Moody’s, Fitch reports cast shadow on Maltese banking

Maltese banks remain constrained by an uneasy economic environment, according to Moody's Investors Service’s new Banking System Outlook on Malta issued late last week

Malta, Moody’s explains, remains strongly dependent on tourism, while other important sectors - namely furniture, textiles, food and chemicals - are vulnerable to growing competition, driven by EU-related liberalisation and reduced protectionism as the country moves closer to EU accession.

Moody’s explains that unless managed effectively, this development could lead to further deterioration in the local banks' loan portfolio quality. According to Moody's, local banks surveyed - HSBC Malta and Bank of Valletta - have very strong positions in the domestic market and the degree to which they have been assimilated into the Maltese economy as a whole makes them too important to be allowed to fail.

As such, in the report Moody's expresses its belief that the government authorities would support the banks if the need were to arise since a failure to do so could potentially destabilise the entire financial system and have severe effects on the domestic economy.

In the case of HSBC Malta, the deposit ratings impute external support from the bank's ultimate parent, HSBC Holdings plc. The acquisition of Mid-Med Bank by HSBC in 1999 brought a new element of competition to the Maltese banking system and introduced new business standards. As part of an international financial services group, HSBC Malta has been able to offer its clients more sophisticated and developed products and services, giving the bank a competitive edge over its main rival, BoV, Moody’s explains

"However, Bank of Valletta maintains an image as the only 'Maltese' bank and thus remains the only alternative for the Maltese public not wishing to bank with the 'foreign' HSBC Bank Malta. In this respect there is some uncertainty over what effect the upcoming privatisation of BoV might have on its image as the only 'Maltese' bank," explains Constantinos Pittalis, Vice President, Senior Analyst and author of the new Banking System Outlook.

The Moody’s report follows hot on the heels a report by fellow credit rating agency, Fitch, which had downgraded Bank of Valletta’s long term outlook from A- stable to A- negative. Fitch had also downgraded BoV’s individual rating from B/C to C. However, the Bank’s short-term outlook had remained unchanged at F2.

However, in its reaction, BoV associated the downgrading with the fact that international credit rating agencies have been applying more stringent criteria in granting credit ratings.

BoV explained that the revised ratings will not impact in any significant manner on the Bank’s profitability or funding programmes and that the all-important short-term credit rating of F2 has been affirmed, while the long-term rating left unchanged at A-.

"The change in the outlook from stable to negative was a reflection of a number of factors which had affected the Bank's profitability in 2001, principally a slow-down in the international and domestic economy and the drop in profits generated by the Bank's associated companies," the bank states.

BoV noted that while the bank’s long-term outlook had been changed from stable to negative, the Bank was satisfied that the efforts of the Bank's management to consolidate BoV’s leading role in the Maltese economy have been recognised by Fitch in that the Bank's short and long-term ratings have been re-affirmed at F2 and A- respectively.

BoV adds that its financial results over the first six months of the current financial year show that the profitability level has stabilised, despite a consistent increase in the Bank's provisioning reserves and a more stringent approach to credit quality assessment, offset by increased interest and non-interest income.

"It is heartening that Fitch ratings have also taken note of the Bank's strong position in the Maltese financial system, the very stable retail deposit base and the strong capitalisation," BoV explains.

BoV said that it will be working over the coming months on improving the asset quality of its balance-sheet while preserving current levels of profitability.