We are told the world is awash with money. I must admit I have not been able to observe this phenomenon by reference to my statistically (as well as monetarily) irrelevant bank account. However, it appears I am not alone in this.

In a recent address, the Governor of the Central Bank of Malta made a number of remarks in respect of the banking sector. In particular, he outlined how the ECB had introduced a series of measures “to ensure that banks can pass on low policy rates to the real economy, in particular where most needed”. He then went on to say that “...the transmission of accommodative monetary policy measures across the euro area remains weak and uneven”.

There are a number of explanations for this, ranging from weak demand for credit in an anaemic (at best) growth environment to the banks needing to strengthen their balance sheets as a tougher regulatory regime starts to bite.

However, in the case of Malta specifically, the growth rate is easily outstripping that of the eurozone average. The National Statistics Office last Monday reported a provisional third-quarter GDP estimate of €1,879 million. That represents an increase of 3.8 per cent when compared to the corresponding period last year. GDP went up by 1.9 per cent in real terms. That contrasts positively with the estimated eurozone average of +0.1 per cent, in itself a setback against the +0.3 per cent recorded in the second quarter. For the year to date, eurozone GDP is still in negative territory at -0.4 per cent. Needless to say, that figure falls short of what the EU high priests would have had us believe last year.

In summary therefore, in the case of Malta, weak growth cannot be cited as an explanation for weak credit growth. It is possible, of course, that demand for credit could remain weak within a reasonably buoyant economy. In fact, local banks do state categorically that demand for credit is weak. However, it would perhaps be more accurate to say that demand for credit is weak at its current price. Money is a commodity and its price is subject to the same dynamics of supply and demand. Demand is not weak in isolation: demand is simply weak at the current supply price. The problem appears to be that the supply price is somewhat sticky on the way down.

The supply price is somewhat sticky on the way down

To illustrate this, the Governor pointed out that local interest rates on business loans are currently around two to three per cent higher than those in a wide range of countries (including Germany, Holland, Finland and Luxembourg). That premium is extraordinary. It manifests itself in typically far higher returns on equity for local banks.

Furthermore, these returns are generated despite what could perhaps be labelled as a belts-and-braces (highly collateralised) approach to the extension of credit, a ‘holier than thou’ attitude in respect of provisioning, and a safety first strategy in respect of investments in the capital markets. It is barely credible that banks so prudent are able to remain so profitable.

We now move on to the sorry tale of the Royal Bank of Scotland (RBS). In a world of good and bad banks, RBS must surely go down as the worst of the lot. One report has concluded that it does not lend enough to small business. That much is par for the course. Another report, compiled by Lawrence Tomlinson, draws the astonishing conclusion that RBS deliberately wrecked small businesses which were viable.

It can be readily agreed that a company is viable if it can generate a profit while paying a ‘reasonable’ rate on its debt funding. It is not ‘unviable’ if it cannot accede to unreasonable requests made by a bank. The Tomlinson report refers to “shocking examples of business owners being confronted with last-minute demands for information and money”. This was done in a premeditated manner to force the subject into financial difficulty and default. This then triggered the sale of collateralised assets to the bank’s own specialist property arm, naturally at a knockdown price. The RBS company slogan is ‘Here for you’. Perhaps ‘There’s no interest like self interest’ would be more appropriate.

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.

Martin Webster is head of equity research at Curmi and Partners Ltd.

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