In a context of significant macroeconomic challenges, Tunisia’s banking sector has demonstrated solid performance over 2017 and 2018. However, banking activity still faces several challenges, and its resilience in overcoming these will determine the success of its evolution over the coming years. Ongoing liquidity insufficiency, coupled with credit risk and reduced levels of capitalisation are primary weaknesses. In particular, new requirements that seek to bring domestic regulations in line with international standards are likely to be difficult for some banking players, and may, as a result, promote more merger and acquisition activity.
Sector Structure
In order to strengthen the overall robustness of the sector, the Central Bank of Tunisia (Banque Centrale de Tunisie, BCT) has continued to apply structural reforms, many of which were introduced as part of the New Banking Law No. 2016-48, which started being implemented in mid-2016. These new regulations are aimed at further aligning the banking sector with Basel III requirements by the end of the decade.
Meeting these requirements presents both opportunities and challenges. The low level of financial services penetration, especially in the less developed interior regions, signifies untapped prospects for banking institutions to grow their market base. Despite the high number of banks operating in Tunisia, the sector as a whole has refrained from expanding credit allocation to some segments of the economy and often those that require it the most.
To this end, harnessing financial technology ( fintech) could significantly boost financial inclusion and improve accessibility, and a move towards consolidation would likely result in more solid banks that have the potential to leverage financial resources to a higher level of economic impact. Although most of the sector’s players seem to be resisting mergers and acquisitions at this point, it is expected that the sector regulator will continue to increase its push towards this over the coming years.
Performance
According to the BCT’s annual report for 2018, the financial sector’s total assets – including those of banks and other financial institutions – increased to 125.7% of GDP in 2018. Tunisia had a total of 42 financial institutions. Of these, there were 23 domestic banks, seven offshore banks, two operating as business banks, eight leasing firms and two factoring companies.
The banking sector’s net income rose by 16.8% in 2018 to settle at TD4.8bn ($1.7bn), up from TD4.1bn ($1.4bn) in 2017. Net interest income represented 51.6% of total banking income over 2018, down slightly from 49.7% in 2017. Banking commissions as a percentage of total income fell as well, from 22.9% to 21.9%. Gains on security holdings represented 14.3% of the sector’s income, down from 18% the year before. Banks’ portfolio income, meanwhile, grew from 9.4% to 12.2% of the total in 2018.
“Banks have performed well in Tunisia, in large part due to the rise of interest rates, which has helped banking margins,” Rym Gargouri Ben Hamadou, director of the corporate finance department at Tunisie Valeurs, told OBG. “Another factor is the trading on Treasury bonds. All banks now get financing with the central bank at low interest rates, and then they finance the Treasury at interest rates that are above 8% over five years, which means their trading margin is very good.”
Meanwhile, operating costs rose by 16.8% from TD2bn ($694.7m) to TD2.3bn ($798.9m) in 2017. This comes on the back of a 15.1% increase in 2016. Banks are aware that a number of pressing challenges will need to be addressed in the near term. In a report published in November 2018, international credit ratings agency Fitch stated that 2019 is likely to be a challenging year for the Tunisian banking sector, in large part due to an environment of tight liquidity.
Assets, Lending & Deposits
This situation has been caused in part by the slow progression of customer deposits relative to lending. This trend has characterised the last several years of activity, with the loan-to-deposit ratio reaching 131% in mid-2018. The BCT’s subsequent decision to establish a 120% limit on loans to deposits starting December 2018 was expected to blunt the growth of loan allocation in the market. However, according to Fitch’s analysis, this measure by itself will not be enough to increase the public’s confidence in the banking sector and attract larger volumes of deposits in the short term. Achieving this will prove critical to improving the overall stability of the sector.
Banking assets increased from TD121bn ($42bn) in 2017 to TD133.5bn ($46.4bn) in 2018, with roughly 91.8% of assets in the hands of domestic banks, according to the BCT’s 2018 annual report. More recent figures from the BCT’s “Financial Statistics Bulletin” showed that banking assets had reached TD123.4bn ($42.9bn) by February 2019. Loans to the economy rose from TD73.3bn ($25.5bn) in December 2017 to TD80.2bn ($27.9bn) in February 2019. Monetary deposits, meanwhile, increased from TD17.7bn ($6.1bn) in 2017 to TD18.2bn ($6.3bn) at the end of 2018, before falling back to TD17.7bn ($6.1bn) in February 2019. Quasi-monetary deposits advanced to TD40.8bn ($14.2bn) in February 2019, from TD37.3bn ($13bn) in 2017.
