High interest rates sign of anti-competitive behaviour

A report by the European Commission's directorate-general for finance has found a healthier economy in Malta, but warned that there are "indications of anti-competitive behaviour" in the core banking segment.

The island's banking industry is divided into two distinct sectors, 'non-core' or international banks and 'core' domestic banks: banks like Bank of Valletta, HSBC Malta, APS Bank, and Banif Bank, who act as the main financial intermediaries providing banking services to residents of Malta.

According to the EC, a look at the structure of income of the core banks suggests some indications that there could be anti-competitive behaviour, especially over interest rates being charged on loans.

It said that the divergence in the income ratios across the sector usually reflects differences in the asset portfolios. Even though there have been divergences in the past, the interest margin on loans in the core banks appears to be converging.

"One bank is an outlier and charges higher rates on average, which can be explained by the higher level of credit and concentration risk on its books that is eventually passed on the prices of its products. Converging interest margins could reflect the broadly similar loan books across the institutions.

"On the other hand, however, it could be indicative of collusive behaviour as, excluding the one outlier, banks charge broadly similar interest margins despite possible differences in the risk profile of their assets.

"Moreover, there is notable divergence in the levels of fees and commissions, particularly fees related to retail services, between the top two banks and some smaller domestic banks. The former thus appear to have been able to exercise their market power and charge higher fees than their peers."

The report appears to reflect complaints from the small business community that banks are still reticent on extending more open lines of credit, by keeping rates of interest at a high level.

Labour MP Silvio Schembri has also led talks as chairman of the parliamentary economic and financial services committee, on bringing banks to lower interest rates on lending to SMEs.

The report in fact warns that low levels of competition among the core domestic banks could result in inefficiencies and higher costs for businesses, presenting a drag on growth.

It also confirmed that the interest rates charged on corporate loans appear relatively high, while retail banking fees in the two dominant banks - BOV and HSBC - appear higher than in the rest of the sector. "A closer look at the drivers of the high intermediation margin and fee and commission income could, thus, be warranted."