On a monthly basis the European Central Bank publishes a list of significant entities that it directly supervises. For Malta, Bank of Valletta plc, HSBC Bank Malta plc and MDB Group Limited (Holding company for MeDirect Bank (Malta) plc) take the spot for the three significant credit institutions.
Both BOV plc and HSBC Bank Malta plc hold total assets which are above 20 per cent of GDP. Local banks fall under the band whose total assets are less than €30 billion. The percentage of European significant banks falling under this segment is 23 per cent out of all significant banks. This provides for a good sample to compare both performance-based and capital-based measures between Maltese banks and European counterparts.
Overall performance metrics for Europe’s most significant credit institutions shows that the return on equity (ROE) has recovered marginally to six per cent in June 2019 from the previous quarter. However, deteriorated when compared with the same period of the previous year. The same could be observed for return on assets (ROA). Q2 2019 numbers show that banks in Malta had their ROE at 7.18 per cent compared to Germany’s 0.01 per cent, France’s 6.41 per cent, Italy’s 7.73 per cent and Spain’s 7.76 per cent.
On a similar note, Maltese banks have their ROA of 0.62 per cent compared to Germany’s zero per cent, France’s 0.40 per cent, Italy’s 0.58 per cent and Spain’s 0.57 per cent. Maltese banks also fair stronger when comparing them with other similarly sized banks. Indeed, the weighted return on equity for these banks stood at 4.83 per cent with return on assets at 0.40 per cent. Profitability metrics are closely followed by equity investors, as these serve the purpose to examine and assess the profits generated by the executive team relative to their injected capital.
The key culprit pinned by banks for their weak profitability lies on the suppressed interest rate environment in the Euro area. In recent years, bank executives had to cut down on costs to maintain a reasonable margin level. This sees a reversal of fortunes for this traditionally lucrative industry. Maltese banks compare favourable in the cost to income ratio as it stands at 63.90 per cent when compared to similarly sized banks that have their cost to income ratios at 69.22 per cent.
On the capital side, the overall Common Equity Tier 1 Ratio, Tier 1 Ratio and Total Capital Ratio stood at 14.34 per cent, 15.55 per cent and 18.01 per cent respectively for significant institutions. An improvement over the previous four quarters could be observed. Maltese Banks beat on total capital ratios with a figure of 20.03 per cent when compared to similarly sized banks, whilst Common Equity Tier 1 and Tier 1 Ratios are in line with peers.
On a similar note, leverage ratios (fully phased-in definition) which capture the total asset exposure value as a proportion of tier 1 capital stands at 7.33 per cent for Maltese banks compared to 6.96 per cent of similarly size banks. In short, banks are marginally overleveraged relative to their capital base and need to contain their risk appetite to get back on track with European banks.
Managing credit risk remains at the centre to managing a credit institution in that the non-performing loans ratio is both an assessment of a bank’s ability to sanction credit to credit worthy individuals/corporates as well as a direct link to the economy’s overall strength. As at Q2 2019, the non-performing loans ratio for Maltese Banks stood strongly at 2.99 per cent compared to the 5.91 per cent for similarly sized European Banks.
Finally, Maltese banks lack behind in the loans to deposit ratio as it currently stands at 52.07 per cent which is the lowest level throughout the whole of the Euro area which averages 117 per cent. Interestingly, despite the low loans to deposit ratio, Maltese banks still maintain attractive profitability ratios when compared to peers. This may be due to the fiercer competitive landscape in non-domestic markets that leads foreign banks to hinder their net interest rate margin. Despite the relative strong position for Maltese banks, investors have to determine whether investment opportunities within these local banks are cheap, fairly value or expensive.
Disclaimer: This article was issued by Jesmar Halliday, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.