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Rating Action:

Moody's downgrades four Tunisian banks' ratings and maintains a negative outlook

20 Oct 2021

Rating actions follow the downgrade of the Tunisian government's bond rating to Caa1 from B3 with a negative outlook

Limassol, October 20, 2021 -- Moody's Investors Service ("Moody's") has today downgraded the long-term bank deposit ratings to Caa1 from B3 of four Tunisian banks: Amen Bank (Amen), Arab Tunisian Bank (ATB), Banque de Tunisie (BdT) and Banque Internationale Arabe de Tunisie (BIAT). The long-term deposit ratings of Société Tunisienne de Banque (STB) have been affirmed at Caa1. The rating agency has also downgraded the Baseline Credit Assessments (BCAs) of BIAT and BdT to caa1 from b3, Amen and ATB to caa2 from caa1 and affirmed STB' caa3 BCA. The outlook on all banks' ratings remains negative.

The primary driver for today's rating actions is the increasingly difficult operating environment for banks in Tunisia as reflected by Moody's decision to lower Tunisia's Macro Profile score to 'Very Weak' from 'Very Weak+'. A secondary driver of today's rating actions is the weakening credit profile of the Tunisian government as reflected by the decision to downgrade the sovereign rating to Caa1 from B3 on 14 October 2021. Tunisian banks are directly and indirectly exposed to the sovereign on both sides of the balance sheet. For further information on the sovereign rating action, please refer to Moody's press release:

https://www.moodys.com/research/--PR_456360.

Please click on this https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL456784 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

WEAKENING MACRO PROFILE RESULTS INTO A DOWNGRADE OF LONG-TERM DEPOSIT RATINGS of BdT, BIAT, ATB and AMEN

The key driver of today's rating actions is the increasingly difficult operating environment for banks in Tunisia as reflected by Moody's decision to lower Tunisia's Macro Profile score to 'Very Weak' from 'Very Weak+'. The lower Macro Profile score results in the downgrade of the Baseline Credit Assessments (BCAs) of BIAT and BdT to caa1 from b3, and of Amen and ATB to caa2 from caa1.

The rating agency expects a difficult operating environment characterized by low economic growth, inflationary pressures, low private investment and delayed structural reforms that will impact the sustainability of banks' credit growth and profitability whilst funding and liquidity remain tight.

The lower banking Macro Profile also reflects an unsettled domestic political situation which has reduced the government's ability to formulate and implement policies, as well as heightened external liquidity risks due to the sovereign's impaired access to international capital markets.

Moody's expects asset quality in the country to weaken further in the next 12 to 18 months, from an already high system-wide average of around 13.0% problem loans to gross loans ratio as of September 2020. In addition, profitability for our rated banks has reduced to an average of 1.0% return on assets ratio as of June 2021 against a pre-pandemic level of 1.6% during 2019. We expect net profits will inch lower as a result of slower lending growth and policy rate cuts during 2020 that will halt the widening of net interest margin witnessed since 2017.

BANKS' EXPOSURE TO THE TUNISIAN GOVERNMENT

Also, mounting liquidity pressure at the sovereign level and higher risks of default would have solvency and liquidity implications for Tunisian banks that are directly and indirectly exposed to the sovereign on both sides of the balance sheet.

The banks' direct government exposure via the purchasing of treasury bills as proportion of shareholders' equity has increased to around 56% as of May 2021 from 37% in 2011 as the government posted wider fiscal deficits since the Jasmin revolution. In addition, we estimate that the total exposure to the sovereign is larger when accounting for lending to state-owned enterprises and foreign-currency loans extended to the government through syndicated deals since 2017 to address refinancing needs that are largely denominated in foreign currency (FX). The direct and indirect exposure to government credit risk together with the primarily domestic focus of their operations renders the banks susceptible to event risk at the sovereign level. Under a Moody's stress scenario, capital buffers at most rated banks would fall below minimum regulatory requirements and call for recapitalization needs.

On the liability side, the banks have been exposed to short-term collateralized Central Bank of Tunisia (CBT) funding. Notwithstanding the fact that the volume of CBT refinancing started a declining trend in 2019 - for the first time since 2010 - it witnessed an uptick to TND11.1 billion in October 2021 from around TND8billion in December of 2020 as the government resorted to turn to domestic banks to refinance two maturities during the summer. Going forward, structural funding shortages for the banks could worsen should deposit collection stall, while the trend of declining CBT refinancing volumes could materially reverse if (1) the recovery from the pandemic-induced economic shock is delayed; and/or (2) persistent fiscal deficits at the sovereign level continue to call for higher funding needs for banks to participate to government budget financing while the government is lacking other funding options.

