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Tunisia: Banks’ true asset quality not clear, says Fitch

The extension of Tunisia’s loan deferral scheme until September 2021 will ease pressure on banks’ financial profiles but will also cloud the transparency of asset quality reporting, said Fitch Ratings.

On 30 December 2020, the Central Bank of Tunisia (CBT) extended the ability of companies hit by the coronavirus pandemic to defer loan repayments, subject to bank approval. They now have until September 2021 to request deferrals.

The original scheme ended in September 2020 and was followed by a three-month gap. Tunisia’s deferral scheme is now longer than most, but some other countries in the region may soon extend their schemes given the widespread resurgence of the virus and new lockdowns.

The CBT is encouraging banks to look favourably on deferral requests and there could be widespread rescheduling of loan maturities to allow repayment schedules suited to stressed borrowers’ cash flow limitations. It is also allowing banks until December 2021 to grant companies hit by the crisis new loans of up to seven years, including a two-year grace period.

The CBT’s 30 December decision follows a series of support measures it has taken in recent months, including an increase in the maximum loans-to-deposits ratio, and a 50bp policy rate cut in October 2020 (to 6.25%) which helped to reduce short-term liquidity pressure for banks.

While the CBT’s moves will alleviate some of the pressure we initially expected banks to face in 2021 (see here), it will also continue to cloud the transparency of financial reporting by distorting reported asset quality data. Banks will defer the classification of loans as impaired and hold off on making loan-appropriate impairment charges for most of this year, which will artificially boost their profitability and capital.

Credit strains after September 2021

Fitch’s outlook for Tunisia’s banking sector is negative. The extension of regulatory forbearance measures will bring some immediate relief to banks but the lingering effects of the coronavirus-related fallout on Tunisia’s economy are likely to cause longer-term credit stress beyond September 2021.

The tourism sector, which accounts for about 14% of GDP, was hit hard in 2020 with tourist receipts estimated to be 64% lower than in 2019. In addition, the lower interest rates will continue to depress banks’ profitability and could pressure their already-thin capital buffers, particularly at banks with weak core profitability.

The ending of support measures in September 2021 will be shortly followed by Tunisian banks’ move to IFRS 9 reporting at end-2021. This is likely to further weaken reported asset quality metrics and force banks to increase provisions given the more forward-looking approach to determine and provision for expected credit losses.

Fitch expects Tunisia’s economy to grow by 4% in 2021. But there are downside risks given social tensions, political instability, and uncertainty over the renewal and possible tightening of measures taken by the authorities to counter a resurgence in coronavirus infections.


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