Taking care: Reforms resulting from the 2016 Banking Law will grow niche segments and align the sector with international norms

Tunisia’s banking sector has experienced positive growth in recent years, with 2017 proving to be another strong period on many fronts. Several risks, however, still threaten the sustainability of this growth trend and the overall health of the sector, including a reduction in available liquidity, low levels of capitalisation and credit risk.

In an effort to address these issues, the Banque Centrale de Tunisie (BCT) has been implementing significant structural reforms, laid out in the New Banking Law No. 2016-48, as well as enforcing additional measures along with other sector players since the law came into force in July 2016. Many of these reforms are geared towards achieving Basel III compliance by the end of the decade.

The financial system’s relatively low penetration rate points to extensive greenfield opportunities, which are likely to attract new players in niche segments such as Islamic finance and microfinance in the near future. As for the banking industry as a whole, observers tend to agree on the inevitability of future mergers, which will contribute to the solidification of more resilient actors.

INCOME & PROFIT GROWTH: According to the BCT’s 2016 annual report, which was released in February 2018, the sector’s net banking income was up 12.2% in 2016, from TD3.10bn (€1.2bn) to TD3.47bn (€1.3bn). “This performance, however, is to be put into perspective with an increasing rate of inflation and a deterioration of credit quality,” Salem Bessaoud, director of Valoris Consulting, told OBG.

Yet, as the BCT revises and tightens risk-management policies, credit quality is likely to improve. “The structure of net banking income is changing, as the share of net interest income is declining. This is due not only to stricter risk management rules, but also because of the reduction in available liquidity in recent years,” Malek Bakir, business analyst at the European Investment Bank, told OBG. Net interest income accounted for 50.7% of total net banking income in 2016, down from 54.6% in 2015, while 24% came from commissions, 16.8% from gains on securities holdings and 8.5% from portfolio income. Meanwhile, operating costs stood at TD1.7bn (€652.7m) – up 11.6% on 2015 – and equivalent to 48.9% of net banking income, similar to the 49.2% recorded in 2015.

The sector’s overall net profit was up 21.2% in 2016, totalling TD779m (€299.1m). This resulted in a return on assets of 1%, in line with 0.9% the previous year, and a return on equity of 10.8%, up slightly from 10.2% in 2015.

ASSETS, LENDING & DEPOSITS: According to the January 2018 financial statistics bulletin issued by the BCT, total banking sector assets were worth TD107.67bn (€41.3bn) in November 2017, up 9.3% from TD98.51bn (€37.2bn) in December 2016 and up 21% on TD89.01bn (€34.2bn) in December 2015.

Loans to the economy totalled TD72.13bn (€27.7bn) in November 2017, representing a 10.6% rise over TD65.21bn (€25bn) at end-2016 and 21.5% over TD59.35bn (€22.8bn) at end-2015. Bank lending to the government grew at a slower pace, from TD8.7bn (€3.3bn) at the end of 2016 to TD9bn (€3.5bn) in November 2017, a 3.4% increase.

Monetary deposits stood at TD16.53bn (€6.3bn) as of November 2017, up 7.7% from TD15.35bn (€5.9bn) at the end of 2016 and 17% above the TD14.13bn (€5.4bn) recorded in December 2015. Quasi-monetary deposits, meanwhile, reached TD36.1bn (€13.9bn), an increase of 3.8% over TD34.78bn (€13.4bn) in December 2016 and 12% more than TD32.24bn (€12.4bn) at end-2015.

LIQUIDITY: While many key metrics have improved, the banking system has experienced a shortage of liquidity in recent years. “Since the 2011 revolution all banks have been suffering from a shortage in available liquidity,” Zouhair Ouakaa, director-general of Banque Tuniso-Libyenne, told OBG. As a result, funding by the BCT grew to around 8% of total banking system liabilities as of February 2017, a significant increase from 0.6% in 2010. This is due to factors such as a large current account deficit – standing at 10.3% of GDP by the end of 2017 – and coincident financial needs of the government. For the first time in Tunisia, the government signed a convention with 13 local banks in July 2017 to help finance the state budget that will see a €250m loan spread out over three years.

