Bank of Valletta enjoyed a successful 2010, but is taking a prudent approach to 2010

Bank of Valletta enjoyed a successful 2010, but is taking a prudent approach to 2010

Malta's domestic banking sector is small and follows traditional principles, yet a steadily growing international banking presence is capitalising on interesting new opportunities such as those presented by the island’s emerging fund management and insurance industries.

There are only 25 banks in Malta, and two of them dominate: Bank of Valletta and HSBC, each with roughly 45% of the local market. However, most banking activity is internationally oriented, so although the domestic retail and business market is close to saturation point there are still plenty of opportunities.

The country's list of banks is diverse, albeit dominated by those of European origin. Besides the two already mentioned, the list includes Akbank, Banif, Bawag, CommBank Europe, Deutsche, Erste, FIMBank, Fortis, National Bank of Greece, Raiffeisen, Sparkasse, Turkiye Garanti and Volksbank. Banif, from Portugal, is a recent entrant and is aggressively targeting the local retail market. CommBank Europe, owned by Commonwealth Bank of Australia, uses the island as a European project finance centre.

FIMBank, a trade finance provider, is an interesting case. Its headquarters are in Malta, but it is largely owned by Kuwaiti interests, with the International Finance Corporation, an arm of the World Bank, having a 5.82% shareholding. FIMBank uses Malta as a base to provide trade finance services around the world, and it has offices or joint ventures in several other countries, including the US, Brazil, Russia, Singapore, Egypt and the United Arab Emirates.

Credit and financial institutions in Malta

Safe and sound

Apart from its relatively small size and international orientation, Malta’s banking sector is characterised by its conventional banking principles. It has the 10th soundest banking system in the world according to the World Economic Forum’s Competitiveness Index 2010-11, up three places from the previous year.

 “The financial crisis didn’t hit us as it did other centres, and that is mainly because of the prudent business model which banks here have been following,” says James Bonello, secretary general of the Malta Bankers’ Association (MBA). “On the funding side, retail banks have minimal inter-bank reliance or exposure as customer deposits cover all their lendings more than 1.6 times over. The internationally oriented banks also have stable deposit funding or are funded by the parent through intra-group loans and other mechanisms.

 “On the asset side, the lending norms have always been very prudent. For example, the mortgage book of the two major banks is quite substantial because the culture here in Malta is to own your house – that’s the aspiration of all young couples – but the default rate on that book is negligible.

“There was some concern expressed by the recent International Monetary Fund mission here about the banks’ high exposure to real estate, but banks started putting the brakes on property development financing some years ago. The percentage of a development they would now finance could be as low as 50%, and would typically not exceed 60% in the case of more deserving applications, so lending is conservative.”

Mr Bonello says the same careful principles apply to banks’ investments. “Their investment book has never been in exotic assets – it has been in very well rated securities. In the financial crisis, of course, all investments had to be marked to market and banks suffered a decline in market value. But apart from a relatively small loss on Lehman Brothers sustained by one bank, there were no shocks to the system.” And who would have thought that Lehman wasn’t a good investment?

Future opportunities

Victor Rizzo Giusti, chairman of the MBA and general manager of Volksbank Malta, says only five or six of Malta’s banks are involved in retail activity, Volksbank being one of them. “The domestic market is very small, so banking sector growth will be mainly on the international side,” he says. As of September 2010, total assets of the country’s banking sector amounted to about €50bn, some €37bn of which were with banks not doing much domestic business.

Much of the future growth will come from servicing other rapidly growing areas of finance in Malta, in particular the funds industry, including fund managers and fund administrators, and insurance, particularly captive insurance companies.

Companies are licensed by the Malta Financial Services Authority to operate either as 'credit institutions', which are fully fledged banks allowed to take deposits, or as  'financial institutions', which provide banking services but cannot take deposits. Figure 1 shows the numbers of each, and the growth trends over the past three years. Deutsche Bank has had a minor presence on the island for several years as a 'financial institution', but last year upgraded to a 'credit institution'. Its main reason for doing this was so it could act as a custodian for the growing number of fund managers on the island, which puts it in direct competition with Bank of Valletta’s Valletta Fund Services and HSBC Securities Services (Malta).

During the course of 2010, two other companies were licensed as credit institutions – FCM Bank and IIG Bank (Malta) – and one – The International Banking Corporation (Malta) – had its licence revoked.

Big in a small market

HSBC has been on the island since it bought Mid-Med Bank from the government in 1999. The acquisition gave it a 40% to 45% share, depending on sector, of the domestic market, a share it has maintained in the face of stiff competition from its main rival Bank of Valletta. Nearly 30% of HSBC Bank Malta’s shares remain in public hands and are quoted on the local stock exchange. Its 2010 results were good: profit before tax was €83.1m, up 16.7% on 2009; total assets were €5.7bn, up 10.7%; loans and advances to customers were €3.3bn, up 2.4% (the only key indicator to register slow growth); customer deposits were €4.5bn, up 9.2%; and return on equity was 16.1%, up from 15%.

Alan Richards, the bank’s chief executive officer, says that in the aftermath of the 2009 recession, 2010 “was a difficult year, so the results are especially pleasing”. “The local economy is performing relatively well, though any slowdown in growth in Europe will inevitably impact Malta’s open economy,” he warns. Pleasing results maybe, but Malta is a small nation – it is the smallest in the EU, by both land area (316 square kilometres) and population (413,000). So why should a bank as big as HSBC bother?

“It’s an attractive market if you look at the returns we generate,” says Mr Richards. “Our annual return for shareholders here over the past decade has been about 15% to 20%. By any international standards that’s good.

