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Fitch: do not liken Malta to Cyprus

Potential bank liability much lower in Malta

There are “substantial differences” between the Maltese banking system and failed Cypriot banks, according to a special report released yesterday by international ratings agency Fitch.

We think the Government would support the core domestic banks

The Maltese banking system does not present the same level of risk despite having assets worth eight times the country’s GDP, it found.

The analysis compared the size of the banking sectors in Malta and Cyprus, 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 report noted.

However, it warned of “some danger” in the long term for the business model adopted by Malta’s financial services if European and global authorities shifted their stance towards offshore financial centres.

Fitch said financial and insurance activities represented eight per cent of Maltese value added two years ago, compared with Cyprus’s nine per cent and the eurozone average of five per cent.

Fitch noted Malta had the second largest banking sector in the eurozone after Luxembourg, outstripping Cyprus where total bank assets accounted for just under seven times the island’s GDP.

Malta’s banking sector was in the spotlight soon after the EU and the International Monetary Fund agreed a €10 billion bail out for Cyprus, which had to wind down its second largest bank and depositors with sums over €100,000 were forced to take a massive cut on savings.

The international press speculated whether the banking sectors in Malta and Luxembourg were next in line.

However, the Fitch report dispelled any doubts about the similarities between Malta and Cyprus, even after the Central Bank of Malta and the Finance Minister had underscored the differences.

“We think the Government 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 home government,” Fitch said.

Core domestic banks have assets just over twice the GDP but Fitch noted that, for at least one of the core domestic banks, HSBC Bank Malta, the bulk of support would come from the parent company.

Within this scenario Fitch said the contingent liability that potential bank support placed on the Maltese Government was near 128 per cent of GDP (less than twice the economy), significantly lower than in Cyprus, where domestic banks accounted for 466 per cent of GDP.

Cyprus had to bail out its banks, which had heavy exposure to Greece, but they were too big to handle and the country had to ask for help from the EU and IMF.

Malta’s banking sector is inflated by the presence of international banks with assets worth 494 per cent of GDP that have very negligible links to the domestic economy and non-core banks with smaller operations that account for 77 per cent of GDP.

Fitch said the Maltese banking system was less vulnerable to a destabilising withdrawal of non-resident deposits even though these account for 69 per cent as opposed to 37 per cent in Cyprus.

The majority of Maltese non-resident 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”, Fitch said.

Cyprus was blighted by deposits of wealthy foreigners, particularly Russians, of dubious origin.

Fitch said only 17 per cent of deposits in Malta’s core domestic banks came from non-residents.

Fitch’s rating of Malta’s economy is A+ with a stable outlook while Cyprus is B on a negative rating watch.

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