TUNISIA. Tunisian banks' relatively simple product offerings, and the Tunisian banking system's moderate growth and limited dependence on international markets have helped banks in Tunisia remain resilient to the global economic downturn, but tough economic conditions are creating new risks, said Standard & Poor's Ratings Services in a report published today "Banking Industry Country Risk Assessment: Tunisia."

Standard & Poor's ranks the Tunisian banking industry in Group 8 out of our 10 global Banking Industry Country Risk Assessment (BICRA) groups (where Group 1 is the strongest).

"This classification reflects our opinion of the banking system's weak, although improving, asset quality; its exposure to cyclical sectors amid an economic slowdown; and intense competition," said Standard & Poor's credit analyst Mohamed Damak.

"Partly offsetting these negative factors are our opinion that the banking system has a good track record of stability and a limited reliance on international markets, and that Tunisia has an open and
fairly diversified economy."

We also take into account Tunisian authorities' supportive approach toward the banking system. Although they have limited financial flexibility compared with that of some other countries in the wider Middle East North Africa region, the hands-on approach of the central bank makes it easier for it to take necessary actions in case of need.

However, the structure of the banking system--which includes 20 commercial banks--could result in a selective approach to support in the case of a systemic crisis. In our view, tight control of the Central Bank of Tunisia enhances the system's stability.

The Tunisian banking system is not immune to risks, however, and Standard & Poor's expects the economic slowdown to put pressure on banks' already weak asset quality indicators.

Exposure to some export-oriented sectors, such as the mechanic and electronic industry (MEI) and tourism sector, are the main sources of risk given the depressed economic conditions in the EU, which is a major client for the MEI corporations.

On the other hand, tourism receipts reportedly increased so far in 2009, over the same period in 2008, and the government intervened to support companies operating in the MEI sector, which somewhat alleviated the pressure on asset quality.

The Tunisian banking system is one of the smallest in North Africa by assets, with the public sector controlling one-third of total assets, foreign investors--mainly French financial institutions--controlling one-quarter, and Tunisian investors holding the remainder at year-end 2008.

Price competition puts pressure on banks' profitability, and high provisioning needs also contribute to their relatively weak profitability.

Tunisian banks have a barely adequate level of capitalization when asset quality is taken into account. In addition, we regard banks' enterprise risk management as weak, despite improvements over the past years.

Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com

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