The pendulum swings. The Malta financial centre has weathered a storm triggered by the financial crisis in Cyprus, whereby Malta was for a while twinned with that distressed island because of its substantial deposit base relative to Gross Domestic Product. The comparisons were not based on fact once the structures of the financial systems are not at all comparable.
Malta has a good song playing and there is appreciation for it
Too much attention was based on the liabilities of the Cypriot banks – their deposits, a substantial part of which came from Russian money, along with suspicion that money laundering was taking place. In reality, the problem of Cyprus was on the assets side of the banks – their loan and investment portfolios. Too much money was invested in Greece, in the form of corporate advances or sovereign bonds.
Once Greece began turning belly up with haircuts flying all over the place, Cyprus was hammered with one blow after the other. Malta did not and could not suffer that. For one thing the deposit base of the five core banks amounts to little over double the GDP. These deposits, almost in their entirety, belong to domestic investors. In other words, the banks’ deposit liabilities were not in danger.
On the asset side the core banks’ assets are, again almost in their entirety made up of holdings of Malta government bonds, which are rarely traded on international markets and so not subject to bouts of lack of confidence. While the loan book is made up of domestic loans. These are dependent on the state of the Maltese economy, which is quite fair and one of the penchants of the defeated Nationalist government.
Granted, part of the loans represents the banks’ exposure to the property sector and loans thereto are viewed with caution. Once again Malta bears no external comparison. Property prices have fallen and the construction industry has faltered.
But the banks rarely make loans to property developers unless they are fully secured with acceptable collateral and guarantees. To the extent that collateral takes the form of property, value is taken on a forced sale basis. Furthermore there was no sudden burst of a property bubble. Prices declined gradually over the past four years or so and security was adjusted downwards accordingly, with write-downs and general and specific provisions made regularly.
In the property sector the Maltese banks also have considerable exposure in the form of personal loans taken to construct or buy an own residence, the Maltese and Gozitans being among the highest residence owners in the world. Here too, advances are made carefully, ensuring repayment programmes by both spouses or partners were possible, and secured by the written down value of their property.
It is a fact that accommodation property prices have declined over the past four years. Yet, they have not collapsed as they did, say, in Ireland. There, values have fallen by as much as 50 per cent. Equity – the margin of a higher market value of property over the borrowers’ loans – has vanished. This, too, is a factor to take into account.
A cultural or behavioural factor. Maltese house borrowers, even when prices were booming, rarely second loans against their equity, wisely resisting the efforts foolishly made by some of the banks to entice them to do so.
As a result, depressed prices have had little effect on property owners. One rarely hears of the banks repossessing residences because owners are unable to sustain their repayment programmes. This contrasts once more with the position in Ireland, in Spain too and elsewhere as well.
All this shows that the early reports linking Malta with Cyprus were groundless and arose more out of ignorance of the facts than from careful, critical analysis of them.
Now the wheel has turned full circle. There has been a spate of analytical reports by rating agencies and noteworthy investment analysts. They make it clear that Malta is not in danger – and say why. Clearly they have taken note of public comments made by analysts and the authorities and also reflect behind-the-scenes factual briefings given by the Central Bank and the banking regulator, the Malta Financial Services Authority.
To the extent that the agencies and analysts express caution over the banks’ exposure to the property sector the remarks made above are easily borne out by statistics.
Still, all the banking sector should not just lie back and enjoy the spring sun. It has to look critically at itself to determine to what extent it could increase own capital and reserves. They have good buffers, but good is never perfect. They should be improved and can be improved.
As confirmed again last week, the lending banks are making good profits even when operating profit is marginally dented. Shareholders, needless to say, want their cut out of increased profits. Before recommending it to them, the banks should increase their specific provisions as well as contingent general cushions.
Malta has a good song playing and there is appreciation for it. More should be done to make the song better still.