Banks’ high interest rates under investigation

Malta’s two major banks, and a third core domestic bank – Banif Bank – have denied suggestions by European Commission experts who have examined the island’s banking sector, that high interest rates are the result of some form of collusion or anti-competitive tactics by the banks.

The European Commission’s IDR (in-depth report) has not ruled out possible collusive behaviour among banks, after four of the five core domestic banks, identified by the Central Bank of Malta, appeared to have similar interest margins on loans.

The IDR found that the interest margin – the difference between interest rates on deposit accounts and loans – was so similar between banks, that it was possible that the limited competition had allowed interest rates on loans to converge between different banks… even if the profits that Maltese banks are making would allow them to start bringing interest rates down, in line with other EU banks.

In 2009, the difference between ECB rates and those offered by Maltese banks was 2.8%, and in 2013 this climbed to 4.8%.

And when it comes to profits, Maltese banks also registered the second highest return on assets in Europe, and the highest return on equity, with 24% compared to just 5% for German banks.

But the most concrete fact of all is the lack of competition that exists between the five domestic banks – BOV, HSBC, APS, Banif Bank and Lombard Bank – which makes their market concentration the highest in the eurozone. With the Maltese people’s propensity for saving giving banks a great deposit base, and super profits, all this could have an effect on interest rates, high banking fees and commissions.

Banking denials

But here’s what the banks that MaltaToday spoke to, said about the IDR.

Bank of Valletta “categorically denied” the claims of collusion on interest rates.

“Over the last three years, BOV sanctioned no less than €2.2 billion of credit facilities to the Maltese economy, 60% of which were taken up by local business. Availability and access to finance has been one of the main reasons why the Maltese economy has remained resilient during the recent economical and financial crisis in Europe,” a BOV spokesperson said, referring to such initiatives as the Jeremie programme and Start Plus, which made finance available to so many Maltese SMEs.

“The EU Commissioner for SMEs himself, as well as the European Investment Fund commended BOV… our Jeremie programme was the model of how other countries in Europe should implement such an important lending programme.”

Banif Bank also expressed “strong reservations” on the collusion claim.

“Rates are set based on the bank’s strategy and set targets. In addition the rates change according to various factors including the term, client’s risk exposure, and economic trends, among others. Our claims can be substantiated by the fact that during the years that Banif has been operating in the Malta, we have witnessed various competitive moves between local banks to the benefit of the end consumer,” a bank spokesperson said.

“When Banif entered the market, we challenged the status quo. Obviously Banif had to set its rates keeping in mind its objectives and shareholder return. Banif’s philosophy is not to compete on price but on high quality service and product innovation.”

Like BOV, HSBC Malta is the other main core domestic bank, which last December launched a €50 million fund for local businesses accessing new markets, offering lower exchange rates, reduced interest margins, and specialist advice.

“HSBC reviews its pricing on a regular basis, taking into account the needs of both its depositors and borrowers, while being cognisant of the competitive landscape. There is no single formula for pricing as this depends on factors like the type of customer – be it retail, small business or corporate – and most importantly, the risk-rating of the customer and the purpose of the facility required, which varies from case to case.

“It is important to maintain a proper balance in the banking system between deposits and loans to ensure that appropriate support is provided to the local economy which in turn will facilitate growth. The growth rate in Malta has been above average throughout the economic downturn,” a spokesperson said.

Investigation into interest rates

But even finance minister Edward Scicluna agrees that the high interest rates are something the government must learn more about, which is why back in November he announced an investigation by the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority.

“The fact that there are two major banks operating on the island makes the local market somewhat duopolistic. This does not however prove that there is collusive behaviour taking place,” Scicluna says about the EC’s in-depth review report.

But Scicluna doesn’t rule out the conclusions of the IDR.

“Based on indicators produced by the Central Bank, which could be interpreted as signs of anti-competitive behaviour, the government asked the MFSA and the MCCAA to investigate. Both institutions are currently undertaking this evaluation.”

Not only about profits

Although Maltese banks have gone to lengths to deny that their lending rates are unnecessarily high, pressure is now mounting from all sides with comments from the governor of the Central Bank of Malta Prof. Josef Bonnici, and the chairman of the economic and financial affairs committee in parliament, Labour MP Silvio Schembri, signalling a determined attitude on addressing the spread.

Labour MP Silvio Schembri says his call for banks to lower their credit interest rates is justified.

“The IDR indicates that there is anti-competitive behaviour, and while I do not agree with all the conclusions of the Commission, I find some of these conclusions are what I have been saying for the past months,” Schembri told MaltaToday.

“Personally I do not think there is collusive behaviour between banks on interest rates, but in my opinion bank charges and fees are so high that these are serving as a barrier to change from one bank to another, and therefore leading to less competition.

“One cannot say that there is no competition at all because otherwise, the relatively new banks could not have survived so long. On the other hand I still believe there is room for improvement.”

Schembri says that the fact that core banks have now reported relatively high profits even during the last recession, shows that the market remains dominated by the oligopoly of Bank of Valletta and HSBSC Malta.

“One must also keep in mind that our banking system was vital in avoiding a financial crisis, implying that their conservative model has worked. But although banks are not charitable institutions, they have to think long-term and cannot make super-normal profits at the cost of economic growth.”

Even MEP candidate for Labour, Charlon Gouder, is joining the bandwagon of outrage, saying the IDR findings on interest rates are “worrying” considering they are 3% higher than the eurozone average.

Big savers: a double-edged sword

Marie Donnay, a head of unit who led the in-depth report (IDR), told MaltaToday that Malta has higher interest rates on loans for new businesses that the euro area on average.

Moreover, the difference between the interest rates that banks charge on new business loans and pay on household deposits, is higher in Malta than in the euro area.

“The reasons for this phenomenon are complex and very likely a combination of elements,” Donnay says, saying the IDR gives some pointers to the investigators from the MFSA and the MCCAA who are undertaking an examination of the banks’ interest rates.

Donnay’s report offers four clear indicators as to why banks are keeping interest rates high.

Firstly, there is the high risk banks are facing from the corporate sector, especially in construction which is still struggling to shift property units. “The corporate sector in Malta appears to be more indebted and more highly-leveraged than most other EU states. This suggests that Maltese companies could be more vulnerable to shocks, which could translate into losses for the banking sector. In order to protect themselves against these credit risks, banks could request higher interest rates in order to support profitability and preserve their capacity to build capital buffers.”

However, while the European Central Bank has been pulling down the loan rates – and in most eurozone states interest rates for loans have been falling faster than for deposits – in Malta the margin has remained remarkably stable.

Donnay says this reflects banks’ “stable funding base” – people in Malta save a lot in deposits, so banks have a low reliance on funding from international financial markets, limiting the need to compete for retail deposits by increasing interest rates on deposit accounts.

“An investigation into this area might improve the efficiency of financial intermediation in Malta, which could be beneficial for growth,” Donnay says.