Challenges Ahead
During a hearing in a parliamentary commission in May 2019, Marouane Al Abbasi, the governor of the BCT, recognised that 2019 would probably be a difficult year for sector players, as they are forced to operate under a context of more restrained liquidity. In mid-February 2019 the BCT raised the key interest rate by 100 basis points, which marked the third hike within 12 months, taking the rate from 6.75% to 7.75% as monetary authorities attempted to rein in inflation and counter the rising trade deficit.
“The increase in borrowing rates led to record levels of profitability for the sector in 2018,” Mondher Ghazali, general manager of Union Internationale de Banques, told OBG. “However, 2019 will be a more difficult year as the growth of deposits has halved, and many banks will try to restrict credit access in order to comply with the new loan-to-deposit ratios imposed by the central bank.”
Improving Credit
One expected consequence of the country’s current macroeconomic situation is the overall weakening of the loan portfolio. Despite sustained positive performance, accumulated non-performing loans (NPLs) continue to drag on some sector players, especially state-owned institutions. In 2018 NPLs accounted for 14.6% of sector loans, representing a moderation from its 2015 peak of 16.6%. The problem is more severe within the country’s three state banks, which altogether had an NPL rate of 21% in 2015.
In the medium term, the central bank is gradually implementing its five-year strategy to restructure the public banks. It focuses, among other elements, on the improvement of internal risk-management mechanisms and better information systems. Sector stakeholders are also likely to move forth with the recapitalisation of public banks. In 2015 the Parliament approved the injection of €437m into two state-controlled banks: Société Tunisienne de Banque and Banque de l’Habitat (BH). The IMF has estimated that restructuring state banks could cost more than €870m in total.
Privatisation of state banks could be fundamental in helping to be able to generate such a financial injection. “BH is the best candidate for privatisation because of its portfolio and financial state. It is already managed like a private bank,” Gargouri told OBG. “The state could sell this bank to an investor, and then use the funds from this to restructure the other two public banks, which are in a worse financial situation,” she added.
In the initial draft of Tunisia’s 2019 Finance Law, published in late 2018, the government announced the establishment of the Banque des Régions, which would have initial capital of TD400m ($138.9m). A later draft of the proposed budget specified that the bank’s main mission would be to support employment creation in the country’s poorest regions through the financing of entrepreneurial projects. However, the legislation is expected to be shelved until after the parliamentary and presidential elections scheduled for late 2019.
Regulation
Over recent years regulatory moves by banking authorities have also targeted more pressing challenges among private banks, namely a lack of adequate liquidity, persistently high NPL rates and insufficient capitalisation. Mid-2016 saw the introduction of the New Banking Law No. 2016-48, which has allowed for the implementation of significant structural changes to the regulations governing the sector. One major amendment introduced was the increase of minimum capital requirements, which were doubled from TD25m ($8.7m) to TD50m ($17.4m). The BCT also reserves the right to request even higher levels of capitalisation for banks considered to be in a riskier situation.
Equally important have been the new governance requirements incorporated into the law, which include the obligation for banks to separate the role of chairman of the board of directors from that of director-general. In 2017 the banking authorities also created a new deposit guarantee fund to protect bank deposits of up to TD60,000 ($20,800). The move will reportedly cover around 95% of domestic banking clients. In a move that may accelerate digitalisation, the new banking regulation allowed for the establishment of non-banking payment institutions, which is likely to push banks and new competitors to develop mobile payments and other digital solutions. “The digitalisation of the financial sector is happening, and the first outcomes have been positive. We now need some support from all the sectors of the economy in order to better integrate innovative solutions and increase the level of transparency in the long term,” Hicham Seffa, CEO of Attijari Bank, told OBG.
Another key development has been the tightening of prudential rules by the BCT. In 2018 the banking regulator announced it would push for stricter deposit-to-credit ratios, with a limit of 120%. “This required banks to reduce their credit allocation and increase provisions,” Bassem Neifer, an analyst at Alpha Value, an independent equity research firm based in Tunisia, told OBG.
The move had substantial repercussions for banking stocks during the last quarter of 2018. “A large number of investors dropped banking stocks; but banks, in order to sustain their shares, dropped other stocks, which in turn affected the overall performance of the stock exchange,” Neifer said. Another significant ratio change is the maximum percentage of Tunisian banks’ loan portfolio that can be allocated to other companies in their group, which was reduced from 75% to 25%.
Seeking Consolidation
The large number of players not only creates a difficult competitive environment for the banking sector, but also has a number of negative consequences on the impact of banking activities on the economy at large. There are 23 commercial banks vying for market share of the country’s population of 11.6m, resulting in strict competition between banks. The BCT is well aware of the benefits that may arise from having stronger banking institutions, and the IMF has also recommended that consolidation of the banking sector be pursued as government policy.
