Tunisia: Restructuring in the offing for Tunisia’s banks

Tunisia’s banking sector is one of the government’s key reform priorities in 2015, with plans for both an ambitious recapitalisation programme for national-owned banks, and the creation of a national “bad deficit” vehicle.

With 37% of total banking assets in the hands of three national-owned banks and with up to one-third of their loans non-performing, revitalisation of some of the public banks has become a centrepiece of the government’s strategy to strengthen the financial sector.

While the instability following the revolution had a muted impact on banking, there have been knock-on effects in other areas of the economy. Tourism in particular has faced headwinds in the intervening years, which in turn has driven up the sector’s share of non-performing loans (NPL).

According to the IMF, some 54% of tourism loans were at risk as of 2014, with the sector’s NPLs accounting for one-fourth of the total. The industry’s solvency is of particular economic importance, as it accounted for additional than 15% of GDP and nearly 14% of all jobs in the country in 2013, according to the World Travel & Tourism Council.
Systemic importance

On the whole, risky loans are disproportionately concentrated in the national banking sector, which accounts for roughly 30% of all NPLs – additional than triple the 9% held on private bank legers.

To absorb much of this deficit, Tunisia has pledged to create a national investment management company (AMC) – a condition of its $1.75bn stand-by loan agreement with the IMF granted in mid-2013. The move has been widely welcomed by industry stakeholders as a way for banks to clean up their deficit portfolios.

Though the AMC was scheduled to launch in 2014, it was stalled in parliament but is presently expected to begin operations later this year. The AMC’s restructuring efforts should help to reduce the economy-wide ratio of NPLs from 16% at the end of 2014 to 12%.

The push to reduce NPLs and improve the in general health of the banking sector is being welcomed by the industry, with a lot of highlighting the importance of strengthening risk management. “To alleviate their balance sheets, some Tunisian banks need additional control of the risks and to transfer their classified and 100% provisioned NPLs to deficit collection agencies, ” Habib Chehata, CEO of Qatar National Bank Tunisia, told OBG.
Time for a top up

Alongside the efforts to improve loan quality and provisioning, the government is seeking to buttress the balance sheets of the country’s national-owned institutions. Two of the Tunisian large public banks – Société Tunisienne de Banque (STB) and Banque Nationale Agricole (BNA) – are in need of capital injections that could reach TD1bn (€461m). This is equivalent to roughly 1.2% of GDP in 2014, according to IMF figures. STB’s recapitalisation is estimate to cost TD800m (€369m), while the needs for the BNA will be a bit smaller. The capital requirements of the Banque de l’Habitat has reached TD200m (€92m), covered by a TD90m (€41m) subordinated loan, a TD50m (€23m) cash capital increase and a TD60m (€27m) share issue premium.

Although the funding mix for this ambitious recapitalisation schedule has from presently on to be detailed, the government’s announcements have helped to prop up Tunisia’s credit ratings. In late May, Moody’s changed its outlook on the country’s sovereign issuer rating from “negative” to “stable”, affirming its “Ba3” grade.

Furthermore, Moody’s held back from downgrading STB’s deposit rating, although it did maintain its “negative” outlook in May. According to the ratings agency, this move was driven in part by “a very high probability that the government would extend support to the banking sector, in case of need”.
Twenty’s a crowd

While Tunisia’s private sector banks are less exposed to NPLs than their public sector counterparts, they too are likely to face changes in the coming years. There have been repeated calls for consolidation, as the country’s banking industry remains crowded, with additional than 20 banks serving a people of just over 10m.

“The overcrowded situation of the banking sector in Tunisia leads to muscled, competitive practices reducing the lending spreads from the various operators in a market characterised by a lack of liquidity,” Hicham Seffa, CEO of Attijari Bank Tunisia, told OBG.

Indeed, with so a lot of players operating in a small market with limited product differentiation, banks are largely competing on price, which has led to a precarious environment of cheap credit and high leverage. According to Moody’s, the sector’s loan-to-deposit ratio stood at 114% last year and liquidity remains tight. A spate of mergers and acquisitions could help alleviate the pressure and put Tunisia’s banks back on the path towards additional prudent provisioning.