The sovereign downgrade reflects weakening governance and heightened uncertainty regarding the government's capacity to implement measures that would ensure renewed access to funding to meet high financing requirements over the next few years. There is a risk that, if significant funding is not secured, high liquidity pressure may lead to default. This risk is partly mitigated by the past build-up of the foreign exchange reserve buffer that provides some backstop to upcoming external debt service payments in the short term.

AFFIRMATION OF STB's LONG-TERM DEPOSIT RATINGS AND BCA

The affirmation of STB's long-term deposit rating captures its resilience to the lowering of the sovereign rating, being already at the Caa1 level. The affirmation STB's caa3 BCA indicates Moody's view that the bank's low standalone credit profile already incorporates the expected deterioration in asset quality and profitability on the back of the coronavirus induced economic disruption of 2020 in the context of already weak pre-pandemic operating conditions.

OUTLOOK

The negative outlook is in line with the one on Tunisia's government rating and continues to reflect (1) the potential for any further deterioration in its capacity to extend support to banks; (2) continued weakening in the banks' operating conditions as captured by the potential downgrade of Tunisia's sovereign rating that would further cap the banks' standalone financial profiles and carry solvency and liquidity risk implications from a sovereign default in case of high liquidity pressure; together with (3) downside risk that a delayed recovery from the coronavirus outbreak shock on the local economy presents on the banks' already weak standalone credit profiles.

The negative outlook on the sovereign rating captures downside risks related to possible protracted delays in reforms and reform-dependent funding which would erode FX reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks. In this scenario, the probability of a public sector debt restructuring that would entail losses for private sector creditors would rise.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on banks' ratings is limited as indicated by the negative outlook. However, the outlook on the ratings would likely be stabilized if Tunisia's Caa1 sovereign rating outlook is changed to stable from negative.

Conversely, downward pressure on banks' ratings would develop following a downgrade of the sovereign rating signaling (1) a reduction in the government's capacity to extend financial support in case of need for Amen and STB as these banks benefit from government support uplift; and (2) a potential downgrade on the standalone financial profiles of BdT and BIAT. Downward pressure on the BCAs of Amen, ATB, BdT and BIAT would come from a greater-than-expected deterioration in operating conditions and the sovereign's credit profile exerting pressure on their asset quality, profitability, capital adequacy and liquidity.

Moody's does not have any particular governance concern for rated Tunisian banks, although the rating agency believes that their relatively high asset risks reflect banks' substandard risk governance culture, particularly for public banks.

BANK-SPECIFIC CONSIDERATIONS

- Amen Bank

Moody's downgraded Amen's long-term deposit ratings to Caa1 from B3. Moody's also downgraded the bank's BCA to caa2 from caa1 and maintained a negative outlook on the bank's long-term deposit ratings. The downgrade of the long-term deposit ratings is in line with the downgrade of the Tunisian sovereign rating as detailed above.

The bank's Caa1 long-term local currency deposit rating still benefits from one notch of uplift from its caa2 BCA, reflecting Moody's assessment of a very high probability of government support in case of need, given Amen's 8.1% deposit market share in Tunisia. The negative outlook on Amen's long-term deposit ratings is in line with the negative outlook on Tunisia's sovereign rating.

The downgrade of the BCA is in line with the lowering of Tunisia's banking Macro Profile as detailed above. Amen's caa2 BCA reflects the bank's weak asset quality (around 15.3% ratio of problem loans as of June 2021), low loss absorption buffers and moderate profitability which remains challenged by a high cost of funding as well as a relatively tight liquidity profile.

- Arab Tunisian Bank

Moody's downgraded ATB's long-term deposit ratings to Caa1 from B3, BCA to caa2 from caa1 and Adjusted BCA to caa1 from b3 and maintained a negative outlook on the bank's long-term deposit ratings. The downgrade of the long-term deposit ratings is in line with the downgrade of the bank's BCA and Adjusted BCA.

The downgrade of ATB's Adjusted BCA to caa1 from b3 reflects the bank's lower BCA of caa2 and one notch of affiliate support rating uplift based on Moody's continued assessment of a moderate probability of parental support from ATB's majority shareholder, Arab Bank PLC (local currency deposit rating Ba2 stable, BCA ba2).

