Tunisia: Loans granted to the state would have eroded 90% of the capital in the banking sector (Fitch Rating)

Tunisian banks’ exposure to sovereign risk (excluding public enterprises) was 16% of the sector’s assets at the end of May 2022, i.e. around 90% of the sector’s equity capital. This is revealed by a note from Fitch Ratings on the Tunisian banking sector.

Although not very high by regional standards, this situation poses risks to the sector due to insufficient capital. The risk exposures in the Tunisian banking sector are mainly in local currency, which means that a restructuring of the government debt in local currency could cause significant losses, the international rating agency explained in a document published on Wednesday, October 12, 2022.

Despite sovereign risks, however, liquidity pressure eased following the continued mobilization of deposits and the increasingly cautious granting of loans.

The sector’s reliance on central bank funding was 5% at the end of May 2022, well below the peak of 15% in 2019, when Tunisia faced a major liquidity crisis. The average customer loan-to-deposit ratio calculated by Fitch fell to 111% at the end of 1H22 (end 2021: 114%).

The Tunisian banking system is relatively insensitive to the tightening of global financial conditions due to its low dollarization, which limits refinancing risks, according to Fitch Ratings.

Banks account for a significant amount of government bonds to finance the government deficit, and only 1% of customer deposits in the sector are denominated in foreign currency. However, a slowdown in deposit growth combined with increased refinancing requirements from the government may create new pressure on liquidity.

The profitability of the Tunisian banks limits the impact of the restrictive operating context of the sector

The rating agency indicated that the profitability of Tunisian banks, which recovered close to pre-pandemic levels in the first half of 2022 (1H22), should help limit the impact of the sector’s restrictive operating environment, despite rising credit risks and deteriorating asset quality.

Lower provisions for receivables and higher interest rates led to a strong return to profitability in the first half of 2022, with the sector’s average return on equity year-on-year rising to 16% from 10% in 2021 to stay close to its equity. 2019 level, i.e. 17%.

On the other hand, the agency mentioned that the average net interest margin in the largest banks rose to just 4% in the first half of 2022 against 3.8% in 2021, and this due to the insignificant effect of interest rate increases, which have relatively limited refinancing costs considering the high proportion of current accounts and low-yielding savings.

Operating profitability was lifted by the decrease in allocations to provisions for receivables, which on average make up 31% of the result before recognition of allocations (43% in 2021), the agency showed.

The agency doubts that allocations to provisions for receivables are sufficient to cover credit risks given the sector’s restrictive operating environment and the deterioration of asset quality, noting that high inflation, the rise in interest rates and political instability are putting pressure on creditors as the average ratio (non-performing loans/loans) for the nine largest banks (excluding STB Bank) increased by 150 basis points to 11.7% at the end of 1. half year 22 against an industry average of 13.1%.

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