In an assessment of the Tunisian banking sector published On Nov. 9, 2011, Standard & Poor’s Ratings Services said that it is maintaining its Banking Industry Country Risk Assessment (BICRA) on Tunisia at group ‘8’. It is also revising the economic risk score to ‘7’ from ‘8’, and assigning an industry risk score of ‘8’.
We have reviewed the banking sector of the Republic of Tunisia (foreign currency BBB-/Negative/A-3, local currency BBB/Negative/A-3) under our updated BICRA methodology.
Our criteria define the BICRA framework as one “designed to evaluate and compare global banking systems.” A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group ‘1’) to the highest-risk (group ’10’). Other countries in BICRA group ‘8’ include Lebanon, Argentina, Uruguay, and Georgia.
Our economic risk score of ‘7’ reflects our opinion that Tunisia has “high risk” in “economic resilience”, “intermediate risk” in “economic imbalances,” and “very high risk” in “credit risk in the economy,” as our criteria define these terms.
Tunisia’s economy is diversified and demonstrated resilience during the economic downturn of 2008-2010. However, various shocks, including the uncertainty of the political transition after the ouster of former president Ben Ali, a plunge in tourism revenue, and lower growth prospects in the country’s main trade partner the EU, have hindered Tunisia’s growth prospects.
There is no sign of a real estate bubble in Tunisia despite rapid growth in real estate prices over the past five years. Past economic growth and sustained domestic demand for housing have contributed to market stability, in our view. Under the prevailing economic conditions, we expect real estate and equity growth to be limited over the short term.
Credit growth is likely to remain subdued, and we expect banks’ nonperforming loans (NPLs) to increase over the short to medium term in the aftermath of 2011’s political unrest State-owned banks carrying substantial problematic assets as a legacy from previous crises tend to apply relaxed underwriting standards. However, private banks tend to use more conservative underwriting standards and therefore have much lower levels of problem loans.
Our industry risk score of ‘8’ for Tunisia is based on our opinion that the country faces “very high risk” in its “institutional framework”, “high risk” in “competitive dynamics,” and “very high risk” in “systemwide funding,” as our criteria define these terms. Our “very high risk” assessment of the institutional framework is underpinned by a regulatory framework that we view as conservative in terms of solvency requirements and classification of nonperforming loans (NPLs).
However, this is offset to some extent by recent legislation that allows banks to not classify as NPLs some new problem loans arising from 2011’s political turmoil. Tunisian banks have insufficient provisioning to cover problem loans, in our view, and the regulator has yet to implement Basel II principles to identify all the risks.
The central bank has been supportive of the banking system in the past and under current difficult conditions, but we see its recent track record as moderate given the need for still pending capital injections to weakly capitalized state-owned banks. We also consider supervision of the banking sector to be barely adequate.
Tunisian banks have high risk appetite, with a sector that is fragmented and competitive. This leads to low margins and profitability. Although the Tunisian banking sector has been very stable in the past, we expect future reforms to change the competitive dynamics to some extent, enabling consolidation and potentially opening the way for new entrants.
There are no particular market distortions affecting the sector. Tunisians banks do not feature high-risk characteristics related to complex or risky products.
The banking system is primarily funded by a stable customer deposit base. However, core customer deposits as a share of total loans are lower than for some regional peers. Funding support from foreign parents is limited and relates only to a handful of private banks that control a modest market share. These characteristics are further underpinned by a narrow domestic debt capital market.
We consider the Tunisian government as “supportive” toward domestic banking. Although we recognize the track record of support, we are of the view that the government has limited financial flexibility and capacity to provide extraordinary financial support to banks in times of stress.