Malta incomparable to Cyprus: S&P’s clean bill of health for Maltese banks

The size of Malta's domestic banks that would have be to supported in a crisis is a "fraction" of the 530% of gross domestic product in total assets amassed by Cypriot banks, Standards & Poor's have declared in report comparing Luxembourg's and Malta's banking institutions with those of crisis-ridden Cyprus.

In their report 'Small Countries, Big Banking Systems: How Malta And Luxembourg Differ From Cyprus', S&P declare that the factors behind Cyprus's difficulties is not currently likely to be replicated elsewhere in Europe.

While banks in Malta and Luxembourg do take significant foreign deposits, foreign liabilities fund domestic assets only to a limited extent, and assets have retained their credit quality while exposure to insolvent borrowers remain low and manageable.

"We there see limited direct implications form the Cypriot banking failure for Malta and Luxembourg," S&P said.

Although Malta's financial system is "large relative to the economy's output", S&P sees a limited liability for the government in a worst-case scenario.

With total assets almost eight times the size of its GDP, Malta's financial system, clearly separating between international and domestic banks, "results in almost no spillover from international activities into Malta's domestic activity" because the Maltese government would only have to support banks that take deposits and lend domestically - in total assets totaling 2.7 times the size of the GDP, mainly comprising of Bank of Valletta and HSBC (together 180% of GDP or 70% of total domestic assets).

Other foreign banks like Turkey's Akbank and Garanti Bank - the largest foreign presence in Malta at 360% of GDP - use Malta as a booking centre for foreign-exchange loans, but do not take local deposits or lend to Maltese residents.

Hypothetically, if a Turkish bank had to cease operations in Malta "the result would likely be at worst a minor shock to the economy and nothing like recent events in Cyprus. We expect that Maltese central government fiscal revenues might suffer on the margins, but the real economy would remain more or less unscathed."

Even if HSBC Malta finds itself in difficulty, it would be its UK parent, HSBC Bank plc, that would likely extend assistance: "HSBC Bank plc's issuer credit rating is higher than that of the Republic of Malta and its Maltese subsidiary's assets are what we view as a negligible proportion of the group's balance sheet."

S&P also say that although domestic banks remain exposed to worsening real estate prices, overall impairments will remain relatively contained. Otherwise there appears to be little exposure to "eurozone periphery sovereign or bank debt".

The ratings agency instead considers Cyprus's case as having been a fairly unique situation, attributed primarily to the Greek public- and private-sector defaults to Cyprus' large domestic banks. "Assets in Cypriot banks consisted of, in part, impaired loans to the Greek public and private sectors, and were ultimately worth far less than the banks' liabilities. Equity capital was insufficient to make up the difference."

In Cyprus, this component became too large for the government to save, with total assets at 5.3 times the size of GDP at end-2012. Compounding this was foreign deposits in the domestic banks, catering to Russian clients, and the blurring of resident and non-resident accounts.

"Only Ireland comes close in terms of the scale of its banking crisis and the connection between the banks and domestic real estate and private-sector employment," S&P said.

"The Cypriot banking crisis was born on the asset, not the liability, side of banks' balance sheets. The banks didn't fail because of the providence or the size of their customer deposits. In our view, similar to the Icelandic and Irish banks and the Spanish cajas before them, the Cypriot banks' difficulties are the result of their lending - not their borrowing - decisions."