Updated | Maltese banking resilient and profitable, MFSA reacts to S&P risk warning

The Maltese financial services regulator has declared Malta’s banking sector remains resilient and profitable, in the wake of a banking risk report by Standard & Poor’s.

The credit rating agency highlighted increased reputational and operational risks for Malta’s banking sector, moving its risk score up two notches on its 10-point scale. It referred to allegations of money laundering against the now-shuttered Pilatus Bank and its “perception of poor transparency at some banks” on the island.

“The MFSA reaffirms that the banking sector in Malta remains resilient and profitable with local banks benefiting from a steady operating environment and an expanding economy,” the financial services authority said in a statement.

“The MFSA has always supervised the banking sector very closely and continues to do so within a dynamic regulatory environment. In efforts to continue strengthening the Authority, major reforms are underway in its organisational infrastructure including investment in top tier supervisory technology, increase in human resources and technical capacity in order to enhance the efficacy and governance of the sector but also to address current and future challenges particularly in the RegTech and FinTech space.”

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.

“Bank of Valletta plc is subject to direct supervision of the ECB, although the MFSA engages on an ongoing basis both with the ECB and Bank of Valletta. The MFSA is confident that all de-risking measures including potential risks relating to legacy litigation are being addressed strategically by BOV within a long-term view of the business,” the MFSA said.

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”.

Malta’s Central Bank said Malta’s core domestic banks’ asset continued to improve, with non-performing loans falling to a historic low and below the euro area average. “Small international banks, like Pilatus Bank, do not pose any systemic risk on domestic financial stability,” it said.

“The business model of core domestic banks fundamentally remains that of channelling retail deposits to resident lending and to investment in low risk securities. The banking sector, in particular core domestic banks, has already been undergoing a rigorous de-risking process, which is set to continue and hence mitigate further any perceived reputational risk.”

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.

“[Both entities] fall under the direct ministerial responsibility of Minister Edward Scicluna who must now shoulder his responsibility for yet another damning review of his handling of Malta's financial services sector.”

The PN said that following the Panama Papers, Scicluna had said that Prime Minister Joseph Muscat needed to take tough decisions. “These decisions were not taken.”

It accused Scicluna 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.”