Malta’s concentrated banking system still performing well, says Moody’s

Malta‘s domestic banking system remains highly concentrated but continues to record good performance thanks to growth in household credit, Moody’s Investors Service said in its new Banking System Outlook for Malta.

Malta‘s domestic banking market remains dominated by the two largest deposit money banks (DMBs), namely Bank of Valletta (rated A3/P-1/D+) and HSBC Bank Malta (not rated), which jointly control around three-quarters of domestic banking assets.

Foreign-oriented banks account for around 55% of aggregate banking system assets, but they cater only to non-residents and are not the focus of Moody’s report.

“The highly concentrated and duopolistic nature of Malta‘s domestic banking market remains a drawback for the system. In comparison to the two largest banks, the remaining domestic market participants are significantly smaller and, although there are no regulatory barriers to entry, existing and new market participants would need to invest in considerable resources (in the Maltese context) to match established players,” said Stathis Kyriakides, a Moody’s Analyst and author of the report.

“The small scale of the operating environment also limits the banks’ lending opportunities and exposes their loan portfolios to industry and concentration risk, primarily in the manufacturing, tourism and construction sectors.”

Household/personal lending has been the main driver of the credit expansion of recent years. In particular, low interest rates and higher household income have led to growing demand for mortgage loans and rising real estate prices.

Moody’s cautioned that, despite historically low delinquency rates, the consistent accumulation of debt by individuals could compromise their repayment capacity in the event of a sharp rise in interest rates or cyclical strains on income levels.

The rating agency also views banks’ heavy reliance on real estate collateral as a concern: any material recession-driven decline in the property market could potentially jeopardise the banks’ asset quality and might weigh on ratings.

In recent years, Malta‘s banking regulation and supervision functions have continued to improve and strengthen in an effort to bring them in line with EU standards.

“We view the country’s impending adoption of the euro as positive in promoting further alignment with more advanced supervision practices. It should also shelter Malta‘s economy from external financial shocks, remove most domestically oriented banks’ (already low) currency risk and eliminate transfer risk,” Kyriakides explained.

The banking system has maintained its relatively good performance in recent years, thanks largely to comfortable net interest margins and a higher growth rate in loans, especially in higher-yielding retail loans.

In terms of efficiency, banks’ cost base has also improved, in part due to improved income levels, as well as a concerted effort by banks to contain their operating expenses. As interest rate margins appear to have stabilised, Moody’s expects banks’ overall profitability levels to remain adequate, sustaining the banking system’s consistent track record.