In its 2016 annual report, the BCT pointed to the growing share of long-term credits in total lending to the economy, including housing and consumer credits, which also reduces liquidity in the short term. Transformation risk has been further exacerbated by banks’ increasing reliance on money markets to ensure their credit coverage ratio, while deposits have fallen to 80.4% of total coverage. However, the BCT reported that all banks respected the regulatory liquidity ratio of 70% in 2016. If economic growth continues to pick up, in part through a recovery of key sectors such as tourism and phosphate, the liquidity situation is likely to improve.

MARKET STRUCTURE: Tunisia’s market hosts 23 onshore banks and seven offshore banks. Of the onshore institutions, 18 are universal service banks, two are specialised in microcredit financing and three are sharia-compliant. In terms of ownership, the onshore entities can be categorised as seven public, three private, three mixed and 10 foreign banks. The newest market entrant is Wifak Bank, an Islamic institution that began operations in 2016 following the transformation of former leasing company El Wifak Leasing in 2015.

While market-wide figures for 2016 were not available at the time of publication, data for Tunisia’s 11 listed banks – which accounted for 86.5% of the total assets in 2015 – indicate that the largest player in the sector was Banque Internationale Arabe de Tunisie (BIAT). This entity was the leader among listed banks in 2016 as well, including in terms of lending for the first time in recent years, according to ilBoursa, a site that provides information on the Tunis Stock Exchange. With a loan book of TD7.7bn (€3bn), BIAT was responsible for 14.8% of total lending for listed banks, and it was up 16.6% over 2015. The largest shareholder in BIAT is the Tunisian conglomerate Mabrouk Group.

The second-largest listed bank was the majority-state-owned Banque Nationale Agricole, with a market share of 14% in terms of 2016 lending, followed by the public Banque de l’Habitat, which, at 12.1%, pushed private Amen Bank to fourth (11.3%).

CONSOLIDATION: Tunisia’s banking sector is composed of a large number of actors, given the domestic market of 11.4m people. “A major problem in the banking sector is tight competition. The BCT should further increase minimum capital requirements in order to encourage consolidation of the sector,” Hicham Seffa, CEO of Attijari Bank, told OBG.

While consolidation has been widely discussed, several obstacles have prevented such mergers from occurring in practice. According to Bessaoud of Valoris Consulting, the shareholders of many banks represent large industrial groups that rely on horizontal integration to compete with each other, making mergers between those banks unlikely. Regarding former development banks that have transformed into universal banks, Bessaoud underlined that these banks continue to suffer from insufficient critical mass, although the specificities of their shareholding base, which includes various sovereign foreign investors, do not tend to encourage mergers either.

The government, for its part, has announced the possible cession of its shares in some public banks, depending on the results of their ongoing restructuring programmes. Local media has reported that plans to cede the government’s stakes in Banque Zitouna, Banque de Tunisie et des Emirats, and Tunisian Foreign Bank are likely to move ahead in 2018.

In general, the country’s banking industry continues to suffer from low levels of capitalisation. The tightening of prudential ratios, along with a series of regulatory improvements that aim to achieve full compliance with Basel III norms by 2020, are meant to incentivise mergers within the banking sector. The advantages of such a shift are plenty.

“As the Basel II and Basel III accords increasingly become implemented in Tunisia, more banks will merge and the sector will consolidate. As banks consolidate and grow to a decent size, they will be increasingly capable of financing large projects in the economy, as well as accompanying Tunisian companies when they expand internationally,” Ahmed Rjiba, CEO of Banque de l’Habitat, told OBG.

BAD LOANS: Non-performing loans (NPLs) have been another significant obstacle to sector growth in recent years. This is particularly the case for stateowned banks, which accumulated politically tied lending prior to the country’s 2011 revolution. The BCT estimates that NPLs accounted for an average of 15% of total sector liabilities in 2016, but up to 20% of public banks’ liabilities.

