The Baa2/P-2 foreign currency deposit ratings of Tunisian banks have a stable outlook and reflect the high likelihood that the authorities will support both public and private sector banks in trouble, reports Moody's Investors Service in its recently published annual Banking System Outlook for Tunisia.
However, as Tunisia's rating rises, the rating agency notes that it will seek a higher level of support to take the weakest banks to the country ratings ceiling. This may lead to the dissociation of weak private sector banks' deposit ratings from the ceiling.
"A major positive development for the strength of the Tunisian banking sector over the past few years has been the improvement in solvency through the containment in the growth of non-performing loans, through government guarantees of public sector debt and through higher provisioning," says Bernard Musyck, a Moody's AVP and author of the report.
Musyck nevertheless notes that this trend has been reversed during 2002 due to the general economic slowdown. "That said, the recent upgrade of Tunisia's foreign currency ceiling to Baa2 reflects the existence of necessary conditions for long-term growth and a track record of forward-looking economic policy that reacts quickly to changes," the analyst explained.
In addition, said Moody's, robust profitability and a relatively benign competitive environment have also been sustaining financial strength ratings (FSRs). Tunisian banks enjoy good interest margins and are likely to continue to do so over the medium term. Banking sector liberalization is allowing banks to enter new market segments and activities and to broaden their franchises.
Although such changes should also lead to an increasingly competitive environment, they could put positive pressure on the banks' ratings over the longer term. However, Moody's noted that the ratings are constrained by a high level of credit risk.
Continuing improvements in banks' credit risk practices will be measured against the competitiveness of Tunisian companies within the context of further trade liberalization with the EU to determine whether their credit risk profile improves over the medium term, said the rating agency.
Another constraining factor on Tunisian banks' FSRs is the moderate use of technology in their operations. However Moody's notes that this should be overcome over the next few years. The rate and success with which such technology is integrated could have a longer-term impact on individual banks' FSRs, concluded Moody's. — (menareport.com)
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