Moody’s: Loans to the government would erode all bank capital

Moody’s Investors Service (“Moody’s”) reviewed yesterday, Tuesday, October 4, 2022, the downgrade of the Caa1 long-term deposit ratings of five major Tunisian banks.

This follows Moody’s decision on September 30 to review the Tunisian government’s (Caa1) long-term ratings for possible downgrade.

Probable erosion of equity

The agency explains its approach with the climate of uncertainty affecting banks’ operating conditions and the delay in the IMF’s financing program. She believes that liquidity risks are increasing and that Tunisia’s external position is fragile, increasing the country’s risk of default.

The second factor in the board’s position concerns the banks’ direct exposure to the risk of underwriting government bonds to finance the state budget, which can erode their equity by 53% and threaten the quality of their assets.

The rating agency also expects that the large fiscal and external imbalances and the high risks of domestic refinancing will pose significant threats to the sustainability of the public debt, together with the possible occurrence of social tensions, which may be exacerbated by the consequences of the Russian-Ukrainian conflict.

The agency drew attention to the sluggish economic growth, the increase in inflationary pressures, the weakness of private investment and the delay in structural reforms, considering them as reasons that could affect the ability of banks to finance agents. impact on their profitability, liquidity and solvency.

Moody’s also assesses that the banks’ total exposure to government loans is quite large – around 1.1 times their equity capital when taking into account loans to public companies and syndicated foreign currency loans granted to the government since 2017. As a result, it assesses Moody’s that the capital thresholds of most rated banks would fall below the regulatory minimum requirements, which could lead to recapitalizations.

Low effect of the crisis

Nevertheless, and contrary to the forecasts of certain credit rating agencies and financial organizations, the Tunisian banking sector has not suffered significantly from the consequences of the economic crisis and the misdeeds of the pandemic; on the contrary, it has been able to consolidate its equity. , develop its results and manage its solvency and liquidity risks in an optimal way.

Incidentally, according to the latest Annual Report of the Central Bank (BCT) 2021, despite the continued economic difficulties, the banking sector continued to mobilize deposits at a steady pace, i.e. 8.5%, a pace slightly lower than in 2020 and financial year 2019 (9.3%).

Data from banks also show that their equity has increased remarkably from 15,743 million dinars (MD) at the end of 2020 to 16,648 MD at the end of 2021, thus strengthening by 906 MD, which corresponds to a sustained increase of 5 , 75%.

The same data shows the success of the sector in ensuring an optimal match between resources and uses, which allowed it to meet regulatory ratios, especially in terms of short-term liquidity (LCR) in parallel with the improvement in ratios. ) and equity (ROE). And with good reason, the total amount of assets went from 101,858 MD in 2020 to 109,388 MD at the end of the last fiscal year, which for this purpose means a decline of 7,530 MD or 7.39%.

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