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Ratings on five Tunisian banks affirmed following sovereign downgrade; Outlooks Negative.

Standard & Poor's Ratings Services has affirmed its ratings on the five Tunisian banks it rates. Specifically, it has affirmed: its 'BB+/B' long- and short-term counterparty credit ratings on Arab Tunisian Bank (ATB); its 'BB+/B' long- and short-term counterparty credit ratings on Banque de l'Habitat (BH); its 'BB/B' long- and short-term counterparty credit ratings on Banque de Tunisie et des Emirats (BTE); its 'BB+' long-term counterparty credit rating on Banque Tuniso - Koweitienne (BTK); and its 'BB' unsolicited public information (pi) rating on Societe Tunisienne de Banque (STB).

It also removed its long-term ratings on ATB, BH, BTE, and BTK from CreditWatch, where they had been placed on 17 January 2011 with negative implications. The outlooks on the long-term ratings on these four banks are negative.

S&P said that, on the one hand, the political and economic legacy of the former regime and the precipitous transfer of power have, in its view, damaged Tunisia's prospects for growth, public finances, and external balance. With respect to economic growth, much will depend on the future of the tourism industry, whose prospects are currently uncertain, and the ability of the new government to attract foreign direct investment (FDI). On the other hand, S&P's outlook on Tunisia's rating is stable, which reflects its expectation that the downside risk from political instability will be contained, and that the political transition will be deeper and more orderly than we had previously anticipated.

Its affirmation of the banks' ratings reflects S&P's opinion that these banks are relatively well armed to face the inevitable short-term pressure on their financial profiles - particularly on asset quality, profitability, and capitalisation. Although their financial profiles may deteriorate, S&P expect them to remain commensurate with the banks' stand-alone credit profiles (SACPs), which it assess presently at 'bb-' for ATB, BH, BTE, and BTK, and in the 'b' category for STB. These relatively low SACP levels in a global context reflect S&P's view of the structurally high credit risk embedded in the domestic economy and the banks' modest profitability.

Its Banking Industry Country Risk Assessment (BICRA) is '8' for Tunisia (the scale ranges from group '1', which denotes the lowest risk, to group '10', which denotes the highest risk). The BICRA score of '8' factors in regular periods of surges in nonperforming loans (NPLs) and weakening financial profiles resulting from endogenous and exogenous crises, such as the tourism crisis in the early 2000s. Although the abrupt economic slowdown it expects for 2011 is of a very different nature, S&P expect the effects on the financial system to be broadly similar. It therefore believes the 2011 crisis will wipe out the benefits of the improvements that rated banks achieved in the 2008-2010 period.

The affirmation also reflects two additional elements:

Its understanding that the liquidity positions of the banks it rate have remained broadly unchanged since the beginning of the crisis and that customer deposits have remained stable, allowing for stable funding profiles;

Its opinion that support from owners (private and public) is unlikely to change. All of the Tunisian banks S&P rate benefit from uplift above their SACPs, which takes into account the likelihood S&P sees of extraordinary support from the sovereign or foreign owners, if needed.

The negative outlooks on the long-tern ratings of ATB, BH, BTE, and BTK essentially reflect:

Downside risks related to a potentially higher deterioration in asset quality (and subsequently profitability and capitalization) than S&P currently envisage. These risks could be heightened by: 1) the absence of an economic rebound in 2012 contrary to its present expectations; and 2) the concentrated nature of the loan portfolios, with high exposures to potentially vulnerable sectors like tourism and more generally the small and midsize enterprises segment;

Lower credit demand in the event that economic perspectives remain durably weak, which could depress revenue generation;

Declining capital positions if retained earnings remain very low in 2011 and 2012 and if owners of the weakly capitalised banks, notably STB and to a lesser extent BH, are not willing to inject capital.

If it sees any of these risks looming in the next months, it may lower the ratings on any of the banks.

ARAB TUNISIAN BANK (BB+/Negative/B)

The ratings on ATB primarily reflect its strategically important status for the Arab Bank group (operating entities rated A-/Stable/A-2), which owns 64.2 per cent of ATB. This provides the bank with an uplift of two notches above its SACP of 'bb-', according to its group methodology.

