I was prompted to compile the schedule included with this article by the European Central Bank’s announcement on July 21 of a 50-basis points rise to zero in the key euro interest rate.
This is the first increase in the past 11 years and is intended to combat the unanticipated rise in inflation which is now forecast to reach 6.8 per cent by the end of 2022, in contrast with an original forecast of 3.5 per cent. Other interest rate increases are likely to be made later in 2022.
It will be recalled that the ECB first introduced a negative interest rate of -0.40 per cent in March 2016 and this was raised to -0.50 per cent in September 2019. As was the case with other banks in the EU, this had a profound effect on the profitability of local banks in view of their high liquidity, resulting in the banks paying interest on their surplus funds that were placed with the Central Bank of Malta.
Notwithstanding their efforts to increase lendings to their customers, the banks ended up with higher balances with the CBM at negative interest rates. Balances held as at the end of 2021 are shown in the last column of the table.
The schedule also gives comparative figures for 2020 and 2021 for funds borrowed by the listed banks (classified as Malta’s core banks) from other banks and from customers. The variances in amounts and percentage terms are also included. These figures reflect a contraction in customer deposits in the case of HSBC, Lombard and MeDirect.
This could well have resulted from a policy decision to reduce expensive customer funds in anticipation of the removal of negative interest rates. However, it is worth noting that MeDirect had the lowest level of surplus funds placed with the CBM (€25.9 million) while HSBC has much more to gain with the removal of negative interest rates with some €1.2 billion placed with the CBM.
It is striking that BOV stands to gain most from the ECB’s interest rate rises in view of the fact that they held no less than €4.3 billion with the CBM at the end of 2021. Indeed, at the Q&A session for its shareholders held on June 15, BOV’s chief finance officer indicated, in a reply to a question from the floor, that it is estimated that the bank’s profits should benefit by up to around €20 million by not paying interest on its surplus funds with the CBM.
It is also worth noting that, irrespective of the ECB’s removal of negative interest rates, BOV should definitely benefit by €450,000 per annum from the recent court decision that they should release to his heirs about €90 million of funds pertaining to the late Muammar Gaddafi of Libya.
Another point worth noting from an analysis of the variance figures in the schedule is the modest increases in customers’ funds, with the leaders being APS with an increase of 14.52 per cent. Of course, for the reasons already stated, the banks had no incentive to seek an increase in such funds unless they saw good prospects for employing these profitably.
As regards borrowings from other banks, BOV’s figures show an abnormally high year-to-year increase of 88.03 per cent. The reasons for this are unclear and it remains to be seen if during 2023 BOV will have reduced this level of borrowing from other banks, especially as it is quite likely that the interest cost of such borrowings will rise following the increases in ECB interest rates. In this regard, it appears that HSBC, Lombard and MeDirect have already taken preventative action.
Anthony R. Curmi is a former Mid-Med Bank general manager and senior executive of Barclays Bank International in London, the Bahamas and Milan.