A government-led strengthening of the Tunisian banking system and a reduction of the state’s influence on the Tunisian banks have been underway since the mid 1990s, but the banks’ portfolios remain saddled with doubtful loans and the government still retains control over banks that together hold almost one-half of the system’s assets, Standard & Poor’s says in a report on the Tunisian banking system (“Bank Industry Risk Analysis: Tunisia”).
“The banks’ structural asset-quality problems partly reflect the high economic risk in the domestic economy,” explains Standard & Poor’s credit analyst Taos Fudji, author of the report. “This is due to significant corporate debt leverage, a legal environment unfavourable to creditors, and a weak payment culture. The level of problem assets has also been increased in state-owned institutions by government-directed lending to finance the development of the agriculture and tourism sectors, which are regarded as priorities for the country’s economy.”
Fudji says that the overall risk of the banking system has remained stable in recent years, with the weaker institutions generally benefiting from the strong support of state ownership. The government’s presence has slowed down the rationalisation of the banking system, which remains fragmented.
In Standard & Poor’s view, Tunisian banks must change their practices to focus more on the relative risk and return of their client relationships as well as improve their financial disclosure–in order to unlock the good long-term growth potential of an increasingly affluent local population as well as to tap additional funding sources.
“In this respect, the presentation of consolidated financial statements in the coming year would be considered a key positive step,” adds Standard & Poor’s credit analyst Yves Burger, a co-author of the report.
A new banking law of 2001 reinforced the regulatory framework, and domestic institutions continued to upgrade their credit systems. However, these efforts were hampered by a sharp slowdown in economic growth in 2002, which cut deeply into profitability and impacted asset quality.
The report notes that Standard & Poor’s does not expect a material improvement in the Tunisian banks’ financial profile in 2003 or 2004. Although economic growth is rebounding, the domestic banks’ profitability is expected to remain weak, constrained by structural growth in overhead costs, the rise in non-accrual loans, and an 87bp reduction in BCT’s base interest rates in the first half of 2003. Internal capital generation will thus remain limited in the face of a pick-up in loan demand that is expected to follow the rebound in economic growth. Tunisian banks lack momentum to solve their capitalization and credit quality issues in the next two years.