Fitch Ratings has affirmed Arab Banking Corporation Tunisie's (ABC Tunisie) Long-Term National Rating at 'AA+(tun)' with Stable Outlook and Short-Term National Rating at 'F1+(tun)'.

Key Rating Drivers

ABC Tunisie's National Ratings are driven by potential support from its parent, Bahrain's Arab Banking Corporation B.S.C. (ABC; BB+/Stable), which owns 100% of ABC Tunisie's share capital.

The Stable Outlook on the Long-Term National Rating reflects our assessment that upside and downside risks for ABC Tunisie are equally balanced relative to other Tunisian issuers'.

Shareholder Suppport: ABC Tunisie represents less than 1% of ABC's assets and its contribution to group profits remains modest. Fitch believes that ABC's ability to support ABC Tunisie is high given ABC Tunisie's small size, but, in our opinion, its propensity to do so may be lower because of ABC Tunisie's limited role in the group. However, ABC is not planning to dispose of ABC Tunisie, and high levels of management and operational integration between the two entities suggest continued commitment to ABC Tunisie.

ABC is a Bahrain-based wholesale bank operating in the Middle East and Africa region and Brazil. ABC also has an offshore branch in Tunis and business flows between ABC Tunisie and the branch are substantial. On a combined basis, the Tunisian presence is more significant to ABC.

Very Challenging Operating Environment: Tunisia's GDP grew 3.1% in 2021 after a contraction of 8.7% in 2020. The mild recovery is underpinned by a sluggish tourism sector, a high level of political and economic uncertainty, which has hindered private investment, and weak recovery of private consumption. Following the downgrade of Tunisia's sovereign rating to 'CCC' from 'B-' on 18 March 2022, we have revised the Tunisian banks' operating environment to 'ccc' from 'b-' with a negative outlook to reflect these challenges.

Niche Bank: Established in 2000, ABC Tunisie is a small domestic bank with a network of 17 branches. It targets corporate clients (82% of the loan book at end-2021) and therefore has high single-name concentration and exposure to state-owned enterprises. The bank's retail loans (18% of the total) are weighted towards unsecured personal loans.

Heightened Risk Profile: As a purely domestic bank, ABC Tunisie's risk profile is inevitably high given the very difficult domestic operating environment. However, credit risk is well-managed and the bank has consistently reported below-sector average impaired loans ratios in recent years. Concentration to the public sector in the loan book is high, which weighs on our assessment of ABC Tunisie's overall risk profile.

Vulnerable Asset Quality: ABC Tunisie's impaired loans ratio of 4.5% at end-2021 compares well with the average for the sector (around 13%). However, rapid loan growth in recent years and a deteriorated operating environment will put pressure on asset quality. Single name concentrations are high; its 20-largest exposures represented 76% of gross loans at end-2021 (9.1x equity), making the bank highly exposed to event risk.

Modest Performance: ABC Tunisie's profitability is volatile and fairly weak, with return on average equity (ROAE) usually below 6%. The bank posted a small loss in 2021 due to higher loan impairment charges; the latter can vary greatly year on year, due to the difficult operating environment and regulatory changes. Cost efficiency is just acceptable with a cost-income ratio at 77% in 2021.

Limited Capital Buffers: ABC Tunisie's capital ratios are comfortably above regulatory requirements in Tunisia, with an end-2021 Tier 1 capital ratio of 20.2% and a total regulatory capital ratio of 21.3%. However, we view buffers as low given concentration risks, asset-quality vulnerabilities and moderate loan loss reserve coverage. ABC has a record of providing ordinary capital support to its subsidiary - a total of about USD33 million since 2005.

Stable Funding; High Liquidity: The bank has access to group funding and deposits flow from ABC's standalone branch in Tunis. Deposit concentrations are high and funding is very short term but the largest depositors have proved stable over time. ABC Tunisie's liquidity is heathy with high-quality liquid assets covering 62% of total customer deposits at end-2021.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade would require a multi-notch downgrade of ABC or significant weakening of strategic importance of ABC Tunisie to its parent. We do not consider either likely at present.

A downgrade of Tunisia's sovereign rating would not necessarily result in a downgrade of ABC Tunisie's National Ratings because its credit risk, relative to the sovereign's and other local issuers', may remain the same.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Scope for an upgrade of the National Ratings, which are already high, is limited.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

ABC Tunisie's ratings are linked to ABC's.

ESG Considerations

N/A

RATING ACTIONS

Entity / Debt

Rating

Prior

Arab Banking Corporation Tunisie

Natl LT

AA+(tun)

Affirmed

AA+(tun)

Natl ST

F1+(tun)

Affirmed

F1+(tun)

senior unsecured

Natl LT

AA+(tun)

Affirmed

AA+(tun)

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