Risk to Malta’s financial stability ‘should not be overstated’ – Brussels

Malta is experiencing macroeconomic imbalances which will need monitoring and policy action, the European Commission said today in a series of in-depth reviews it carried out on various EU member states.

Commissioner Olli Rehn today said that this was a wake-up call for EU member states to regain competitiveness, and that country recommendations will be formally presented in May.

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The European Commission also sent a fair notice to observers that risks to Malta's domestic financial stability stemming from the presence of a very large financial sector "should not be overstated" given the very limited exposure of internationally-oriented banks to the domestic economy.

But it still urged continued regular monitoring of the activities of the internationally-oriented and non-core domestic banks.

The EC said Malta's high corporate and government debt levels "warrant attention to ensure the long-term sustainability of the public finance" and once again called to attention Malta's very large financial sector, and the strong link between domestic banks and the housing and construction market.

The EC said banks had to watch out for property price developments and collateral valuations, and support the rental market to prevent the prospect of property price bubbles. Malta's local banks are major lenders to homeowners.

The usual reminders of Malta's core problematic areas were reiterated by the EC: the sustainability of public finances due to the high cost of pensions, and liabilities from debt in state-owned companies. Again, the EC is telling Malta that it should carry out "timely pension and healthcare reforms" - which in EU lingo means raising retirement age and introducing payments for state healthcare - to cut down on public debt.

And as usual a warning to banks: to be careful of how much they loan to the private sector in the face of a real estate market that has not been performing well for years now.

Core domestic banks do not appear to be exposed to the volatility on international financial markets. Bank of Valletta and HSBC own 80% of the overall 220% of GDP in total assets owned by BOV, HSBC, APS, Banif and Mediterranean Bank.  The EC said that their traditional banking model and the stable deposit base, thanks to the high propensity to save by Maltese households, helped the core domestic banks cope with the financial crisis.

But although profitable, the core domestic banks' specific provisioning against loan losses is rather low. Almost two-thirds of private sector loans are secured by real estate collateral. So far, the slowdown in the construction sector has not hit "particularly hard" the value of the banks' loan value: the share of non-performing loans increased moderately in recent years, from around 5% in 2008 to just above 8% in June 2012.

But Brussels says that higher provisioning is needed to strength non-performing loans coverage, as well as discouraging an increase in the loan-to-value ratio of real estate loans.

The EC was more concerned about high public and private debt, saying the burden of funding the government was entirely on Maltese residents, the risk being that it "crowds out private investment and consumption in case of insufficient liquidity in the financial system."