The two main banks, HSBC Malta and Bank of Valletta, have defended their interest rate margins, saying that the price of lending was based on a number of factors.

They were reacting to Times of Malta Business after the Governor of the Central Bank of Malta, Josef Bonnici, said at the Institute of Financial Services dinner, that Maltese banks should consider reducing the interest rate margin. The announcement did not come as a surprise. The Governor has been discussing this issue with the banks at length ­– and he noted that the “one or two banks have already tweaked their rates recently”.

Reducing interest rate margins would have a considerable impact on banks’ core operating profits, which have been declining – but Prof. Bonnici was not sympathetic.

“When you look at the profitability of Maltese banks, and you plot it against our counterparts in the stronger EU countries, you find that their profitability is at the top end of the range.

“There is room for reflecting on the interest rate margins and whether they could be narrowed, which would improve the competitiveness of our economy as the banking sector provides a key input into the functioning of the economy,” he said.

He said that the CBM had been studying the pass through from the European Central Bank rates to what happens in the local market for some time and that they found it disappointing, both with regards to the time it takes as well as to the scale of the reaction.

“Frankly, the pass through is very weak in Malta and often does not filter through the whole economy. Obviously, it would affect their profitability. On the other hand, they could become more efficient. I think that at the end of the day, the whole economy will be served better by having a more competitive banking structure,” he said.

The implication is that he expected the banks to take action – although it was not clear what would happen if they did not, as although there is essentially a duopoly, he admitted that this was not a job for the Competition Authority as the financial sector was too complex.

Prof. Bonnici also shrugged when asked about the need to balance the needs of the economy against shareholder expectations.

“Without any doubt, shareholders should get their return. But what is the appropriate return?” he said. He believes that the high rates for loans are hampering companies, especially SMEs – and that there would be more demand if they were lower.

“When Bank of Valletta launched the Jeremie scheme, it was fully subscribed very quickly. SMEs and their cost of funding is an issue that the European Central Bank has been very concerned about... Our SMEs are facing a situation in terms of costs which is similar to the stressed economies. And yet our economy is not stressed. The margins in countries which are not stressed are lower. This needs some attention.

“It is not a case of forcing them as rates are charged by banks according to what they perceive as appropriate. But the question is: can the banks do more to promote their competitiveness?

“To give you an example, about a year or two ago, the ECB issued a three-year LTRO and I encouraged the banks to tap into these funds – now at 0.25 per cent – and use them to offer better rates. One took a big amount but then just parked it with us. Another bank used the LTRO in an appropriate way and offered packages at a lower rate because their costs were lower. Sometimes I feel that because we have excess liquidity, the banks do not perhaps exploit these sources of funding appropriately. The end result is that the economy is very disappointing,” he said.

Listen to his comments in full on www.timesofmalta.com.

Bank of Valletta – chairman John Cassar White

Banks make a margin by charging higher rates to borrowers than they pay to depositors. This margin must be sufficient to cover three requirements. Firstly, the margin must be adequate to make up for credit losses, which arise when borrowers find themselves in financial difficulties which prevent them from repaying their borrowing. We must remember that such losses have to be made good for from the bank’s own funds, and not from depositors’ money. Secondly, the margin must cover the administrative costs of maintaining the infrastructure necessary to receive deposits and give out loans. Thirdly, it must also include a fair return to shareholders, who are risking their capital by investing in banks.

Despite our belief that the interest margins made by Maltese banks are not wide off the mark, Bank of Valletta recently reduced its business lending base rate by 15 basis points. At the same time, the rates payable on deposits were calibrated to encourage longer-term savings – this was done by increasing rates payable on deposits with a maturity longer than one year by up to 50 basis points.

HSBC Bank Malta – spokesman

HSBC Bank Malta reviews its pricing on a regular basis, taking into account the needs of both its depositors and borrowers, while being cognisant of the competitive landscape. There is no single formula for pricing as this depends on factors like the type of customer – be it retail, small business or corporate – and most importantly, the risk rating of the customer and the purpose of the facility required, which varies from case to case.

It is important to maintain a proper balance in the banking system between deposits and loans to ensure that appropriate support is provided to the local economy which in turn will facilitate growth. The growth rate in Malta has been above average throughout the economic downturn.

Chamber of Commerce, Enterprise and Industry – spokesman

The Malta Chamber wants Maltese companies to grow and create jobs but companies will only be able to do so in a sound business-friendly environment with access to finance at affordable borrowing rates.

Further improvements to access to finance for local businesses are, of course, welcome as would be a lower cost of borrowing as suggested by the Governor. That said, the Malta Chamber understands the peculiarities of the Maltese financial market and believes that, going forward, stakeholders must ensure a sustainable balance between lower costs to business and the continued robustness of the Maltese financial system which is a prerequisite for the country’s future macroeconomic prospects.

While the recently proposed Budget measure to conduct a review of bank charges to businesses makes sense, the Malta Chamber believes that this must be preceded by a thorough assessment of the impact which lower interest margins are likely to have on the soundness of our banks in the light of the expected tightening of capital requirements for banks.