Fitch Ratings has affirmed Arab Tunisian Bank's (ATB) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B-'.

The Outlooks remain Negative. Fitch has also affirmed the bank's Viability Rating (VR) at 'ccc'.

Key Rating Drivers

ATB's IDRs and National Ratings are driven by potential support from the bank's 64.2% shareholder, Jordan-based Arab Bank Plc (AB, BB/Stable). ATB's National Ratings (AA+(tun)/Stable/F1+(tun)) are the highest ratings across Fitch-rated Tunisian issuers.

The 'ccc' VR is heavily influenced by our assessment of the domestic operating environment. ATB operates exclusively in Tunisia, where operating conditions are increasingly challenging, reflecting the lingering impact of the pandemic shock combined with the sovereign's weaker credit profile and global pressures. ATB's VR is two notches below the 'b-' implied rating, due the operating environment constraint and the sovereign rating-constraint adjustments.

Shareholder Support: Fitch believes that ATB is strategically important to AB. Integration links are strong, with AB defining the subsidiary's strategy and overseeing its credit, market and liquidity risks. AB also provides risk-management expertise. While ATB has not required extraordinary support from AB, the parent provides ordinary support in the form of capital increases and liquidity lines.

Very Challenging Operating Environment: Tunisia's GDP grew 3.1% in 2021 after contracting 8.7% in 2020. The mild recovery is underpinned by a sluggish tourism sector and high political and economic uncertainty, which has hindered private investments, and by weak recovery of private consumption. We have revised the Tunisian banks' operating environment to 'ccc' from 'b-' with a negative outlook to reflect these challenges.

Well-Established Tier 2 Bank: ATB is Tunisia's sixth largest bank by domestic deposits with a market share of 7.7% at end-2021 (end-2020: 8.3%). Established in 1982, the bank provides standard banking products and services to corporates, SMEs and retail customers and benefits from good brand recognition in Tunisia.

Heightened Risk Profile: As a purely domestic bank, ATB 's risk profile is inevitably high, given the very difficult domestic operating environment. Nonetheless, the bank has a reasonable history of managing concentration risk across sectors, customer type and large exposures, which are not high by developing market standards.

Weak Asset Quality: ATB lends mainly to large local corporates but also to SMEs, retail/very small companies and public sector entities. The bank's unconsolidated impaired loans/gross loans ratio increased to 12.1% (end-2020: 11.3%), broadly in line with the sector average.

Net Loss in 2021: ATB posted a net loss of TND68.5 million in 2021 (12% of end-2021 equity), mainly due to a significant increase in loan and securities impairment charges. More stringent provisioning in 2021, in line with the Central Bank of Tunisia's (CBT) revised guidance on collective charges, has dented profitability.

Small Capital Buffers: We view ATB's capital buffers as weak relative to the bank's risk profile. The Tier 1 capital ratio was 7.9% at end-2021 (unchanged from end-2020), against a minimum regulatory requirement of 7%. ATB's regulatory capital ratio was 12.3% at end-2021. We expect capitalisation to be supported by a potential rights issue in 2022 and by growth in lower-risk segments.

Adequate Funding, Improving Liquidity: ATB is primarily funded by stable customer deposits, which accounted for 85% of total non-equity funding at end-2021. Deposits are well balanced between retail and corporates, and concentrations are acceptable by emerging market standards, with the 20 largest deposits representing 18% of the total at end-2021. Tunisian dinar liquidity conditions eased during 2021 and ATB has reduced its reliance on CBT's finance, which is now around 1% of total non-equity funding (end-2019: 10%).

Rating Sensitivities

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

ATB's Long-Term IDRs are sensitive to a downgrade of Tunisia's Country Ceiling, which is primarily sensitive to a downgrade of Tunisia's Long-Term Foreign-Currency IDR. They are also sensitive to regulatory and/or potential operational restrictions constraining ATB's ability to provide support, particularly in foreign currency, or to any changes in Fitch's assumptions regarding AB's capacity and willingness to support the bank.

ATB's IDRs would also be downgraded if AB's strategic interest in the bank weakens or if the parent's IDRs are downgraded by at least four notches.

ATB's VR is sensitive to further deterioration in the bank's asset quality and sustained deterioration in profitability affecting capital ratios. This could come from sustained deterioration in the domestic operating environment.

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

An upgrade of ATB's Shareholder Support Rating and IDRs would require an upgrade of Tunisia's Country Ceiling. This is highly unlikely in the near term.

An upgrade of the VR would require sustained improvement in the operating environment allowing for a strengthening of asset quality, earnings and capitalisation, which is unlikely at present.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

ATB's ratings are driven by AB's IDRs.

ESG Considerations

ATB's ESG Relevance Score of '3' for e social impacts reflects ATB's exposure to social disapproval of interest rate practices in the banking sector, versus '2' that is typically assigned to banks. Nevertheless, environmental, social or governance assessments are not rating drivers for ATB.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com

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