NPL coverage by provisions is viewed as only moderate, and the capital buffer is limited. Credit risks will remain elevated due to the still challenging Tunisian economy.

Tunisian treasury bills and bonds represent 8% of assets, and are all denominated in Tunisian dinars. They are not considered highly liquid, as the secondary market in Tunisia has little activity. However, they can be repo-ed with the CBT and qualify as collateral for borrowing purposes. The share of government claims in total banking assets rose to around 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. ATB’s level of exposure to Tunisian government risk is lower than the peer average. Nonetheless, it represented 96% of equity at end-2024, and thus there is concentration risk.

ATB’s capital ratios are considered low despite slight improvement in 2024. The capital position is also eroded by the shortfall in loan-loss provisions against NPLs. The overall capital position of the Bank currently provides only a limited capacity to absorb shocks.

Weak profitability is a principal challenge. Although revenue is at a satisfactory level against average assets, it is eroded by high operating costs and very high impairment charges. At the operating profit level, ATB’s return of 2% is very low – and the lowest in the peer group despite slight improvement in 2024. It offers little loss absorption capacity. The ROAA has been at an unsatisfactory level for some years, again despite recording improvement in 2024.

H1 25 results were much weaker. Operating income was slightly lower, but net profit for H1 25 was only TND2.6mn against TND12.4mn in H1 24, impacted by higher personnel expenses and general operating costs. The banking sector is facing some regulatory 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. However, improved GDP growth should lift credit demand, albeit modestly.

Rating Outlook

The Outlook for LT FCR is Stable and is in line with CI’s internal assessment of sovereign credit risk for Tunisia.

Rating Dynamics: Upside Scenario

The ratings may be raised or the Outlook revised to Positive, but this would require further improvement in the operating environment and would need to be preceded by a similar rating action on the sovereign, 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 ATB’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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