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Moody's Investors Service says that subdued economic growth, evolving regulation and significant asset risk pressure will maintain pressure on Tunisian banks' performance.
Moody's report, entitled "Banks - Tunisia: Subdued economic growth, evolving regulation and significant asset risk will maintain pressure on banking performance," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
"Asset risk is a major issue facing Tunisian banks, and we expect non-performing loans to remain at high levels -- at around 17% of gross loans at the end of 2016," says Oliver Panis, Vice President -- Senior Credit Officer at Moody's. "These high nonperforming loan (NPL) levels reflect challenging economic conditions amid historically loose regulation that has contributed to weak loan underwriting practices."
Tough operating conditions in Tunisia will continue to pressure domestic banks. In November 2016, Moody's forecasted GDP to remain subdued at 2.1% in 2017, from 1.4% in 2016, as 2015 terrorist attacks depressed private investor and consumer confidence, and high unemployment weigh on the economy.
The rating agency notes, however, that the modest recovery in 2017 will be driven by mining and energy sectors, some stabilisation in tourism, and renewed investment support. The international community pledged around TND34 billion ($15 billion) towards Tunisian redevelopment at the Tunisia 2020 investor summit in November 2016.
Still evolving banking regulation, the phasing out of regulatory forbearance measures and weak governance at banks have posed significant credit challenges for Tunisian banks. While new regulatory reforms, developing Basel II and III prudential frameworks and facilitating the resolution of distressed debt, will start to address these issues over the coming quarters, they will take time to be fully implemented, according to the rating agency.
Capital ratios will remain modest, with regards to our expectation of volatile economic conditions and the banks' high level of problem loans. "In 2017, we also expect banks' profitability to stagnate, with a return on assets at around 0.9%, considering additional provisioning will be required after forbearance on problem loans in the tourism sector is lifted" says Olivier Panis. Moody's also expects liquidity levels to remain tight in 2017 and banks to maintain their reliance on central bank funding as credit growth remains higher than deposit growth.
