Credit ratings agency Standard and 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.
In a news release published on Wednesday, S&P Global Ratings noted allegations of money laundering against Pilatus Bank and its “perception of poor transparency at some banks” on the island.
Malta, which previously scored a four on the S&P Global Ratings banking industry risk score, has now been given a six-out-of-ten rating. A score of one on the index is the lowest risk, with 10 being the highest.
Malta's enhanced risk, as perceived by S&P Global, means the credit rating agency’s anchor for banks operating primarily in Malta now sits at BBB-, rather than BBB.
The warning and downgrade comes just one month after the European Banking Authority found that Malta’s FIAU failed to impose effective sanctions against Pilatus Bank and breached EU money laundering directives in failing to act.
S&P Global Ratings expressed its view that EBA scrutiny was prompted by the arrest in the US of Pilatus Bank chairman Ali Sadr Hasheminejad on charges of having violated economic sanctions against Iran.
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”.
It was not all bad news – the agency said that 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.
Malta’s fast-growing economy, S&P said, would likely help banks increase their lending and gradually reduce their exposure to non-performing loans and credit losses.
The sector, however, faced risks if the housing market were to collapse, given banks’ “high exposure to the real estate and construction sectors”.
Central Bank says sector is strong and profitable
The Central Bank of Malta was quick to react to the downgrade, insisting in a statement issued on Wednesday night that Malta’s banking sector was “sound, resilient and profitable” with non-performing loans at historic lows and below the eurozone average.
It said that it had no concerns about core domestic banks, saying the quality of their assets continued to improve and that a “rigorous de-risking process” which was already underway would continue and mitigate any “perceived reputational risk”.
Small international banks “like Pilatus Bank” posed no systemic risk on domestic financial stability, the Central Bank said.
S&P warns about BOV
The Central Bank said the S&P Global Ratings banking industry risk score was “essentially based on the rating of Bank of Valletta”.
The credit ratings agency did indeed focus a great deal of its assessment on BOV, lowering the bank’s long-term credit rating to BBB from BBB+ while affirming its A-2 short-term rating. It maintained its negative outlook of the bank.
S&P said that it saw risks for BOV’s business, capital and risk profiles from potential reputational damage and litigation charges, with the agency highlighting the bank’s legal battle concerning failed shipping giant Deiulemar.
BOV has had €363m frozen by an Italian court as precautionary warrant in that case, and on Tuesday the bank told shareholders that it was setting aside €75m for litigation costs and would not be issuing an interim dividend.
That news sent bank shares down more than nine per cent, although they rebounded by just over five per cent on Wednesday.
S&P said that if BOV were to lose that lawsuit, “the financial effect could be substantial” 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.
It saw no evidence of the precautionary warrant having deteriorated the bank’s franchise, with BOV maintaining its market dominance and the government’s 25 per cent shareholding in the bank also contributing to its stability.
S&P said its negative outlook of BOV was based on potential fallout from litigation.
In a brief statement, BOV acknowledged the downgrade but noted that the credit rating agency had highlighted its resilient profitability and improved asset quality.
"The bank’s CEO Mario Mallia reiterated the commitment towards the long-term stability and sustainability of the group through the build-up of strong capital buffers and other measures related to the on-going process of de-risking," BOV said.