Tunisia takes steps to bolster the banking sector
Authorities in Tunisia are considering a $1.1bn recapitalisation of state-owned banks over the next two years in an effort to help reduce risk in the country’s financial sector and reassure investors. Equivalent to 2.6% of GDP, the funds could provide the boost that the three public banks need to strengthen their balance sheets, reduce the impact of non-performing loans (NPLs) and begin to scale back their heavy reliance on central bank liquidity injections.
The recapitalisation plan is a key element of a broader strategy to overhaul the sector, as outlined by Tunisian officials in a letter to the IMF published in June. The IMF’s decision to award the North African country a two-year, $1.74bn stand-by agreement, partly on the basis of the government’s promises to address weaknesses in the banking system, suggests that the benefits of reform may be substantial.
Audit of state-owned lenders planned
A central component of the government’s plan is the audit, reform and possible restructuring of the three state-owned banks: the Société Tunisienne de Banque (STB), Banque Nationale Agricole (BNA) and Banque de l’Habitat (BH).
These institutions have faced complications in recent years partly due to their heavy lending to the tourism industry, which has been hit by both domestic political instability and the economic slowdown in Europe. Moreover, as the government noted in its June letter, state-owned banks have been subject to “poor governance in the past that led to a significant accumulation of NPLs”. Today, the three public banks represent nearly 40% of sector assets but have the highest rate of NPLs, at around 30% in mid-2013, compared to a 9% NPL rate in the private sector.
Strengthening the position of these three banks is a priority and part of a broader effort to stimulate economic growth. As such, the government is preparing to inject more than $1bn, in line with the IMF’s 2012 Financial System Stability Assessment of Tunisia.
Ultimately, the government will base the amount and timing of recapitalisation on outside audits to be carried out by the private sector. The STB will be reviewed by Pricewaterhouse Coopers; the BNA by a group represented by Finance et Gouvernance, and including Bain & Company and Tunisian consultancy cabinet NEJI Fethi; and the BH by Roland Berger Strategy Consultant/FICOM and ORGA Audit.
Once the results are known, the government will have one of three options: recapitalise the banks in their existing form to address weak loan quality and absorb any future losses, merge two or more public banks, or sell off a portion of the state’s interest in the entities. The final recapitalisation amount can be revised up or down, or even eliminated entirely, depending on the direction the state chooses to take. In mid-2013 the government has stated that it plans to generate the initial recapitalisation funds through the issue of non-negotiable government securities.
Broader reform package
The audit of the state-owned banks is just one part of a larger programme that has been set up to improve the soundness of the broader banking sector. For example, the government announced in June that it would create an asset management company that will absorb bad tourism assets in exchange for state-guaranteed bonds. The central bank (Banque Centrale de Tunisie, BCT) estimates that the tourism sector accounts for around 20% of all NPLs, and this move could help to streamline bank assets considerably in the medium term.
The BCT has also said it will introduce mechanisms to more accurately forecast bank liquidity needs in its effort to gradually reduce its considerable liquidity injections. Furthermore, starting in late August 2013, banks were required to guarantee at least 10% of new central bank refinancing through government securities, with plans to increase this to 20% for each bank by December 2013. The BCT aims to raise this progressively over the next two years in an effort to eventually eliminate the use of loans as collateral for central bank financing. Finally, the BCT also aims to purchase long-term government bonds and loosen the creditor interest rate ceilings in the short term, as part of a plan to boost liquidity in the banking sector and encourage interbank transactions.
These reforms arrive on top of previously announced commitments such as collective provisioning requirements to protect against latent risk and a gradual increase of the capital adequacy ratio from 8% to 9% by 2013 year-end and 10% in 2014. The reform programme will be difficult to implement given the current economic environment, yet the government has committed to a bank overhaul process that will be necessary to stimulate economic recovery and rebuild fiscal and external buffers.
An earlier version of this article reported that the planned audit of the BNA would be conducted by a consortium composed of Bain & Company and Tunisian consultancy cabinet NEJI Fethi. We wish to clarify that the France-based Finance et Gouvernance is also a member of the group, and represents the consortium.