Updated | S&P raises Malta banking risk score, citing Pilatus concerns and BOV litigation

S&P said Malta’s banking reputation could be at risk even when potential weaknesses at international banks like Pilatus did not pose a direct risk to domestic financial stability

Pilatus Bank chairman Ali Sadr Hasheminejed
Pilatus Bank chairman Ali Sadr Hasheminejed

The credit rating agency Standard & Poors has highlighted increased reputational and operational risks for Malta’s banking sector, moving its risk score up two notches on its 10-point scale.  

S&P Global Ratings referred to allegations of money laundering against the now-shuttered Pilatus Bank and its “perception of poor transparency at some banks” on the island.

Pilatus chairman Ali Sadr Hasheminejad was arrested by the FBI in March on charges of money laundering and breaches of US sanctions against Iran, for actions predating the bank’s establishment in Malta in 2013.

Malta previously scored a four on the S&P Global Ratings banking industry risk score, but this has now been raised to a six-out-of-ten rating. A score of one on the index is the lowest risk, with 10 being the highest.

S&P said its anchor for banks operating primarily in Malta is now at BBB-, rather than BBB.

The credit rating agency said that even if potential weaknesses at “internationally oriented financial institutions” did not pose a direct risk to domestic financial stability, Malta’s banking reputation “could be at risk”.

Last month, the European Banking Authority found that Malta’s FIAU failed to impose effective sanctions against Pilatus Bank.  

The agency said the steady operating environment would continue to support local banks’ profitability and that it expected banks to keep a solid funding profile, with customer deposits that “more than cover” their funding needs.

The Central Bank of Malta reacted by saying that Malta’s banking sector was “sound, resilient and profitable” with non-performing loans at historic lows and below the eurozone average.

It said small international banks “like Pilatus Bank” posed no systemic risk on domestic financial stability, the Central Bank said.

Bank of Valletta’s long-term credit rating was also lowered to BBB from BBB+ while affirming its A-2 short-term rating. It maintained its negative outlook of the bank.

S&P highlighted the bank’s legal battle concerning failed shipping giant Deiulemar, citing risks for BOV’s business, capital and risk profiles from potential reputational damage and litigation charges. BOV has had €363 million frozen by an Italian court on a precautionary warrant, and on Tuesday the bank informed shareholders that it was setting aside €75 million for litigation costs and would not be issuing an interim dividend.

S&P said that if BOV were to lose that lawsuit, “the financial effect could be substantially” relative to its total equity of €962 million, though it noted that the bank could well have time to build up a capital buffer to plan for that eventuality.

BOV has acknowledged the downgrade but noted that the credit rating agency had highlighted its resilient profitability and improved asset quality.

PN reaction

In a reaction, the Nationalist Party said that the downgrade was the result of the “deterioration in level and quality of supervision of the financial services sector “.

“Pilatus Bank should never have been licensed to operate in Malta. The authorities not only licensed it but also allowed this bank to operate with impunity,” the PN said, pointing to the Malta Financial Services Authority and FIAU as being directly responsible.

It accused Finance Minister Edward Scicluna, who is responsible for the two entities, of failing to protect the country’s financial services sector, “choosing instead to protect his colleagues”.

“Minister Scicluna now has to take a tough decision himself. He must show whether he is capable of assuming political responsibility for the institutional failures that led to the reputational downgrade of Malta’s most important economic sector.”