The recently published Central Bank of Malta’s Financial Stability Report 2013 has been the subject of very limited comment in the financial press. This is surprising as it contains a mine of information including various statistics and charts concerning all the banks licensed to do business in Malta. These are split into three categories i.e. (a) core domestic banks; (b) non-core domestic banks and (c) international banks.
This article centres on the financial situation as at the end of 2013 of the five core domestic banks shown in the accompanying table which summarises some quite revealing comparative statistics taken from the figures published in the banks’ 2013 year-end financial statements.
The CBM’s report quotes combined statistics for these banks but lacks a comparative analysis of the figures of each of the banks concerned. The financial strength or stability of each individual bank cannot therefore be assessed from the report. However, updated figures are known to the regulator(s) from detailed returns that all licensed banks are obliged to submit periodically.
The financial statements published by the banks have perforce to adhere to international financial reporting standards and also to the requisites of local legislation. However, in some respects there is no uniform pattern on the level of disclosure. For example, not all banks give sufficient information enabling a calculation to be made of the percentage level of their non-performing loans and advances in relation to their overall lendings. The CBM report states that the combined level of the five banks is 9.2 per cent and that this rose from 8.2 per cent in 2012.
It is significant that customers’ deposits in all five banks totalled €12.8 billion (of which 85 per cent were held by the two main domestic banks – BOV and HSBC) and assets/liabilities €14.5 billion or 211 per cent of Malta’s gross domestic product. According to a recent statement by the Malta Bankers Association this figure compares with €5.3 billion (78 per cent of GDP) for non-core domestic banks and with as much as €33.3 billion (492 per cent of GDP) for international banks.
Using total assets as a yardstick, BOV remains by far Malta’s largest core domestic bank. Indeed BOV was recently declared by Global Finance to be the safest bank in Malta. At the other end of the spectrum, Banif is slightly ahead of the older established Lombard. However, as regards total equity Banif is by far the minnow. Indeed, the extent to which it relied on customers’ funds is reflected by the fact that Banif’s ratio of deposits (93.9 per cent) to total liabilities is higher than that of the other four banks except APS.
BOV also ranked as the leader with €541.1 million in terms of total equity (shareholders’ funds) which is way ahead of the second-ranking HSBC (€366.3 million) and nearly 25 times Banif’s equity base of €21.7 million. Yet, in terms of customers’ deposits, Banif with €559.9 million surpassed lowest ranking Lombard (€501.3 million), a remarkable achievement in just six years of operations.
It is appropriate to highlight here the reliance of depositors on the Deposit Compensation Scheme. Firstly, depositors should bear in mind that this is limited to a maximum of €100,000 per customer per bank (presently individuals and small companies but this is due to be extended to enterprises of whatever size by July 2015). Secondly, accordingly to the CBM’s report, as at the end of 2013 the scheme covered only 7.8 per cent (less than €1 billion) of total deposits with these five banks.
Thus one concludes that over 90 per cent of deposits (nearly €12 billion) with the core domestic banks are not covered by the scheme. According to the MFSA’s latest report the scheme’s accumulated capital and reserves were €18.4 million. It is to be noted that the scheme covers not only the five domestic banks but 21 banks that are licensed to take deposits in Malta.
BOV was endowed not only with the highest equity base but also had the highest level of liquid resources, i.e. placements with the CBM; Treasury bills and cash (€194.6 million). As a percentage of such placements to total assets Banif (15.7 per cent) and Lombard (22.6 per cent) had the highest levels of liquidity. This is understandable in the case of Banif in view of its very low equity base but seems excessive in the case of Lombard. According to the CBM’s report the overall average was 6.8 per cent of total assets. It is significant that, in the case of Banif, these assets rose from €71 million in 2012 to €93.9 million in 2013 possibly on the insistence of the regulatory authorities for the reasons mentioned above.
In view of the upcoming regulatory measures, banks are still encouraged to increase their provisioning levels and strengthen their capita through prudent dividend policies
In terms of after-tax profits, BOV with €70.5 million was also the leader in 2013 but with a ROE and ROA only slightly inferior to those of HSBC. BOV had the best cost/operating income ratio (38.7 per cent) with Banif (87 per cent) still struggling to bring this down to anywhere near the level of the other four core domestic banks the next highest being HSBC (49.9 per cent).
As regards lendings, the total for all five banks was €9.8 billion i.e. an average 76.5 per cent of total customers’ deposits. This percentage is in line with international levels and varies among Malta’s core domestic banks between a low of 66.2 per cent (APS) and a high of 84.1 per cent (HSBC). Clearly APS adopts the most conservative lending policy while recording a very respectable ROE and ROA.
The figures speak for themselves. Although the maxim that a chain is as strong as its weakest link does not necessarily apply in the case of five totally unconnected banks, one cannot exclude that a significant weakness in any one bank excludes the possibility of this having a domino effect. Doubtless, the supervisory authorities have this aspect under their constant attention although the CBM highlighted in its report the fact that “the core domestic banks’ capital buffers well exceeded the regulatory thresholds”.
It is noteworthy however that, in the preface to the CBM’s report, the concluding comment is: “In view of the upcoming regulatory measures, fragile global economic conditions, especially in the euro area, and remaining threats to the financial system, banks are still encouraged to increase their provisioning levels and strengthen their capital through prudent dividend policies. Furthermore banks should continue to diversify their funding sources while implementing further measures to reverse the contraction in corporate loans.”