Credit-to-Deposit Ratio: A Key Indicator for the Banking Sector
When it was first announced a few years ago, the credit-to-deposit ratio, also known as the transformation ratio, had a significant negative impact on bank stock prices. No one really knew the impact of this limit on the ability of credit institutions to lend money.
However, things quickly became clearer as the majority of banks fell below the 120% threshold. Since then, the trend has been downward, and by the end of 2023, it had stabilized at 104.9% for resident banks. According to the list of disciplinary measures taken by the Central Bank, only one bank failed to meet the threshold and was fined 0.369 million dinars in 2023.
This suggests that there is still significant room for maneuver for the sector to give a significant boost to the economy. For now, this is not visible, as interest rates remain high and demand is focused on short-term financing. Moreover, deposits are improving, albeit driven by households rather than businesses.
It is worth noting that this ratio takes into account gross claims, including non-performing ones. We are seeing that the rate of classified claims is evolving and reached 13.6% by the end of 2023, up from 12.6% the previous year. The rise of risks in the economy is a worrying point, as banks will continue to tighten their grip on guarantee requirements, negatively impacting the transformation ratio.
If the economy recovers, we will see a deceleration of deposits going towards consumption, but an improvement in the overall quality of assets. The transformation ratio will thus be preserved from any sudden deterioration. The sector is capable of injecting, without difficulty, at least 5 billion dinars of additional credits. This is good news, but it will not happen on its own. Easy money that does not produce has never been the right approach.
