Recent reforms shore up Tunisia's banking sector

The banking sector in Tunisia has benefitted from a history of relative stability, thanks to a steady hand from the regulator, a focus on banking fundamentals and a comparatively high level of sophistication, particularly in terms of services like leasing. In 2016 several indicators continued to rise, including assets and lending. However, select weaknesses, in terms of both public sector institutions and competition, have become more prevalent and are prompting a period of change. June 2016 also saw the passage of a new law that has made wide-ranging changes to the banking regulatory framework, and further shake-ups are in the pipeline as the sector moves to try to reach Basel III norms by the end of the decade.

The industry’s three main publicly owned financial institutions have also been undergoing restructuring and modernisation efforts, following an audit of their finances in 2014 against a backdrop of high non-performing loan (NPL) ratios. The industry, despite currently facing a tight liquidity environment, continues to see new players enter the market, attracted in part by the limited level of financial inclusion, which points to extensive greenfield opportunities.

Indicators

Total banking sector assets were worth TD96.4bn (€41.3bn) as of November 2016, according to latest available data from the Banque Centrale de Tunisie (BCT). This was up 8.3% from TD89bn (€38.2bn) at the end of 2015 and 16.3% on TD82.9bn (€35.6bn) the year prior to that. Assets are also up from TD58.1bn (€24.9bn) at the end of 2010, equivalent to a nominal compound annual growth rate of 8.8% for the 5-year period between 2010 and 2015.

Bank lending to the economy accounted for TD65.1bn (€27.9bn) of assets as of December 2016, according to data from the BCT. This was up from TD59.4bn (€25.5bn) a year earlier, a year-on-year (y-o-y) rise of 9.6%, and up 16.3% on the figure for the previous year at TD56bn (€24.1bn). Bank lending to the government has been rising even faster, standing at TD8.5bn (€3.6bn) in November 2016, up from TD7.2bn (€31.bn) at the end of 2015 and TD5.8bn (€2.5bn) at the end of 2014. Short-term lending made up 42.7% of total lending to the economy, and medium- and long-term credit accounted for 57.3% in 2015, according to figures from the industry representative body the Tunisian Professional Association of Banks and Financial Institutions (Association Professionnelle Tunisienne des Banques et des Etablissements Financiers, APTBEF). Monetary deposits were worth TD14.6bn (€6.3bn) as of November 2016, up 3.5% from TD14.1bn (€6bn) at the end of 2015 and a rise of 10.6% from TD13.2bn (€5.7bn) a year before that. Quasi-monetary deposits, including term deposits and savings accounts, stood at TD34.1bn (€14.6bn) in November 2016, up from TD32.2bn (€13.8bn) and TD31.3bn (€13.3bn) at the end of 2015 and 2014, respectively.

Profitability

Sector profits were up 14.9% for the year in 2015, totalling TD654.1m (€280.5m), according to the most recent APTBEF figures, leading to a return on assets of 0.9%, up from 0.8% in 2014, and a return on equity of 10.1%, down from 11.3%. Both indicators, though having fallen sharply in 2013, are up substantially on 2011 figures, and are roughly in line with those from Tunisia’s regional peer Morocco. Net banking income, which is income before operating costs, grew to TD3.11bn (€1.3bn) in 2015, up 6.8% on the previous year. Growth was also down from 16.4% in 2014, in large part a result of a fall in net interest income growth to 1.9%, from 8.1% the previous year. Such net interest income accounted for 54.7% of total net banking income, while 22.5% was accounted for by commissions, 16.5% by gains on securities holdings and 6.7% by portfolio income. Operating costs, meanwhile, rose by 7.9% y-o-y to TD1.66bn (€711.9m), or 53.5% of net banking income, up from 52.8% the previous year.

Liquidity

The banking system has seen a reduction in available liquidity in recent years due to factors such as a large current account deficit, which reached a high of around 9% of GDP in 2014, according to latest available World Bank data, although this has improved marginally to just under 9% in 2015. Mohammed Salah Souilem, director-general of monetary policy at the BCT, told OBG that other drivers of this trend include rising cash circulation, which he said was growing at around 8-10% per year, as well as the growing domestic financing needs of the government, which was taking further money out of the system.

