The differences between the Maltese and Cypriot banking systems far outweigh the similarities, meaning the Maltese banking sector does not present the same level of risk to the sovereign that was seen in Cyprus, Fitch Ratings said today.
In a special report published today, the ratings agency compared the size of the Maltese and Cypriot banking sectors, their funding sources, asset quality, and capitalisation.
"While both Malta and Cyprus seemingly have large banking sectors that substantially exceed the size of their economies and that rely to some degree on funding from non-resident depositors, a closer examination reveals substantial differences," the agency said.
"Malta's whole banking sector has assets worth 789% of GDP, making it the eurozone's second largest (after Luxembourg) and outstripping Cyprus, where total banking assets accounted for 672% of GDP in H112. However, using the Central Bank of Malta's categorisations, "international banks" with negligible links to the domestic economy have assets worth 494% of GDP. 'Core domestic banks' that have strong links with the domestic economy and are considered systemically important account for 218% of GDP. 'Non-core domestic banks' with smaller operations and links with the domestic economy account for 77% of GDP.
"We think the government of Malta would support the core domestic banks, but would be less likely to support non-core domestic banks and would be very unlikely to support international banks (where support would come from the parent bank or its home government). We also believe that for at least one of the core domestic banks, HSBC Bank Malta, the bulk of support would also come from the parent.
"So the contingent liability that potential bank support places on the Maltese sovereign - around 128% of GDP - is significantly lower than in Cyprus, where the domestic banking sector, accounting for 466% of GDP, proved too big for the sovereign to support," Fitch said.
"The Maltese banking system is also less vulnerable to a destabilizing withdrawal of non-resident deposits than its high proportion of non-resident deposits suggests (68.8%, compared with 37% in Cyprus). The majority of these deposits are in international banks, mostly the deposits of the parent banking groups, which present a lower risk of capital flight than other types of foreign deposits (such as deposits of wealthy foreigners). Only 17% of deposits in Malta's core domestic banks are from non-residents.
"Looking ahead, the possible long-term shift in the stance of the European (and global) authorities towards offshore financial centres spells some danger for Malta's financial services 'business model'. Financial and insurance activities represented 8% of Maltese value added in 2011 (9% in Cyprus; 5% for the eurozone on average), but this figure does not take into account other sectors supporting this activity.
Ratings of Malta is 'A+' with a Stable Outlook; Cyprus at 'B' on Rating Watch Negative