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Tunisia: Bank on It

As the financial results of the first semester of 2008 are beginning to emerge, some of Tunisia's largest banks are reporting significant increases in income, reflecting the fundamental soundness of Tunisia's banking sector.

This week, state-owned Banque de l'Habitat reported a 50% increase in interest and investment income over the first six months of this year, with net profits rising to $22.7m from $15m over the first six months of 2007. Banque de l'Habitat 's revenues rose 14% over the same period. Similarly, Banque de Tunisie , one of Tunisia's larger private-owned banks, posted a 15% rise in net profits, from $19m to nearly $23m, on the back of growing interest revenue and commissions.

The public-owned Société Tunisienne de Banque (STB), Tunisia's largest bank in terms of assets, also reported solid growth, with revenues rising 9.3% as a result of increased customer deposits; net profits have so far remain unchanged at $28m. STB, together with Banque de l'Habitat and the state-owned Banque Nationale Agricole , represent 47% of the total credits issued in Tunisia.

These results come as good news to Tunisia's domestic banking sector, which has faced a number of challenges in recent years. Indeed, a majority of Tunisia's banks have seen their performance dragged down by a rising non-performing loans (NPL) portfolio with the average ratio for the sector hovering around a relatively high 17.3%, compared to ratios of 5% or lower in other Mediterranean countries. The NPLs are to some extent a remnant of the banking sector's historical emphasis on public industrial and commercial development but have been reinforced by shortcomings in risk management.

Similarly, with some 43 financial institutions currently involved in the Tunisian banking sector, including 20 universal banks, eight offshore banks and a number of leasing and factoring companies, the sector also suffers from over-fragmentation. Bank margins have been negatively impacted by strong competition, undermining long-term expansion plans, while moves towards consolidation have been few and far in between.

However, the fundamentals of the domestic financial sector, which makes up a large proportion of the stock exchange activity, look to be steadily improving. A recent International Monetary Fund (IMF) report in July stated that while the NPL ratio remains high, the sector has been increasingly pro-active in improving the sustainability of its lending practices, as testified by a decline of over seven percentage points in bad loans since 2004. Additionally, the Central Bank has set a target of an NPL ratio of 15% by 2009 and is moving to increase the rate of provisions to NPLs to 70%, which would boost the resilience of the sector.

Perhaps more crucially, the private sector is beginning to increase its share of the market, as the privatisation programme starts to hit its stride. Although the much-anticipated privatisation of Banque Franco-Tunisienne has been postponed, due in part to legal and auditing issues, the majority sale of Banque Tuniso-Koweitienne (BTK) to the Groupe Caisse d'Epargne (GCE) has helped to increase momentum for privatisation. The GCE purchase from the Tunisian and Kuwaiti governments - which gave it a 60% stake in BTK, one of Tunisia's smaller former development banks - for approximately $240m represented one of the success stories for the country's privatisation programme.

The Central Bank is also taking a number of steps to improve the overall standards of the banking sector, including accelerating Basel II implementation and delegating banks the authority to execute transactions involving hedging instruments. Already, listed credit institutions are no longer faced with foreign borrowing limits or constraints. A Central Bank strategic committee is aiming for a 2010 start date for Basel II policies, to boost internal corporate governance and risk provisioning, as well as improve service quality.

The continuing strength of Tunisia's banking and finance industries has boosted the sector's regional profile, which in turn has led to increased interest from outside investors, as evidenced by projects such as Bahrain-based Gulf Finance House's planned $3bn financial centre in northern Tunis. The 450 ha project, which will boast a number of purpose-built facilities for financial companies, will be the first offshore financial centre in North Africa.

© Oxford Business Group 2008