Kmar Zaouali, director of planning and management control at Banque de l’Habitat, said liquidity continued to tighten. She told OBG, “Most banks are facing a similar situation and BCT provisions of liquidity for the market remain substantial.” Souilem also told OBG that outstanding refinancing to the sector from the central bank stood at around TD7.3bn (€3.1bn).

However, he argued that the situation would likely improve as economic growth picks up in the coming years, citing signs that tourism receipts and phosphate exports were on the path to recovery. “There is likely to be an improvement in the external sector in 2017, which will be positive for liquidity,” he told OBG, adding that the government may also take measures in 2017 to limit the use of cash in some segments, which would further improve the situation.

Retail Market

Retail lending accounted for nearly a third of lending at TD20.4bn (€8.7bn) as of December 2016, with credit to companies and professionals accounting for the remainder, according to the BCT. Despite its smaller size, Lilia Kamoun, senior analyst at Tunisie Valeurs, a stockbrokerage, said the retail sector was currently more promising than lending to companies. She told OBG, “The retail sector is characterised by lower risks and higher profits than business lending, and all banks have increased their focus on it in recent years to support their activity.”

Mortgage loans were the largest category of retail credit as of December 2016, at TD9.1bn (€3.9bn), followed closely by housing refurbishment loans, which were worth TD8.4bn (€3.6bn). Consumer credit, excluding car loans, was worth TD2.64bn (€1.1bn), while the value of outstanding vehicle loans stood at TD292.77m (€125.6m). Surprisingly, given the limited growth most mortgage markets in emerging markets experience, mortgage and home improvement lending were not only the largest categories in the segment, but also the fastest-growing at an annual rate of around 10% in 2016. Zaouali told OBG that there was a great deal of competition in the segment, given the existence of guarantees and collateral in the form of the accommodation itself and borrowers’ salaries, which make such loans highly sought after by banks.

Sector Players

The country has a total of 23 onshore banks, in addition to seven offshore institutions. Sharia-compliant Wifak Bank is the newest financial institution operating in the country, following the acquisition of a new licence by former leasing company El Wifack Leasing in 2015. The most recent entrant prior to that was Al Baraka Bank Tunisia, which became an onshore bank in early 2014, previously operated in the country on an offshore basis and is part of the Bahrain-based Al Baraka Banking Group. The largest player in the sector is Banque Internationale Arabe de Tunisie (BIAT), with assets of TD9.84bn (€4.2bn) in 2015, according to the most recent APTBEF figures. This was equivalent to an asset market share of 13.2%, according to APTBEF figures, for total sector assets of TD74.6bn (€32bn) – lower than that estimated by the BCT. The largest shareholder in BIAT is Tunisian conglomerate the Mabrouk Group. The second-largest player is the majority state-owned Banque Nationale Agricole (BNA), with a market share in terms of assets of 11.1%, followed by the locally owned Amen Bank at 10.6%.

Consolidation

Given the large number of banks operating in the 11m-person market, consolidation is a widely discussed issue in the sector, although a number of obstacles to mergers help to explain why there has been little in the way of such activity to date. Prominent among these challenges is the fact that many local banks are not stand-alone institutions but are frequently owned by larger industrial groups that emphasise horizontal integration and are in competition with each other, making mergers between them unlikely. Habib Benhadj-Kouider, CEO of the BNA, told OBG, “Consolidation is inevitable; in fact it is necessary to improve the performance of the banking sector.”

Nadia Gamha, director-general for banking supervision at the BCT, told OBG that the institution was in favour of consolidation, which she said was necessary to allow Tunisian banks to accompany domestic firms abroad, adding that economies of scale would also improve profitability in the sector. However, she added that the central bank could not force any mergers, and was working instead to encourage consolidation by, for example, tightening prudential ratios.

