Malta’s banking system remains strong and resilient

David Borg FCCA MIA MIT CPA
Director – Capstone Group

The outlook for the Maltese economy remains positive as confirmed by the EU’s winter economic forecast published on the 22nd February 2013. The report places Malta as registering the second highest forecasted economic growth within the 17 Eurozone countries with GDP growth of 1.5% just after Estonia with 3%. This is in stark contrast with the projected contraction of 0.3% in GDP growth across the Eurozone.

The Commission said that domestic demand is expected to become the main driver of Malta’s economic growth in 2013-2014 and the already buoyant domestic property sector will continue to register additional growth on the back of EU funded capital projects.

Following the latest developments in Cyprus, some speculation has been raised about the sustainability of other EU member states with a seemingly heavy reliance on internal banking sectors. Whilst the risk of contagion is possible, this is considered to be highly unlikely quite simply because the approach of the Malta Financial Services Authority, the regulator for financial services in Malta, in developing the island as a reputable financial services centre has been significantly different to the approach and methodology taken by its Cypriot counterpart. Although perhaps having one of the most over-sized banking sectors within the Eurozone, a careful analysis of the underlying facts and figures should be undertaken before any meaningful conclusions can be taken let alone communicated to a global audience as we have seen over the past few days. The island’s banking industry can be divided into two distinct sectors, ‘non-core’ or international banks and ‘core’ domestic banks. Non-core banks, leverage on the island’s popularity as conduit for foreign owned banks to effect loans back to their country of origin. This enables them to benefit from various economic factors including the lower cost of establishment, the high level of specialisation and resources available and some fiscal related incentives. Such activity generates virtually no direct economic or financial impact on the local economy. On the other hand, activity carried out by the ‘core’, or domestic banks, who act as the main financial intermediaries providing banking services to residents of Malta, have a clear and direct link to the domestic economy. Assets of these core banks amount to just below 300% of GDP which is within normal limits. Furthermore, around 70% of Malta licensed banks are foreign owned therefore inferring capital injections from parent companies in third jurisdictions would be forthcoming if additional capitalisation may be required as opposed to a ‘bail out’ from the EU or the IMF. It is therefore clear that the size of the core domestic banking sector is certainly manageable and not at risk.

These comments were also confirmed by Prof. Josef Bonnici, Governor of the Central Bank of Malta, who actually dismissed any comparison between Malta’s banking system and that of Cyprus, as ‘misleading’.

The recent change of government should also have no effect on banking policy nor on maintaining the anticipated level of growth since the newly elected Socialist Government has endorsed the road map introduced by the outgoing Nationalists to continue to develop Malta as one of the leading and most reputable financial services centres in the region.

Having observed the stand taken by the architects of the Cyprus bailout, namely Germany and the IMF, one may interpret a drive towards reducing oversized banking sectors which are failing or which are in trouble. This is clearly not the case in Malta who has also sent clear, strong signals that it is not ready to sanction and accept an emigration of funds from Cyprus to Malta. The message from the jurisdiction is loud and clear and for Malta it remains ‘business as usual’.