banking

Tunisian banks’ improved profits hide increased risks (Fitch Ratings)

October 11, 2021

TAP) - The Tunisian banks' improved profitability in the first half of 2021 (1H21) hides several impending risks, Fitch Ratings said on Thursday.

The sector's recovery could be threatened by Tunisia's fragile political situation, the expiry of debt relief measures, and the transition to IFRS 9 accounting.

Aggregated net income for the 10 largest banks increased 37% year on year in 1H21 and the average return on equity improved to 11% (2020: 10.1%; 2019: 16.8%).

The average net interest margin held up at 3.8% (2020: 3.8%) as lower funding costs mitigated the impact of steep interest rate cuts since March 2020.

However, loan impairment charges still consumed 38% of pre-impairment operating profit and overall profitability is unlikely to return to pre-pandemic levels as long as weak credit conditions persist.

'Our outlook on the Tunisian banks' operating environment score is negative, reflecting risks from Tunisia's (B-/Negative) macroeconomic weaknesses. Fiscal and external liquidity risks are exacerbated by political risks and delays in agreeing a new IMF programme.

Fitch forecasts Tunisia's GDP to grow by only 3.4% in 2021 after a sharp contraction of 9.3% in 2020', Fitch Ratings indicated.

'We expect Tunisian banks' asset quality metrics to weaken due to the expiry of the loan deferral scheme on 30 September and of other borrower support measures by end-2021. The non-performing loans ratio for the 10 largest banks was 11.0% at end-1H21 (end-2020: 10.7%).

Reserve coverage of impaired loans was adequate at 72% but capital buffers could prove insufficient in a severe stress scenario, which cannot be ruled out,' it added.

The move to IFRS 9 starting from end of financial year 2021 is likely to weigh on asset quality metrics and require additional provisioning given the use of forward-looking data in the models.

However, Fitch Ratings expects a gradual phase-in, helping banks to adjust.

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