State-Owned Banks

The Tunisian government remains an important player in the market, with four majority state-owned banks – the BNA, Société Tunisienne de Banque (STB), Banque de l’Habitat and Banque de Financement des Petites et Moyennes Entreprises – together accounting for 31.1% of total banking sector assets in 2015, the great bulk of which is accounted for by the first three. Such state-backed banks have faced strong headwinds in recent years, in part as a result of pressure prior to the country’s 2011 revolution to engage in politicised lending, which together with other lending practices brought about high NPL ratios.

In order to address this and put the segment on a firmer footing, in 2014 the authorities launched an audit of the three main state-owned institutions. The following year the government decided to restructure STB and Banque de l’Habitat, by recapitalising both banks with sums of TD756m (€324.2m) and TD110m (€47.2m), respectively. In April 2016 Banque de l’Habitat also issued TD60m (€25.7m) of subordinated debt to further boost its capital base.

BNA has yet to be recapitalised, but it is planning to sell a number of assets in coming years, which should raise new capital. Following the recapitalisations, all three banks were also internally restructured, with the goal of avoiding a repeat of past lending practices. Structural changes included the addition of independent administrators to their boards of directors – this change has now been extended to all banks under the new banking law (see analysis).

These administrators were also appointed as chairs of the banks’ respective internal audit and risk committees. Ahmed Rjiba, CEO of Banque de l’Habitat, told OBG, “The final version of the new banking law is the product of long discussions between the BCT and the APTBEF, representing the banks. The new law represents the most important banking reform in Tunisia in the previous few decades.”

Credit Risk

While the country has a credit registry covering roughly one-third of the adult population, three institutions have also hired a consultancy to establish a rating system for companies in each bank. Haykel Khadraoui, director of credit risk, evaluation and oversight at Banque de l’Habitat, told OBG in October 2016 that the establishment of the bank’s rating system should take around 20 months. In light of such measures, Gamha told OBG that she thought it was unlikely that Tunisia’s banks would see a return to their previously troubled situation. She said, “The banks’ main problem was credit risk, which is unlikely to re-emerge to the same extent as governance and risk management at the banks have been improved.”

Clear Improvement

As a result of such efforts, Banque d l’Habitat’s situation has witnessed particular improvement, with levels of activity having also grown substantially. Other banks and financial institutions have also seen similar success, and in relation to public banks, many private banks have successfully overcome existing financial obstacles and report being well-prepared going forward. In addition to the above measures being applied to all public banks, in 2015 Banque de l’Habitat launched a new risk management policy that focuses on three areas: stepping up collection efforts, including the creation of both a central and regional recovery team; unloading some of its bad debts to a collection company; and improving its credit management. This effort has had a substantial impact on the bank’s NPL ratio, which had fallen to 16% as of late 2016, down from 21.9% in 2013, and the bank is seeking to further reduce that figure to 12.6% by 2019, as well to achieve a 19% return on equity. Khadraoui told OBG that the institution was also in the final stages of selecting a consultancy to adopt best practises in managing market risk and operational risks.

Banque de l’Habitat is also seeking to reduce its costs by diversifying its deposit base in favour of more shortterm accounts. Currently, 68% of its deposits consist of long-term holdings, which attract higher interest rates. In addition, on the supply side the financial institution is also planning to diversify its product base and financing risk by reducing its reliance on property lending – which currently accounts for 42% of its loan book – while maintaining its status as the country’s main mortgage lender. The bank is also currently in the midst of an expansion programme under which it is opening around 10 new branches each year. Zaouali told OBG that its plans included reaching a total of 130 branches by the end of 2016, while also renovating and modernising existing branches.

BNA is also working on a number of changes, including a complete upgrade of its internal IT system and development of its activities abroad. However, there is still some concern that other public financial institutions will have a more difficult time dealing with their financial problems in the short term; BNA’s NPL ratio, for example, remained high at 24.8% at the end of 2015. “BNA’s situation has improved somewhat and it is working to clean up its loan book, but STB still has a long way to go with regard to provisioning,” Kamoun told OBG.

