By Mario Mallia
As the Chief Officer of Risk for Bank of Valletta, I would like to refer to the article Malta: Another Weak Link In The European Chain Of Tax Havens?, posted on 2nd April 2013 by The Motley Monetarist.
The article tries to make a comparison between the Maltese and the Cypriot banking systems that is misleading. There is indeed a superficial resemblance, since both countries have a banking sector that (when measured in terms of total assets) amounts to around eight times GDP. But even a cursory look at the Financial Stability Report published annually by the Central Bank of Malta would be enough to show that the Maltese situation is radically different.
The Financial Stability Report distinguishes between "core domestic banks" and the others, which are classified as "non-core domestic" and "international banks." Core domestic banks are defined as "the main financial intermediaries providing banking services to residents in Malta and which have a significant link to the domestic economy." These are the banks which are embedded in the local economy, which finance Maltese industry, and which provide Maltese households with savings and investment opportunities. These banks make up the financial engine, which drives the economy.
It is important to point out that the size of this core sector is only around two times GDP, which is around 50% of the EU average. It is therefore clear that the size of the core, Maltese, sector is very manageable, and can in no way be seen as being "too big to fail."
The remainder of the sector - which amounts to six times GDP - is made up of "non-core domestic" and "international" banks. The majority of these banks are subsidiaries of EU banks offering a range of services that include trade finance, investment banking and group funding operations. The business they carry out with residents is very limited; their contribution to the Maltese economy is marginal since the bulk of their business is situated overseas. Unlike the core domestic banks, in no way can they be considered to be "intertwined" with the Maltese economy.
It is therefore completely deceptive to put Malta and Cyprus in the same bucket. The two models are completely different. The Cypriot domestic banking sector is relatively large, and is financed to a great degree by offshore funds. The Maltese domestic banking sector is relatively much smaller, and is financed primarily by Maltese households and businesses.
It is also misleading to state that Malta is "plagued by a growing external debt and persistent current account deficits" without drilling deeper into these figures. Much of the external debt to which the article refers, is, in fact, the liabilities of the international banks registered in Malta. These are not liabilities of the country, or of the sovereign, but of these foreign institutions. These liabilities are backed by foreign assets. The "real" debt of Malta is nowhere near the 35 billion euros indicated by the article, it is closer to 4.7 billion euros.
The article is also misleading, and grossly unfair, in respect of Bank of Valletta, the largest financial institution on the Island. There are at least four points, which need to be clarified, or corrected:
1. Consider the position today of the Bank of Valletta, with total assets surpassing 7.05 billion euros ($8.95 billion), a BBB rating, only 296 million euros ($375.92 million) in deposits at the central bank, and one has another Cyprus in the making.
The article points out that Bank of Valletta (BOV) has "only" 296 million euros deposited with the European Central Bank (ECB), out of total assets of 7 billion euros. The implication is that it is under-liquid. The writer omits to mention that BOV has a further 677 million euros on deposit with other prime banks, and an investment book of 2.1 billion euros, comprising top quality marketable securities, most of which are eligible for collateralization with the ECB.
Taking all these together, BOV's liquid assets amount to 43.7% of total assets, which is very high by any standard. Couple that with BOV's rock-bottom loan-to-deposit ratio of 66.7% (which means that, out of every 100 euros deposited, only 66.7 euros are lent out), and it becomes clear that not only does BOV have no liquidity problems, but, if anything, it may be considered to be overly liquid.
The credit rating report on BOV issued by Fitch in February 2013 commends BOV's prudent financial management, commenting that "…funding is supported by a large and stable customer deposit base. Loan/deposit ratios are kept at conservative levels…and refinancing risk is mitigated by significant unencumbered liquid assets (EUR0.9bn, 13% of total assets) available for refinancing operations at the European Central Bank."
In this regard, it is also worth pointing out that in January, BOV repaid all of its long-term refinancing operation (LTRO) borrowing, amounting to 170 million euros, to the ECB.
2. The EBA (European Banking Authority) guidelines on the Tier 1 ratio have increased to 9%. Currently the Bank of Valletta is just barely skimming this minimum.
Firstly, the regulatory minimum Tier 1 ratio will be 6%, not 9%. A capital conservation buffer of 2.5%, which can be dipped into subject to dividend restrictions, will be added on. The 9% ratio referred to is a nominal floor, which the EBA established by applying a 9% multiple to risk-weighted assets held as at 30 June 2012. BOV's regulatory capital is comfortably in excess of this floor.
BOV's track record with regard to ECB/EBA stress tests speaks for itself. The Bank has passed both tests conducted to date very comfortably. This despite the fact that, unlike many of its European peers, BOV has never had to resort to Government support to stay afloat, even at the height of the 2008 financial crisis.
BOV has gone on record many times stating that it will meet Basel III/CRD IV capital requirements well before the January 2019 deadline without having to curtail dividends and without having to raise fresh capital on the markets. In other words, it will generate its own required capital by means of core profit retention.
Fitch also commented on what it described as BOV's "healthy profitability," the source of its robust capital situation:
In light of the bank's strong market shares, its ability to price risk has remained relatively unaffected by competition. Its net interest margin remains high despite the low interest rate environment, and together with higher non-interest income, it absorbed the larger loan impairment charges generated by subdued credit conditions. This has also enabled it to report healthy profitability, with an operating ROAE of 23% in FY12.
3. Thus we see one significant bank, over-leveraged in real estate, loaned out at 3.7 billion euros to its customers (mostly real estate loans)
The entire loan book of BOV amounts to 3.7 billion euros. Of this, 5% is lent out to the real estate sector, while 8.4% is to construction - a good part of which relates to EU-funded infrastructural development. At most, therefore, no more than 13.4% of the loan book can be said to be related to real estate.
A good chunk of the loan book - 30% - is in home loans extended to Maltese residents. The exposure to property in this sector is only indirect, and losses have been historically very low. The risk in this sector is rather to the general economy, because defaults would only be expected to increase in a situation of rising unemployment. But here too, Malta can draw comfort. The EU winter forecast, published this February, is looking towards three straight years of real growth for the Maltese economy, while overall Eurozone GDP is forecast to shrink for two successive years.
4. A total position in derivatives of 8.44 million euros
The impression given here is that BOV is sitting on top of eight and a half million euros worth of derivatives positions. Nothing could be further from the truth. These derivatives do not form part of a trading book, but are merely backing opposite positions entered into by BOV customers hedging their interest rate and currency positions. Thus, their purpose is one of hedging, not of speculation.
Comment is free, but respect for one's readers should have called for a more balanced and less speculative analysis of Malta's banking sector than the article in question presented.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I am an employee of a company whose stock is mentioned in this article.