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Waiting for test results can be stressful. So, when Malta’s financial system passed EU-wide stress tests with flying colours, it might have been tempting for banks to rest on their laurels.
The Bank of Valletta (BoV), chosen to participate for the second time in the tests, saw its core tier one capital ratio drop marginally to 10.4% as a result of the unlikely but plausible shock scenario. In other words, well above the 5% pass rate required.
That bolsters an already strong performance during the financial crisis (no bailouts were required) and the Central Bank of Malta (CBM) confirms that banks maintain strong capital adequacy and liquidity ratios as well as the ability to withstand shocks. No wonder then that Malta is ranked tenth out of 139 economies for soundness of banks in the World Economic Forum’s 2010-11 Global Competitive Index.
Yet the sector is dominated by two banks: HSBC and BoV, which control about 90% of the market. A newcomer like Banif Bank, founded in Portugal, hopes to be listed on the national stock exchange with an eye on becoming a major market player. In all, 25 credit institutions serve international or domestic markets, of which seven are considered “systemically relevant”.
And just because Malta got straight-As on its last report card doesn’t mean CBM has stopped doing its homework, instead assessing systemic vulnerabilities from high concentration risk on banks’ balance sheets. This is owing to large exposures to the real estate sector and a high proportion of short-term and thus potentially volatile deposits in total deposit liabilities.
Meanwhile, property development is in decline. BoV chief, Tonio Depasquale, says the last few months have seen weakened credit demand.
“The financial services sector is expanding, but it is not capital intensive,” he says. Adding to concern is that fact that consumer default rates increased last year, though the ratio of mortgage defaults remained stable at 2.5%, according to CBM. “The lower quality of consumer loans can be viewed as a potential leading indicator of further financial strains ahead,” said its most recent Financial Stability Report, adding that pressures may intensify if interest rates increase.
In terms of laurels, then, in Malta there is cause for celebration but no rest.
Duopoly of Success
HSBC and Bank of Valletta are big fish in a small but competitive pond, their chiefs must angle with the right lure
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Long established in Malta, BoV has a relationship with a big slice of local corporate businesses, often being the go-to bank. “We have fewer restrictions because our head office is in Malta,” says Depasquale, adding that being rooted means BoV understands the Maltese situation while also conferring responsibilities for safeguarding employees.
A new initiative, the BoV mental health policy, was launched during Healthy Lifestyles Week. “It was important to us because we are a local bank and we depend more than other institutions on our staff,” he says, indicating a preference for a communication-based management style to foment team mentality.
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Before becoming head of HSBC Malta in 2008, Richards worked across Asia-Pacific and the Middle East in countries such as Turkey, Malaysia, China and Australia. Still, he is excited by prospects in the here and now.
“The fact that Malta is now known as a viable alternative to Luxembourg or Dublin is very significant,” he says. “We’re now seeing a pipeline of referrals bigger than we’ve ever seen.”
This, he says, is backed by research from the City of London, home to 80% of hedge funds, showing that Malta ranks fourth for global centres poised for significant growth.
“It’s an exciting time,” says Richards. “We’re very optimistic about the future.”
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