“It’s not just about short-term returns, though. Malta as a small trading nation is well connected with some important parts of the world, especially in Europe and Africa. Malta is a strong bridgehead into north Africa and the Middle East. SmartCity Malta, a technology park on the picturesque coastline, is a major investment by a UAE company that will help the growth of the information and communications technology sector. And there are other new pockets of industry developing here, such as aviation, with SR Technics and Lufthansa Tecknik specialising in aircraft servicing. These developments all suit HSBC as an international bank and play to our strengths.

“Malta doesn’t have a large domestic financial market, but neither do jurisdictions such as Bermuda or Jersey. Malta is gaining significant momentum as a creditable international financial centre in the eurozone and as an international bank we are well placed to help with that development.”

Playing to Malta's strengths

As well as employing about 1300 people in its various banking and other activities – which include insurance, asset management and fund services – HSBC set up a 500-seat call centre two or three years ago to serve its UK customers. Other countries were considered for this offshore activity, but Malta won because it is a relatively low-cost EU state, has a good information and communications technology infrastructure, “sensible regulations” and highly skilled people.

Mr Richards admits that the current instability in north Africa and the Middle East – including Libya, not far across the water and where many Maltese firms do business – is a business risk. On the other hand, Malta’s tourism industry, which is one of the mainstays of the economy as the island has the advantage of a warm and sunny climate nearly all year round, may benefit from a redirection of winter sun tourists.

Chris Bond, head of global banking and markets at HSBC Bank Malta, says there is strong demand for his division's services. “In the first half of 2010 we were extremely active in the local corporate bond market. Of the 11 bonds issued last year, HSBC acted as lead manager for seven of them. Also, we are seeing very strong growth in our funds business. As Malta develops its reputation as an international financial services centre, fund sponsors and promoters are choosing HSBC for its international credentials. We have a record pipeline of new mandates.

“Malta's diversified economy showed great resilience during the financial crisis. In 2009, it experienced negative growth of just 1.9%, versus an EU average of minus 4%. Then, in 2010, growth rebounded to 3.4%, again considerably stronger than the 1.7% EU average.”

HSBC has a good number of customers in Malta for its wealth management products. “The investor base here is very much retail and high-net-worth oriented –  there is a limited institutional investor base,” says Mr Bond. “The Maltese are very prudent. They save for their future as opposed to borrow to consume. We identify their needs, bring in products from within the group that meet those needs, tailor them to the local market, and distribute them via the branch network and wealth management advisors.

“So equity-linked deposits have become very popular here. They provide the capital protection of a bank deposit, but give investors the opportunity to gain some significant upside potential. For example, in December HSBC Malta launched the 25th issue of its equity-linked deposit account, which can yield up to 6.25% a year. The return is linked to the performance of a currency basket composed of the Brazilian real, Indian rupee, Russian ruble and the Chinese renminbi against the euro, thus giving customers access to these high-growth emerging markets.”

The original local bank

Bank of Valletta (BoV) is the longest established of Malta’s two main banks. It was formed in 1974, but its roots go back to 1809. Its main shareholders are the Maltese government (25.23%) and UniCredit (14.55%), and it provides the full range of banking services, along with fund management and administration and insurance. It too enjoyed the fruits of last year’s economic bounce-back. For the financial year ending September 30, 2010, profit before tax was €98.9m, up 20.1% on the previous year; total assets were €6.3bn, up 1.9%; and return on equity was an enviable 21.9%, up from 19.8%.

Roderick Chalmers, the bank’s chairman, is still cautious at this stage in the cycle. “Although our results were good in 2010, I think prudence would be a good friend to have in 2011,” he says. “It’s still tough out there for the global banking system. In the first half of 2010 we were back in stable country, and business was looking good, but in the second half the world got the beginnings of the aftershock following the 2008-09 financial crisis – what was a banking problem has transferred into a public sector problem in parts of the eurozone, and the US is not far behind.”

Although Malta’s financial system held up better than most during the crisis, with no bank failures or state bailouts, it did feel the indirect effects. “We are plumbed into the network of global banks, and when they come under pressure we feel it,” says Mr Chalmers. He is concerned that the sovereign debt problems in Europe, which started with Greece, moved on to Ireland and are now surrounding Portugal, may escalate.

“If it stops there, my judgement is that it will be containable,” he says. “But if it starts sliding into Italy or Spain, you then have a problem of a different dimension. I think there is a commitment among the political classes in the eurozone to find a solution, but it will always be the minimum response at the last possible moment which is a very unhappy state of affairs for the markets. As a result, you see great skittishness and schizophrenia in the markets because they are not sure what is happening. The markets fear that a failure to find a solution to the eurozone’s public sector problem will transfer the issue back into the banking sector – because who holds Greek, Irish, Portuguese and Spanish debt? It is the German, British, French and other banks.”

BoV’s financial markets book clawed back some of its unrealised mark-to-market losses in the first half of 2010, but the second half saw spreads widening again across the eurozone and that has had a negative impact on the value of its book. “It is a temporary impact because one of the issues that has helped us get through the difficult period is that we are a very liquid institution and have a virtually zero reliance on wholesale funding and are therefore able to sit on our portfolio until it matures,” says Mr Chalmers. “Any adjustments tend to be temporary mark-to-market ones as opposed to long-term ones, but I think we will see a continuing widening of spread in 2011 in Europe.”

As well as having plenty of liquidity, BoV is well-capitalised, as last year’s EU-wide official stress-test demonstrated. Even so, the bank decided to raise €120m in two bond issues last year, just in case. Says Mr Chalmers: “Our capital ratios already comply with the Basel III requirements, but at the time of the uncertainty a year ago we thought that if there was funding available we should take it because, to quote an Otis Redding song, ‘you don’t miss your water ‘til the well runs dry’.” 


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter