Malta’s financial system is generally safe and sound though the property market must be closely monitored as any slip-up may pose serious problems due to the high loans granted by domestic banks, according to the European Commission.
Stability of core domestic banks would benefit from strengthening provisions for loan losses to limit risks
The property market’s rapid development and its dependence on large bank loans seem to be the main concern, but the Commission’s in-depth study was positive about Malta.
While recognising that public finances have been put in order in recent years, particularly since Malta’s adoption of the euro, public debt remains high and the lack of reforms in the health and pensions sectors may pose a long-term problem.
The report, part of a stricter monitoring process introduced for member states economies after the recent financial crisis, focused on three areas that the Commission identified last year as posing a risk of macroeconomic imbalances in Malta.
Although it established that the island faced several challenges over its high private sector debt, current account balance and high government debt, it only recommended further monitoring and policy action without finding any immediate need for drastic action.
“Malta is experiencing macroeconomic imbalances, which deserve monitoring and policy action. However, these risks should not be overstated,” the Commission said.
On the growth of the property market, the report shows that more than half (52 per cent) of all loans given by Malta’s domestic banks, particularly Bank of Valletta and HSBC, are tied to mortgages and property development. The Commission said although the property market did not yet appear to be exposed to an immediate risk of a bust, it had to be closely monitored and banks had to increase their provision for loan losses.
“The stability of the core domestic banks would benefit from strengthening their provisions for loan losses to limit risks arising from their exposure to the property sector.”
Brussels said although lending standards for construction and real estate services had already been tightened, keeping household mortgage lending in check was essential in preventing excessive debt build-up and asset bubbles.
“Improving loan loss provisioning to increase the relatively low coverage ratio would also contribute towards maintaining banking sector soundness,” the Commission said.
It made a similar recommendation last May.
Although Maltese non-performing loans are still considered low by EU standards, they have increased to just above eight per cent in June 2012, from five per cent in 2008.
‘No problems with debt financing’
The large financial sector – which according to the Commission expanded very rapidly after EU accession, reaching around 850 per cent of GDP by the end of 2011 – also came in for scrutiny.
However, the EU concluded that it poses limited risks as the majority of financial institutions present on the island were internationally oriented and did not do any business in Malta.
Commenting on the domestic banks, which include high street operators such as BOV and HSBC, the Commission said: “These exercise a rather conservative business model that relies mainly on resident deposits for their funding and have low loan to deposit ratios.”
The EU experts said this, combined with a stable deposit base thanks to Maltese households’ high propensity to save, helped core domestic banks cope with the financial crisis and the volatility on international wholesale markets.
On public finances, the Commission reiterated that its sustainability in the long-term remained at risk, particularly due to the lack of reforms in pensions and healthcare and “sizeable state guarantees to State-owned companies”, particularly Enemalta.
According to the Commission, while the Government was currently not experiencing any problems with debt financing thanks to high domestic demand for issued securities, the guarantees to State-owned companies “represent an important risk to the future dynamics of government debt.”
The Government welcomed the Commission’s report, particularly its statement that Malta’s very large financial sector was internationally oriented “and therefore does not pose large risks for domestic stability”.
“The Commission’s report reaffirms the confidence that Malta’s banks and finance sector have enjoyed for many years,” said Finance Minister Edward Scicluna.