The Central Bank of Malta last week released the 13th edition of the Financial Stability Report (FSR), which examines and assesses financial conditions and developments in the Maltese financial system. The report primarily assesses the resilience of the local financial system and identifies sources of potential systemic risk.
The Financial Stability Report is typically released annually in August, followed by a semi-annual update in December. This year’s annual report was released a little earlier than usual. In my opinion, the Annual Financial Stability Report should be considered by all investors in the Maltese capital market because of the importance of the strength of the financial system for any economy and its capital market.
Given that the latest report released last week covers 2020, which coincides with the severe impact on the local economy in the wake of the pandemic, a review of the main findings becomes even more critical this year. In fact, in the 12th edition of the report published in August 2020, it was stated that “the COVID-19 pandemic constitutes the greatest test for the resilience of the Maltese financial system since the Great Financial Crisis”.
CBM continues to classify APS Bank plc, Bank of Valletta plc, BNF Bank plc, HSBC Bank Malta plc, Lombard Bank Malta plc and MeDirect Bank (Malta) plc as the top six national banks. Following the first bond issue of APS Bank plc in the fourth quarter of 2020, all of these banks except BNF Bank plc have securities listed on the Malta Stock Exchange, and that is why the Today’s article will focus only on the main findings of the report regarding major national banks.
In line with expectations at the onset of the pandemic, developments during 2020 left a significant impact on the profitability levels of core national banks following the sharp increase in net depreciation charges (which rose from just 0.5 million euros in 2019 to more than 150 million by the end of 2020), as well as a drop in gross income.
As a result, the aggregate pre-tax profits of the major domestic banks fell to just € 5.5 million in 2020, from nearly € 200 million the year before. This naturally had an impact on profitability ratios normally used in the industry, such as return on equity and return on assets.
In turn, this has also led to a deterioration of the operating cost-to-income ratio by two percentage points to 68.2 percent in 2020, which is above the EU average of around 65 percent.
Despite the economic slowdown, the balance sheets of major national banks grew by 4.2% to reach 25.7 billion euros, equivalent to just over 200% of Malta’s gross domestic product (GDP).
Customer loans remained the largest component of assets on the balance sheets of major national banks, accounting for 48.2 percent of total assets. The report explains that the continued expansion of the loan portfolios of major national banks has been largely driven by mortgages, which however moderated growth in 2020 compared to above-average growth in previous years. Mortgages to residents increased 6.6% in 2020 from the 10.3% increase in 2019.
However, the FSR also points out that the main area of asset growth has been mainly driven by the increase in holdings of government debt securities, which increased by nearly 20 percent to 14.5 percent of total assets. , reflecting “the opportunities for banks to use excess liquidity to buy government-issued debt as it sought to fund measures to support COVID-19.” In fact, the government issued a record amount of Maltese government shares in 2020, totaling 1.34 billion euros, all of which were intended for institutional investors.
The willingness and ability of BOV, HSBC and Lombard Bank to distribute additional dividends to shareholders in the coming months will be an important driver of the performance of the local equity market.
Customer deposits remained the main source of funding for the main national banks, financing nearly 83% of their balance sheets. Customer deposits increased by 6.6% to reach 21.5 billion euros, compared to a growth of 3.8% in 2019, largely thanks to the increase in demand deposits, which increased by 10 , 3%, while term deposits continued to decline. The report says that during the early stages of the pandemic, household deposits accelerated as households increased their savings, possibly also for precautionary reasons, while there was also a contraction in consumption. .
As highlighted in the 2019 report, the six major national banks entered the pandemic with healthy capital ratios, which continued to strengthen in 2020. In fact, the Tier 1 capital ratio improved for reach 18.5%.
In essence, the FSR found that the Maltese financial system remains resilient to the unprecedented economic shock caused by the pandemic. The strong capital and liquidity positions of Maltese banks, coupled with their prudent business models, have enabled these institutions to help households and businesses weather the effects of the pandemic.
The interim financial reporting season for companies with a December year-end begins next week, and three of the major national banks (namely APS Bank plc, Bank of Valletta plc and HSBC Bank Malta plc) will release their financial reports. half-yearly between July 29 and August 2. Although a few weeks ago, these three banks all provided detailed information on their performance in the first quarter of 2021, the interim results will be closely monitored to understand the dynamics across the banking sector as well as other sectors of the bank. economy, which inherently suffer from the continuing impact of the pandemic.
In addition, the interim results could also shed additional light on the strategies adopted by the three banks to improve their profitability in the context of the current difficult environment, which goes beyond the pandemic and includes other important obstacles, such as the very low interest rate scenario. , Malta’s additional jurisdictional risks after the country was graylisted by the Financial Action Task Force (FATF), as well as the disruption created by fintech and other technological innovations.
An area of significant interest to the investing public since the onset of the pandemic (particularly with respect to the three banks that issued equity securities and not just bonds) has been the ability of banks to resume dividend payments following the recommendations from the European Central Bank issued at the end of 2020 for banks to abstain or limit dividends until September 30, 2021.
However, the FSR notes that banks are encouraged to continue to preserve their capital and continue to build their provisions to mitigate any potential increase in credit risk given the continuing uncertainty surrounding the pandemic. HSBC Bank Malta plc and Lombard Bank Malta plc have started distributing dividends to shareholders following the publication of the 2020 annual accounts a few months ago in accordance with the recommendations of the European Central Bank.
In view of the considerable influence that the banking sector has on general investor sentiment, the willingness and ability of Bank of Valetta plc, HSBC Bank Malta plc and Lombard Bank Malta plc to distribute additional dividends to shareholders in the months to coming will be an important driver of the performance of the local stock market in general.
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