Fitch Ratings downgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Arab Tunisian Bank (ATB) from 'B' to 'B-', last March 28.

The rating “follows the downgrade of Tunisia's sovereign IDR to 'CCC' on 18 March 2022, and the downward revision of its Country Ceiling to 'B-' from 'B'. The downgrade of Tunisia reflects heightened fiscal and external liquidity risks in the context of further delays in agreeing on a new program with the IMF after the political changes of July 2021, which is necessary for access to most official creditors,” explained Fitch Ratings analysts in an action commentary published the same day.

The rating agency indicates that ATB could still receive support from “its 64.2% shareholder Jordan-based Arab Bank Plc.” However, concerns remain about the bank’s high exposure to the “ weakened” Tunisian state and “weaker operating conditions.”

Indeed, in late 2021, Tunisia's debt exceeded 100% of its GDP. The country is growing slowly (about 3%) while inflation is over 6%. In November 2021, the country requested a renewal of IMF support. The Bretton Woods institution conditioned that support to structural reforms like reducing the wage bill, which is 16% of GDP and captures more than half of government spending. 

In addition to downgrading ATB's IDRs, Fitch Ratings also lowered the bank's sustainability rating from "B-" to "CCC". The agency explains that this rating reflects " heightened risks to the banking sector's creditworthiness," due to high exposure to the Tunisian government “via direct lending to the treasury and holdings of government securities.”

“Banks are significantly exposed to highly indebted and problematic state-owned enterprises, which are mostly in a poor financial position, with many being loss-making,” Fitch Ratings points out.

“Borrowers' ability to recover and resume debt servicing will largely depend on the extent of the economic recovery in Tunisia, which remains uncertain,” it estimates.

For the U.S ratings agency, “deferred loans were about 2% of ATB's gross loans at end-2021, creating further downside risks to the bank's asset quality.”

“The bank's plans to reduce the non-performing loans ratio to below 8% by 2026 may prove challenging without a sustained improvement in the operating environment,”  it insists.

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