ATB has so far exhibited a superior financial profile compared with the other banks it rates in Tunisia, notably with respect to liquidity. Asset quality and operating performance continued to improve in 2010, and will remain in its view above system averages in 2011, although not immune to pressures. Main risks could stem from ATB's large exposure to the corporate sector and from large single-name risks. We note that ATB has publically communicated that its exposures to counterparties owned or affiliated to the ex-ruling families amount to Tunisian dinar (TND)180 million (six per cent of the bank's credit exposures). It considers this exposure to be manageable for ATB. It expects capitalisation to remain moderate. It estimates that its risk-adjusted capital (RAC) ratio before diversification was about six per cent at year-end 2010, taking into account the TND 20 million capital increase realised in December.

BANQUE DE L'HABITAT (BB+/Negative/B)

The ratings on BH primarily reflect S&P's view that there is a "high" likelihood of support from its majority owner, the government of Tunisia, which directly and indirectly owns 58 per cent of the bank. This provides the bank with an uplift of two notches above its SACP according to our criteria for rating government-related entities (GREs). It expects BH to retain its leading position in the low-risk mortgage segment in Tunisia, and its comparatively low-risk profile. BH has publically communicated that its exposures to counterparties owned or affiliated to the ex-ruling families amount to TND 231 million (4.6 per cent of the bank's credit exposures). It considers this exposure to be manageable for BH, but S&P believe it will put material pressure on the bank's already modest profitability. S&P estimate that our RAC ratio before diversification was moderately above four per cent at year-end 2010. Further pressure on capitalisation is likely in 2011 and could be a trigger for a downgrade.

BANQUE DE TUNISIE ET DES EMIRATS (BB/Negative/B)

The ratings on BTE primarily reflect our opinion of a "moderate" likelihood of support from its co-owner, the Government of Tunisia, which owns 38.9 per cent. The Abu Dhabi Investment Authority (ADIA; not rated) also owns a 38.9 per cent stake in BTE. This provides the bank with an uplift of one notch above its SACP, according to its criteria for rating GREs.

It expects BTE to maintain a strong capital position and an improving funding profile, following the transformation of BTE into a universal bank allowed to collect deposits and not only focused on tourism financing. It also understands that BTE's exposures to counterparties owned or affiliated to the ex-ruling families are minimal. It notes that over the past years, BTE has displayed one of the best credit risk performances among the banks it rates in Tunisia, despite still material concentration in the tourism sector. This is the result of prudent and selective underwriting. It expects this defining characteristic to persist in the future, despite lower earnings in 2011, and to compensate for the small size and limited competitive position of the bank.

BANQUE TUNISO-KOWEITIENNE (BB+/Negative/--)

The ratings on BTK primarily reflect its strategically important status to French bank BPCE (A+/Stable/A-1), which owns 60 per cent of BTK. This provides the bank with an uplift of two notches above its SACP, according to its group methodology.

It expects BTK to maintain a strong capital position and an improving funding profile, following the 2008 transformation of BTK into a universal bank that is allowed to collect deposits and is not only focused on tourism financing. It understands that BTK's exposures to counterparties owned or affiliated to the ex-ruling families are minimal. Support from its committed parent BPCE should help to mitigate asset quality pressures, which could be heightened by the historically high and above-system-average nonperforming loan ratio (which it estimates at around 15 per cent in 2010) and by the strong loan growth since 2008 (more than 30 per cent per year on average).

SOCI...T... TUNISIENNE DE BANQUE (BBpi)

The public information (pi) rating on STB primarily reflects S&P's view that there is a "high" likelihood of support from its majority owner, the Government of Tunisia, which directly and indirectly owns 52.5 percent of the bank. This provides the ratings on the bank with an uplift of one category above its SACP, according to its GRE criteria. It typically does not use modifiers, outlooks, or CreditWatch placements for pi ratings. It has affirmed the 'BB' pi rating on STB but S&P recognise that the bank is likely to be the most affected among the five by deteriorating asset quality, which it already considers as weaker than peers', and profitability. Furthermore, S&P view STB's capitalisation as weak.

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Publication:CPI Financial
Geographic Code:6TUNI
Date:Mar 22, 2011
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