Stakeholders have taken steps to tackle the issue of high levels of NPLs. The BCT has spearheaded a number of initiatives to improve risk management, including the establishment of an internal counterparties rating system within each bank, which has been in place since the end of 2017. Although a new law on public banks’ recovery of unpaid debt was not ultimately approved – in part due to lobbying by the tourism sector, which accounted for 51.4% of all receivables in 2016 – the issue is nonetheless being addressed internally by banks in the country, in collaboration with the BCT. A department dedicated to the recovery of NPLs, for instance, has been created within each public bank.

According to the BCT, the improvement of internal controls and risk management, along with more efficient information systems, are the main axes of the BCT’s five-year plan to restructure the public banks, a programme launched in 2015. Another important principle is the recapitalisation of public banks, which was already carried out at Société Tunisienne de Banque and Banque de l’Habitat in 2015, with capital injections of TD756m (€290.3m) and TD110m (€42.2m), respectively. Improvements have been noticeable, as exemplified by the drop in the average migration rate of short-term receivables to NPLs from 2.9% in 2015 to 1.9% in 2016.

REGULATORY FRAMEWORK: To address the sector’s major challenges – liquidity shortages, low levels of capitalisation and NPLs – the BCT published a new regulatory framework that aims to align the banking industry with international best practice in terms of resolution, security, recovery and governance. The new Banking Law, which came into effect in July of 2016, brought sizeable change to the sector, including in terms of minimum capital requirements; these doubled to TD50m (€19.2m), and the BCT can demand higher levels than the minimum should it judge a bank’s risk profile requires it.

The recent law also strengthened the BCT’s supervisory and governance power over banks, with a new requirement mandating the separation of the role of director-general from that of chairman of the board of directors. Implementation of the Banking Law took place throughout 2017, including setting up a new deposit guarantee fund that will protect deposits of up to TD60,000 (€23,000) in the event of a bank failure. According to the BCT, this amount should provide coverage to about 95% of local customers. Strategic objectives include a more efficient financial system to service the economy, which is why the law also authorises the creation of new non-bank payment institutions, aimed at lifting the banks’ monopoly in terms of payment, and developing services such as pre-paid cards and mobile payments. Further circulars are scheduled to be issued over the course of 2018 to continue implementing the new law’s provisions.

The BCT has also been carrying out its fiveyear banking supervision plan, running from 2016 through to 2020, that looks to strengthen the prudential framework of the sector for better risk coverage. This will include market-based risks, which will reportedly be subject to a new circular in 2018.

ISLAMIC BANKING: The 2016 Banking Law also created a framework for Islamic banking, which is set to boost the development of this segment. Tunisia is home to three sharia-compliant banks: Al Baraka Bank, Wifak Bank and Banque Zitouna, which together accounted for 5.1% of total banking assets in 2016, up slightly from 4.9% in 2015. The segment’s overall net income has experienced considerable growth in the years since 2014, increasing by 48.5% in two years to TD144m (€55.3m) in 2016.

Banque Zitouna was the Islamic banking leader in 2015, with assets of TD1.8bn (€691.1m). This figure grew to TD2.3bn (€883.1m) in 2016, according to the bank’s most recent annual report, but net banking income dropped from TD101.7m (€39m) in 2015 to TD78.4m (€30.1m) in 2016.

While the Islamic banking segment continues to boast strong growth potential, competition is expected to increase, as the new Banking Law allows traditional banks to operate in this segment as well.

MICROFINANCE: As another developing segment with high potential, microfinance is set to increase financial inclusion by reaching out to the 34% of Tunisians who still lack access to formal financial services. Prior to the adoption of the Microfinance Law in 2011, the segment was made up of non-profit microfinance cooperatives, including a national lender, Enda Tamweel, and around 300 small associations. The 2011 law allowed private companies to enter the market and established a dedicated regulator, the Microfinance Supervisory Authority (Autorité de Contrôle de la Microfinance, AMC). The segment counted six private micro-lenders in 2017, and the number of associations has roughly halved since 2011. According to the AMC, the microfinance segment served 423,834 clients as of September 2017, up 15% from a year prior, and the average loan value was TD1493 (€573).

