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Standard & Poor’s Ratings Services claims that domestic and external economic pressures have thrown a harsh light on the paradox facing the banking sectors in Morocco, Tunisia, and Egypt. While stagnant business prospects, weak profitability, and declining asset quality signal the clear need for reforms, structural rigidities continue to stand in the way.

According to a report published by Standard & Poor’s, the recent poor performance of the tourism sector and weakening confidence among foreign investors have increased pressure on the North African banking sector.

“We still view North African banks as having good long-term growth prospects, but in the absence of much-needed sectoral restructuring and rationalisation, and improved corporate governance, their risk profiles are likely to get worse before they get better,” says Standard & Poor’s credit analyst Anouar Hassoune, one of the authors of the report.

Standard & Poor’s has assigned bank ratings in three out of the five countries in the North African region: the Kingdom of Morocco (foreign currency BB/Stable/B; local currency BBB/Stable/A-3), the Republic of Tunisia (foreign currency BBB/Stable/A-3; local currency A/Stable/A-1), and the Arab Republic of Egypt (foreign currency BB+/Negative/B; local currency BBB-/Negative/A-3). The 17 banks rated by Standard & Poor’s in the region carry a narrow range of ratings in the ‘B’ and ‘BB’ categories.

These speculative-grade ratings mainly reflect the risky economic environment in which the banks operate. Common features also include the considerable presence of state-owned banks, increasing competition, deteriorating asset quality, and weak regulatory supervision.
“North African banks focus almost solely on the domestic market, and as a result suffer from the poor sophistication of their respective marketplaces, serving a narrow franchise with limited good-quality lending opportunities,” says Hassoune.

Throughout the region, a clear distinction exists between public-sector banks and their private sector counterparts: On the whole, public-sector banks face harmful asset quality problems, while privately controlled banks have posted more balanced performance on every front, thanks to more professional managerial practices and the absence of moral hazard. Overall, government involvement remains a defining characteristic of the North African banking industry, a situation that Standard & Poor’s does not expect to change in the foreseeable future.