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Malta’s banking sector: Facts & Figures

Updated December 2020– For earlier editions of Facts & Figures click here

In 2019, economic growth in Malta remained healthy, with real GDP growth at 4.4%, albeit markedly lower than the 7.3% registered for 2018. In a small island-state economy the expansion remained largely underpinned by the services sector, although the manufacturing and construction sectors also posted an increase in gross value added. However, during 2019 the increase of exports of goods and services at 1.7%, was lower when compared with the 3.5% registered for 2018. The seasonally adjusted unemployment rate published by Eurostat averaged around 3.5% in 2019 – an historic low. On the other hand productivity growth turned negative. In 2019, this stood at -1.1%, compared with 1.2% in 2018. Meanwhile, public finances improved further, with the general government debt falling in 2018 by 2.4 percentage points, to 43.2% of GDP notwithstanding the budget surplus which narrowed to around 0.8% of GDP. However, within the context of a brisk pace of expansion and tight labour market, the annual inflation rate based on the Harmonised Index of Consumer Prices, averaged 1.6 % in 2019 as against the 1.2% registered in 2018. This said, during 2019 inflation remained contained from a historical perspective.

Over the past two decades, the banking sector in Malta has grown from four retail banks serving the local population to 23 (operative) licensed banks at the end of 2019, only three of which are Maltese majority-owned. The ownership of the other banks originates from various EU and non-EU jurisdictions, including Austria, Australia, Belgium, Greece, Kuwait, Turkey and the United Kingdom. As such, around 60% of the banking sector’s total assets of almost €42 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.

There are six core domestic banks, whose assets (almost €25 billion) represented 186.7% of Malta’s GDP (8.3 percentage points fewer than 2018). The core banks employ 82% of the sector’s workforce numbering around 4,932 employees. Two of these banks are the local market leaders, holding around 71% of this cohort’s assets, and in 2019 operated 64 of the 97 branches of the core banks in the Maltese islands. The core banks exercise a conservative business model consisting mainly in the raising of deposits and the granting of loans mainly to Maltese residents. Resident deposits from, and loans to, this latter sector increased by 3.6% and 8.3% respectively in 2019.

The core domestic banks rely predominantly 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 decreased to 59.6% in 2019 (almost 61% for 2018). On the asset side, the percentage of loans made to Maltese residents for 2019 increased to around 89% when compared to the previous year’s figure of around 85%. As can be seen, core domestic banks continued to apply prudent lending norms and loan-to-value ratios, as well as a cautious valuation of collateral. Their investment portfolios also continued to be widely diversified in well-rated securities.

Overall, the core domestic banks are characterised by a sound capital base (Tier 1 capital adequacy to risk-weighted assets of 17.4%), high liquidity and a healthy profitability. These positive features were acknowledged in the EU Commission’s Country Report Malta 2019.

There are five “non-core domestic banks”, whose assets of around €3 billion represented 22.2% of Malta’s GDP. These banks undertake some business with Maltese residents, but not as their core activity. As such, while the linkages with the domestic economy remained limited, both resident assets and resident liabilities picked up momentum as these banks continued to penetrate the domestic market. With a Tier 1 capital adequacy ratio of 17.1%, well in excess of the required number, these banks have a good shock-absorbing capacity to cover a potential deterioration in asset quality. Furthermore, considering their limited exposure to the domestic economy, these banks are not deemed to pose a threat to domestic financial stability.

Twelve internationally-oriented banks, which are mainly subsidiaries and branches of large international institutions, have almost no links to the domestic economy. Their combined assets of around €13.6 billion (a substantial contraction of 22% on 2018), represented around 102% 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.

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.  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.

In September 2019, MONEYVAL granted a period of one year for Malta to address identified shortcomings related to AML/CFT supervision and the money laundering framework. The relevant authorities are on course to address all MONEYVAL recommendations in time for the submission of their follow-up report which is due to take place in October 2020. In addition, Malta’s AML/CFT regime was updated in line with the Fifth Anti-Money Laundering Directive and takes into consideration the recommendations made by MONEYVAL and the Venice Commission.

Contributor: Karol Gabarretta info@maltabankers.org