Notwithstanding a sizeable potential for growth, Sehl Zargouni, the CEO of Microcred, pointed to several challenges facing microfinance, including current regulations. For instance, the value of loans issued by micro-lenders is capped at TD20,000 (€7680). This limit was established under the 2011 law and has not taken into account the high levels of inflation since, leading a number of segment players to propose a new cap of TD100,000 (€38,400) to the regulator in early 2018. According to Zargouni, the segment is also struggling to finance itself, not least because microfinance firms are not allowed to set up deposit accounts.

While acknowledging the obstacles, Mohammed Taha Allani, director of operations at Taysir Microfinance, suggests that tie-ins with other stakeholders could provide a route for innovation in the segment. “Taysir Microfinance signed a partnership with mobile operator Ooredoo and the Tunisian Post to develop mobile microfinance in 2014. Such innovations will be paramount to the success of microfinance in Tunisia, which requires the regulation to evolve to allow the development of more sophisticated products,” he told OBG.

LEASING: Tunisia’s leasing segment is well developed, with a eight dedicated leasing firms and a penetration rate of 3.5% of GDP. Total lending to the economy by the segment equalled TD4.1bn (€1.6bn) as of November 2017, of which 89.4% consisted of leasing operations and 9.2% was real estate lending. Overall lending to the economy was up 13.9% from TD3.6bn (€1.4bn) at the end of 2016.

Leasing firms’ assets grew by 21% to TD1.79bn (€687.3m) in 2016, according to a mid-2017 report by Tunisie Valeurs Leasing, which estimated that assets would reach TD2.09bn (€802.5m) by the end of 2017, an increase of 17%. However, this performance must be looked at within the context of inflation, according to Badreddine Chahed, the director of risk supervision at Modern Leasing. He noted that about 80% of the country’s leasing base is vehicles, which have seen rising values due to high inflation.

Tunisie Valeurs Leasing maintained its position as the largest player in the sector in 2016, accounting for 22.1% of total leasing firm assets, followed by Hannibal Lease with 20.8% and Arab Tunisian Lease with 14.8%. “Competition in the sector is likely to be exacerbated in the future, as almost all the leasing companies have already upgraded their IT system in order to better select their clients,” Rym Gargouri Ben Hamadou, director of the corporate finance department at brokerage Tunisie Valeurs, told OBG.

Banks have a comparative advantage in terms of financing costs, as they are able to borrow directly from the BCT, while leasing companies must borrow from commercial banks at a higher rate. However, leasing firms have other advantages, according to Chahed, as they typically offer faster services and do not require guarantees from borrowers.

One of the segment’s barriers in recent years has been stagnating profitability, at around 3% since 2013, compared to 4% in the years before. According to Chahed, this is a consequence of higher financing costs faced by leasing companies, as the BCT has raised the country’s policy rate. Another issue takes the form of state-led infrastructure projects. “The leasing segment suffered in the second half of 2017. Payment delays on government construction projects were costing leasing companies a lot of money and affecting their performance,” Habib El Amri, general manager of Modern Leasing, told OBG. “Difficulties will continue into 2018, as the government has delayed a lot of building and public works projects.” In the meantime, Gargouri Ben Hamadou indicated that the BCT has tightened risk management rules for the leasing segment, which is leading to healthier growth, and is likely to have a positive impact on profit margins in the future.

OUTLOOK: Tighter supervision is helping to improve credit quality, while the alignment of locals norms with international standards will contribute to a smaller, more resilient banking system in the future. However, barriers to consolidation, such as shareholders that rely on horizontal integration and a lack of synergy among public banks, may limit such activities in the short term.

In the longer term, the financial system will be instrumental to diversifying the economy’s sources of funding away from traditional banks, with more inclusive opportunities stemming from the Islamic banking, microfinance and leasing segments.