However, the country’s broader economic structure prohibits a higher level of merger and acquisition activity in the banking sector. Since large-scale industrial conglomerates are major stakeholders in some of the biggest banks in the country, and depend on those relationships to finance intergroup activities, any moves towards consolidation are difficult to achieve, independent of their economic sense. The fact that these large conglomerates compete with each other across different sectors of the economy makes the prospect of merging of their banking interests unattractive.
Microfinance
Despite the crowded playing field, existing players have not been able to fully serve the interests of the market as a whole: according to a study by the World Bank, 36% of Tunisians were part of the formal financial sector in 2018. However, the economic and political changes following the 2011 uprising have helped to propel the development of the microcredit segment, which can significantly boost financial inclusion. The first critical step was taken with the enactment of the Microfinance Law in 2011. This regulation established the Microfinance Supervisory Authority, which handles sector oversight and assigns operating licences to private institutions wanting to operate as microcredit providers.
Setting these rules has allowed the market to develop rapidly. As of April 2019 the total loan portfolio of the microfinance segment exceeded TD1bn ($347.3m), with some 600,000 customers (see analysis). In order for microfinance activities to have an even broader impact, the authorities will need to create the necessary conditions that allow for the development of a wide variety of product lines.
“Allocating credit is not enough. Microfinance players should provide other offerings as well, like savings and micro-insurance,” Sehl Zargouni, CEO of Baobab Tunisie, a microfinance provider, told OBG. “Financial inclusion must involve all these other types of products in order to accommodate the specific needs of different populations.”
Innovative solutions from fintech players should also help to bridge gaps and penetrate the unbanked population. Many stakeholders have already identified the need for the central bank to update regulations to keep pace with new developments in fintech. “Tunisia is in need of the development of secure, innovative, cashless payment methods; the involvement of administration, banks and technical operators; as well as a revised framework that protects both institutions and consumers from fraud and cybercrime,” Habib Ben Hadj Kouider, CEO of Banque Nationale Agricole, told OBG.
Islamic Finance
Customer demands are also being addressed through the expansion of Islamic banking, which is gaining momentum in Tunisia, with a growth rate well above that of the broader sector. Under the 2016 Finance Law, regulators established the necessary legal framework to support the segment. There are now three sharia-compliant banks operating in the Tunisian market: Banque Zitouna, Al Baraka and Wifak Banque. As of late 2016 they accounted for roughly 6.5% of total banking assets, and it is estimated that the segment will account for around 15% of the total by 2022. If the segment continues to perform well, it is possible that traditional banks will begin to introduce their own sharia-compliant offerings. According to the existing regulations, commercial banks can open sharia-compliant branches of activity, which would put them in direct competition with current market operators. “In the near future, I expect that a number of traditional banks will open participative windows for Islamic finance,” Ghazali told OBG.
Leasing Segment
The leasing segment has undergone consecutive years of development and is an important segment of the financial sector. According to the BCT’s 2018 annual report, there were eight leasing firms operating in the market. Total lending by the segment to the economy rose by 4.8% in 2018 to TD4.5bn ($1.6bn), from TD4.3bn ($1.5bn) in 2017 and TD3.5bn ($1.2bn) in 2016. Bank resources accounted for 52.7% of the figure, while bonds represented 30.9%. However, the country’s current economic difficulties are likely to impact leasing companies in the coming months and years. “Liquidity problems across the economy mean that the companies will face difficulties in repaying their leasing financing,” Neifer told OBG.
Leasing companies have had to endure the comparative disadvantage of not being able to borrow directly from the BCT, as traditional banking institutions do. Because they are limited to obtaining finance from commercial banks, leasing firms are subjected to higher interest rates. And with the BCT increasing its benchmark interest rates, leasing firms have seen their profits decrease. Fearing the long-term sustainability of the leasing business, sector stakeholders have been discussing possible solutions with the BCT. One of their goals is for the regulator to allow leasing firms to refinance loans that they owe to commercial banks.
Outlook
The banking sector will continue to grapple with a number of pressing challenges in the coming years, stemming in large part from weaknesses in the broader economy, which raises banks’ portfolio risk. Although the central bank is likely to continue to push for sector consolidation, in order to strengthen the sector’s players and boost overall stability, it is uncertain when a clear move towards consolidation will begin to take place. For the moment, having a large number of inadequately financed banks will continue to prevent the sector from making a more complete contribution to the economy.
There are, however, a number of opportunities in emerging segments. Notably, Islamic finance and microcredit are helping to reach Tunisia’s unbanked customers. Fintech operations and non-bank payment branches are similarly being deployed in areas where traditional banks have not run profitably in the past, helping the sector find new revenue streams over the medium term. In the immediate future, however, the sector’s largest players will likely be allocating a fair amount of their resources to adapting to the central bank’s new prudential rules and further aligning with Basel III requirements.
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