Malta’s banking sector: Facts & Figures
In 2016, the Maltese economy grew by 5.0% in real terms, well above the euro area average. This growth was underpinned by a 4% increase in exports of goods and services, and private consumption expenditure. Unemployment levels declined to an historic low of 4.8%, and labour productivity improved by a further 1.3%. The Maltese government sustained its efforts to improve public finances, with gross public debt falling to 58.3% of GDP by the end of 2016, and a budget surplus equal to 1% of GDP being recorded in 2016. Price pressures remained contained, with the inflation rate, based on the Harmonised Index of Consumer Prices, averaging 0.9%.
Over the past two decades, the banking sector in Malta has grown from four retail banks serving the local population to 27 licensed banks as at the end of 2016, only three of which are Maltese majority-owned. The other banks originate from various EU and non-EU jurisdictions, including Austria, Australia, Belgium, Greece, Kuwait, Turkey and the United Kingdom. As such, around 72% of the banking sector’s total assets of around €45 billion are foreign-owned.
The sector is very diverse in terms of inter-linkages with the domestic economy, and can be split into three groups according to the extent of linkage with the Maltese economy: core domestic banks, non-core domestic banks and internationally-oriented banks.
Seven core domestic banks had assets of around €21 billion, which represented 205% of Malta’s GDP, and employed 81% of the sector’s workforce numbering around 4,600 employees. Two of these banks are the local market leaders, owning around 80% of this group’s assets, and operating 69 of the 104 core bank branches in the Maltese islands. The core banks exercise a conservative business model consisting mainly in raising deposits and granting loans for Maltese residents. Resident deposits and loans increased by 6.7% and 2.5% respectively in 2016.
These banks rely mainly on resident deposits for their funding, and have a stable deposit base thanks to the high propensity to save by Maltese households. Their loan-to-deposit ratio is low at around 58%, and this insulated the banks from the volatility on the international wholesale markets during the financial crisis. On the asset side, over 98% of total loans are for Maltese residents, with the banks applying prudent lending norms and loan-to-value ratios, as well as a cautious valuation of collateral. Their investment portfolios are also widely diversified in well-rated securities.
Overall, the core domestic banks are characterised by a sound capital base (Tier 1 CAR of around 15%), high liquidity and a healthy profitability. These positive features were acknowledged in the International Monetary Fund’s Report on Malta published in February 2017, which stated that “solid profitability and adequate capitalisation have kept the banking system stable and resilient”.
Five non-core domestic banks had assets of €2.3 billion, representing 23% of Malta’s GDP. These banks undertake some business with Maltese residents, but not as their core activity. As such, the linkages with the domestic economy are limited, with resident assets and resident liabilities each accounting for less than one-fifth of the banks’ balance sheet size. With a Tier 1 capital adequacy ratio well in excess of the required numbers, these banks have a good shock-absorbing capacity to cover a potential deterioration in asset quality. Considering also their limited exposure to the domestic economy, these banks are not deemed to pose a threat to domestic financial stability.
The 15 internationally-oriented banks are mainly subsidiaries and branches of large international institutions. These banks have almost no links to the domestic economy. Their combined assets, amounting to around €22 billion, represents around 220% of Malta’s GDP. They fund themselves mainly through the wholesale market or through their parent banks, and deal mainly with intra-group activities. Overall, this group is also very well capitalised, has strong liquidity and is profitable. Here again, therefore, the very low level of business carried out with residents, and the fact that these banks have negligible contingent claims on the Deposit Guarantee Scheme, mitigates possible concerns regarding the size of their asset base in relation to GDP, or the threat they might pose to domestic financial stability.
The Malta Financial Services Authority (MFSA) is the sole regulator for all banking, investment and insurance business carried out in or from the Maltese islands. The Central Bank of Malta is primarily responsible for maintaining price stability through the formulation and implementation of monetary policy. It is also responsible for the promotion of a sound financial system and orderly capital markets. To this end, a Joint Financial Stability Board, set up between the MFSA and the Central Bank of Malta, focuses on macro-prudential aspects of financial stability, extending its remit to the entire financial sector.