The downgrade of ATB's long-term deposit ratings to Caa1 from B3 captures the downgrade of the bank's Adjusted BCA to caa1 from b3. Moody's assesses the probability of government support for ATB as high. However, ATB does not incorporate any government support uplift as the Adjusted BCA of the bank is at the same level as Tunisia's Caa1 sovereign rating. The negative outlook on ATB's long-term deposit ratings reflects downside risks on the bank's BCA that could also develop from a greater-than-expected deterioration in operating conditions and the sovereign's credit profile weakening asset quality, profitability, capital adequacy and/or liquidity.

The downgrade of ATB's BCA to caa2 from caa1 is in line with the lowering of Tunisia's banking Macro Profile as detailed above. ATB's caa2 BCA reflects the bank's weak asset quality and high credit concentrations (problem loans ratio at 10.9% as of June 2021), modest capital buffers and strained profitability considering elevated asset risk. These challenges are mitigated by above average funding and liquidity metrics supported by a stable funding base.

- Banque Internationale Arabe de Tunisie

Moody's downgraded BIAT's long-term deposit ratings to Caa1 from B3. Moody's also downgraded the bank's BCA to caa1 from b3 and maintained a negative outlook on the bank's long-term deposit ratings. The downgrade of the long-term deposit ratings and BCA is in line with the downgrade of the Tunisian sovereign rating as detailed above.

Moody's assesses a very high probability of government support for BIAT given the bank's systemic relevance as the largest lender in Tunisia with a 20.4% deposit market share. However, the bank's rating does not incorporate any government support uplift as BIAT's BCA is at par with the sovereign rating. The negative outlook on BIAT's long-term deposit ratings is in line with the negative outlook on Tunisia's sovereign rating.

The downgrade of BIAT's BCA to caa1 from b3 is in line with the lowering of Tunisia's banking Macro Profile as detailed above. BIAT's caa1 BCA is driven by weak capital buffers relative to elevated and concentrated credit risks (6.4% adjusted problem loans ratio as of June 2020) balanced by higher than average profitability, good liquidity buffers and a strong deposit-gathering capacity, underpinned by the bank's position as Tunisia's leading private bank.

- Banque de Tunisie

Moody's downgraded BdT's long-term deposit ratings to Caa1 from B3. Moody's also downgraded the bank's BCA to caa1 from b3 and maintained a negative outlook on the bank's long-term deposit ratings. The downgrade of the long-term deposit ratings and BCA is in line with the downgrade of the Tunisian sovereign rating as detailed above.

Moody's assesses a high probability of government support for BdT. However, the bank's rating does not incorporate any government support uplift as BdT's BCA is at par with the sovereign rating. The negative outlook on BdT's long-term deposit ratings is in line with the negative outlook on Tunisia's sovereign rating.

The downgrade of BdT's BCA to caa1 from b3 is in line with the lowering of Tunisia's banking Macro Profile as detailed above. BdT's caa1 BCA is underpinned by its sound capital buffers (adjusted tangible common equity to risk weighted assets at 13.9% as of June 2021) and prudent risk management relative to local peers, combined with solid profitability. These strengths are moderated by the bank's (1) elevated asset-quality pressures in a highly challenging operating environment; and (2) relatively high reliance on central bank funding which raises refinancing risks.

- Société Tunisienne de Banque

Moody's affirmed STB's long-term deposit ratings at Caa1. Moody's also affirmed the bank's BCA at caa3 and maintained a negative outlook on the bank's long-term deposit ratings. The affirmation of the long-term deposit ratings reflects the resilience of the bank's ratings to the downgrade of the Tunisian sovereign rating as detailed above as those are already at the Caa1 rating level.

The bank's Caa1 long-term local-currency deposit rating still benefits from two notches of uplift from its caa3 BCA, reflecting Moody's assessment of a very high probability of government support in case of need, based on STB's around 11.5% deposit market share in Tunisia and an 83.4% direct and indirect government ownership stake in the bank. The negative outlook on STB's long-term deposit ratings is in line with the negative outlook on Tunisia's sovereign rating.

The affirmation of STB's caa3 BCA reflects its resilience to increased downside risks in the Tunisian operating environment as captured by the lowering of Tunisia's banking Macro Profile. The BCA is underpinned by the bank's high - albeit declining - level of problem loans (reported problem loans ratio at around 13% as of June 2021), driven by historically weak underwriting standards and a concentrated exposure to the distressed tourism sector, low profitability and weak loss-absorption capacity coupled with a tight funding profile. Also, STB's caa3 BCA continues to capture weak internal audit and reporting systems, which translates into a one-notch negative adjustment for 'opacity and complexity'.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for these ratings is Badis Shubailat, +971 (423) 795-05.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL456784 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Constantinos Kypreos
Senior Vice President
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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