Islamic Banking

Tunisia is also home to three Islamic banks, namely Al Baraka Bank, which became an onshore Islamic bank in 2013; Banque Zitouna, which was established in 2009; and Wifak Bank, which restructured itself from a leasing company into an Islamic bank in late 2015. Together the three account for 4.9% of total banking assets, according to APTBEF figures, with Zitouna the largest by assets, which total TD1.8bn (€771.9m). While the Islamic banking segment has been in existence since 2010, Islamic financial institutions were regulated under the same guidelines as conventional banks until the passage of the new banking law in mid-2016, and the creation of a dedicated regulatory framework is set to give the segment a substantial boost (see analysis). The sector faces a challenge in the form of refinancing, as some decrees implementing a 2013 law on sukuk (Islamic bonds) have yet to be issued. Nevertheless, Kamoun said the general outlook for the development of the sector was promising. “Banque Zitouna has developed particularly rapidly in recent years, underscoring the potential of the market,” she told OBG.

Financial Inclusion

One attractive factor that Tunisia’s banking market benefits from, at least in the eyes of potential investors, is the sheer amount of potential greenfield growth. Levels of financial inclusion remain comparatively low by regional standards, with only 27% of Tunisians having a formal account at a financial institution in 2014, according to the most recent World Bank data, compared to 50% in neighbouring Algeria, for example. That being said, there are a number of recent developments that should help to boost inclusion in the coming years.

In 2016 the African Development Bank, for instance, signed an agreement with the Tunisian government for a €268m support programme to boost the development of the local financial sector; one of the two key elements of which will be to reduce regional disparities in the country by boosting access to finance in less-developed regions of the country.

Gamha told OBG that the new banking law, which provides a framework for the Islamic banking sector for the first time and creates new non-bank payment institutions (see analysis) will also help with financial inclusion. “Some parts of the population prefer to deal with Islamic banks, so the development of the sector will bring in savings and deposits that previously were not captured by the formal banking system,” she told OBG. “The new payment institutions will also enable people to make payments and transfers without having to open a bank account, and thus help non-bankable sections of the population access financial services.”

Credit Bureau

As financial inclusion widens, Tunisian lenders are focused on maintaining the health of their balance sheets. To help facilitate this, the country’s first credit bureau was established in 2016, which provides lenders with access to more comprehensive data on potential borrowers. The new platform includes lending and insurance data that should allow financial institutions to develop predictive models and other techniques to better assess credit risk, including data verification, and claims collection and management, among others (see analysis). Furthermore, the new credit bureau is expected to help credit and insurance institutions with their international risk management standards, moving them closer to Basel III requirements.

Microcredit

Recent changes to the local microfinance sector also support increased financial inclusion. Tunisia has a long-standing micro-lending sector that until recently was made up entirely of non-profit microfinance associations, comprising a single national lender, ENDA, and around 300 small local-level associations. Since 2011, however, the sector has undergone significant changes, as the government both issued a new development plan and passed a microfinance law that, among other things, set up a dedicated regulator, the Microfinance Supervisory Authority, and allowed private companies to enter the field.

The first private micro-lenders in the company were established in 2014 and there are now six operating in Tunisia, some of which are rapidly expanding, while the number of local associations has roughly halved. Major firms operating in the sector include Microcred, which as of September 2016 had around 8000 customers, with an average loan size of TD4500 (€1930), and eight branches, mostly in the interior of the country. Hassen Zargouni, chairman of Microcred’s board, told OBG the firm opened another branch in 2016 and planned to launch an additional four in 2017, during which it also intends to pass the 10,000-client mark.

The value of loans issued by micro-lenders is currently capped at TD20,000 (€8580); however, Zargouni added that he would like to see this rise to as much as TD150,000 (€64,300), as well as see a change in the law that allows for microfinance firms to set up deposit accounts. “Micro-savings would help address the most difficult challenge in the field, which is raising financing,” he told OBG. “Having to cover exchange rate risk has become expensive following the decline in the dinar, and has increased the cost of loans by 1%, so firms are tapping the local market more. However, only around half of lenders are doing well enough to obtain well-priced rates from local banks, which raises costs for micro-borrowers,” Zargouni added.

