The time when local banks were being hailed for being an important, strong pillar for the Maltese economy – rather than a ball and chain around the ankle of growth – seems a distant memory. The local banks are today essentially being accused of ‘possible’ collusion which could also weigh down on growth and development. Given the capital structures so commonly used locally we can also see a possible hindrance to ‘capitalism’.
Recently there has been some interesting reading resulting from the European Commission’s in-depth report (IDR) covering the Maltese banking industry. In a report issued earlier this year, the EU’s executive arm said “the interest margin on loans in the core banks appears to be converging,” and this “could be indicative of collusive behaviour”.
Around the same time, during a presentation of the 2013 annual report of the Central Bank of Malta, governor Josef Bonnici also made reference to the fact that lending rates to small businesses remain relatively high when compared to the other EU member states and the EU average.
In my opinion, one needs to understand and evaluate both sides of the story very carefully and responsibly before reaching a conclusion – especially if such conclusion is the basis for change. Let us start with the bank’s existing and prospective customers. These third parties, whether small (or large) businesses or individuals, today have the largest banking choice they have ever had, yet how realistic is it for one to change their bank – the charges involved are very often prohibitive for the marginal improvement. These charges must definitely be addressed in order to ensure least friction possible for a free market to operate.
Secondly, there are instances when the financing required is not debt financing but equity financing. In instances when debt is very onerous and expensive it is probably because debt is trying to be used instead of equity. This equity gap in Malta has long been identified and venture-capital vehicles have been set-up to address this gap and again recently, several such vehicles have been launched both from the private and public sector. The success of such vehicles can only be measured in the long-term since this also requires a cultural change. Thirdly, it is also possible that what the small businesses really need is a development bank in Malta rather than a high street bank – a bank with a focus on servicing such businesses and aiding their development.
From the banks’ point of view there are several issues to keep in mind. Firstly, a point mentioned earlier is the way local businesses are usually financed. Traditionally capital structures are highly geared, only making them riskier in the eyes of the bank.
There are instances when the financing required is not debt financing but equity financing
What this means is that businesses in Malta make excessive use of bank financing and very little use of equity financing. One needs to remember that debt financing may not be the ideal form of financing but if this is the only form of financing available, then this will be pretty expensive.
Thirdly, Marie Donnay, the person who led the IDR, mentioned several possible reasons for this possibility, one of which was the industry exposure of such risk. A substantial portion of the banks’ credit is directly or indirectly exposed to property. If the ultimate underlying risks of the credit lines are the same, irrespective of what the business risk is, this will definitely lead to collusion in the underlying terms of the various credit lines being made available.
Another element is the strong reliance local banks have on deposits. These deposits have tended to be very sticky in the past.
However, with a number of new smaller banks entering the market we have seen a substantial change in the loyalty profile of such deposits. This has definitely impacted the larger more mature banks which have traditionally used this cheap form of capital to finance their business model.
In conclusion, it is not entirely surprising to note collusive-like behaviour within our banking industry given that they are exposed to very similar business models (which are very debt oriented), almost identical assets in terms of collateral (property) and operational models which are very dependent on deposits (from the banks’ angle). One can argue that the same conservative bankers who kept the Maltese business community on a safe and prudent footing are today hindering growth because they are not ‘imaginative’ enough. Personally I welcome less imagination rather than more but at the same time the issues small businesses are facing, in terms of finance costs, need to be addressed without further delay.
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This article is the objective and independent opinion of the author. The information contained in the article is based on public information.
Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.and licensed by the MFSA to conduct investment services business.
Karl Micallef is an executive director at Curmi and Partners Ltd.