However, he noted that the sector was in contact with the regulator and said he was optimistic that changes raising the lending cap and allowing for micro-lenders to take deposits would take place in the coming years, while adding that debt issues could also emerge as a promising form of financing for the industry in the future. “The sector is still too young for major bond issues, but they are the future for micro-credit financing,” he told OBG. Kamoun told OBG that the segment holds substantial potential for growth. “The success of the sector will depend on institutions properly managing their risks; however, providing they do so, the outlook for the segment is promising, as the financial inclusion rate is low and there is a major shortage of banks in some areas of the interior of the country in particular,” she said, arguing that micro-lenders were well-placed to finance micro-entrepreneurs seeking to launch companies in these regions of Tunisia.

Leasing

In contrast to many other African emerging markets, Tunisia also has a well-developed leasing sector. Eight dedicated leasing firms are currently active in Tunisia, which is down from nine in 2014 as a result of El Wifack Leasing’s conversion into an Islamic bank in late 2015. Total lending to the economy by leasing companies was worth TD3.3bn (€1.4bn) as of August 2016, down slightly from TD3.4bn (€1.5bn) at the end of the previous year, but up from TD3bn (€1.3bn) at the end of 2014. Lending as of August 2016 consisted of TD2.8bn (€1.2bn) worth of leasing operations and TD446.9bn (€191.7bn) in real estate lending.

Tunisie Leasing was the largest player in the sector in 2015, accounting for 21.5% of leasing company assets, according to the most recent APTBEF figures, followed by Arab Tunisian Lease (15.5%) and Hannibal Lease (14.3%). At least six local banks also have leasing activities. While these have much lower market shares than dedicated leasing firms, their business is growing rapidly, and the value of outstanding leasing activity by such banks stood at TD699.5m (€300m) as of August 2016, up from TD429m (€184m) at the end of 2015 and TD376.4m (€161.4m) in 2014, not far short of a two-fold expansion in just 20 months.

In addition to their own leasing activities, Tunisian banks are also indirectly active in the sector through the large stakes they hold in major leasing firms operating in the country. For example, Tunisie Leasing forms part of the TLG Financial Group, which in turn is majority-owned by Tunisia’s Amen Group. The latter firm also owns the country’s second-largest bank of the same name. Arab Tunisian Bank, meanwhile, is the largest shareholder in Arab Tunisian Lease with a stake of 32.6%; BNA also holds a 10% stake in the firm.

The performance of the Tunisian leasing segment has been relatively solid in recent years, albeit with a degree of stagnation in terms of profits. Net leasing income rose by 10.7% in 2015 – excluding El Wifack Leasing, which transformed into an Islamic bank late in the year – to TD132.1m (€56.7m), compared to growth of 8% the previous year, according to the most recent figures from APTBEF. However, profits fell by 0.7%, again excluding El Wifack Leasing, to TD42.8m (€18.4m), leading to a return on assets of 1.3%, down from 1.5% in 2014, and a return on equity of 9.1%, down from 9.8% in 2014.

One constraint on growth and profitability is funding, with Thouraya Mzoughi El Ayeb, director of the internal audit department at Modern Leasing, told OBG that financing for the sector was becoming harder to obtain and more expensive. She told OBG, “The main sources of financing for leasing firms are bank loans and bonds, but banks are themselves having trouble raising financing at the moment, while companies going to the bond market are finding that the amounts they are able to raise have shrunk.”

Outlook

Plans to relax the current cap on interest rates, moves by state-owned banks to establish client ratings systems and a raft of reforms are set to support lending both generally and to small and medium-sized enterprises in particular. Furthermore, changes such as the recent recapitalisation and restructuring of the country’s public banks and plans to move the sector towards Basel III norms by 2020 should all help reinforce the stability of the banking system in coming years. Tightening prudential norms could also help to spur consolidation, though structural barriers to mergers in place suggest that the extent of this will be limited.