Noel Grima

One important organizational initiative the Central Bank of Malta is working on at the moment is the creation of a Central Credit Register which should become operational by October.

This was announced by Professor Josef Bonnici, the Governor, at a press conference held at the Mediterranean Conference Centre to launch the Central Bank's Annual Report.

Prof. Bonnici explained that the granular information collected in the CCR will allow lending institutions to operate more efficiently, with further benefits for financial stability.

Later on, during the question and answer session, Deputy Governor Alexander Demarco said this development requires new legislation since there are issues of data protection involved.

Through this Register, credit institutions will be able to access information about their client and clients may also access the information about them held by the credit institution.

But, he warned, no subjective appraisal will be released.

Thus, for example, a bank will be able to reveal to another bank that asks for information how exposed a client is to the bank and what is the status of their loans, whether they are performing or non-performing loans, since this information is not subjective at all.

Prof. Bonnici said this innovation will help contain risks credit institutions faced when approached by a client not known to them. It is also in the client's interest to know what information is had about him by the bank or credit institute.

NPE up after AQR re-classification

The Report notes that the Maltese banking sector  has contributed to

the resilience of the local economy. In terms of bank soundness, Malta ranked 10th

place worldwide according to the 2014 World Economic Forum.

The Capital

Adequacy Ratio of Maltese banks remains well above the 8% regulatory minimum,

while funding relies on stable sources. The Maltese banking sector is profitable, with

the core domestic banks reporting returns on equity and assets that are significantly

better than the EU average.

Earlier, Prof. Bonnici had said that as a result of Asset Quality Review carried out by the European Central Bank on the three main Maltese banks, based on the harmonised SSM definition, the Non-Performing Loans in Malta had been increased from 10.8% to 14.9% at the end of 2013.

A look at the situation in other Euroland countries shows that all saw their NPE proportions rise as a result of AQR re-classification with NPE being rampant in Cyprus at 54%. However, Malta may have had one of the highest proportional increases.

This was made clearer in the preceding slide about the banking sector.

The problem in Malta, Prof. Bonnici explained, lay not with the core domestic banks nor with the international banks domiciled in Malta but in the non-core domestic banks in Malta, especially FIMBank which has recently taken a hit from its business in Greece. Without FIMBank and without this hit, even this sector would be in positive waters.

As a result, both the return on assets and the return on equity for this sector alone is in negative territory.

Malta's core domestic banks with assets totaling €213.5 billion and a customer loans-to-deposits ratio of 63.7% is very healthy.

One or two other non-core domestic banks, which Prof. Bonnici did not name, also had some issues. There are management reshuffles taking place in these banks at the moment.

The international banks in Malta, whose assets dwarf the Maltese ones, have decreased the amount of funds they hold in Malta from €413 billion last year to €369 billion. Deutsche Bank, for instance, has shifted some of its funds elsewhere. In other cases, such as Volksbank which has been purchased by Mediterranean Bank, there has been some consolidation.

Lending rates in Malta, despite suasion by Prof. Bonnici to the contrary, remain above the euro area average. This is an indication of the incomplete pass-through of accommodative monetary policy measures.

At 4.6% to non-financial corporations under €1 million, the rates practiced in Malta are the fifth highest in the Eurozone while loans over €1 million are less at 3.8% and actually the fourth highest in the Eurozone. However, banks have participated in initiatives and schemes to encourage SME lending.

Following the moral suasion exercised on the banks, SME landing rates in Malta went down and converged towards other euro area countries.

As regards QE and Malta, the inflow began rather slowly but has picked up and last week was 'very good'. In general, Malta has obtained some 55% of what was allocated to it. The slow start was not restricted to Malta only: other small Eurozone countries had a similar slow start.

One reason for this, as regards Malta, is the quite high level of liquidity in Malta, thus offering a limited opportunity for QE purchasing.

Besides, there are a number of private bond offers in the pipeline, so investors might prefer those.

The Governor hinted there might be too much exposure by the banks to government bonds. Until now, this has been given a 0 rating but maybe this could be weighted more. This will not change in the immediate future but Basle III and the Commission are known to have put this on the agenda.

Credit growth in Malta is persistently higher than that of other euro area countries, both the unstressed group of countries and the stressed ones.

Credit growth to the corporate sector is positive as a whole but still negative as regards the construction sector. Mortgages remain the main driver of total credit growth.

Towards a development bank

Replying to questions at the end, Governor Bonnici was asked about Malta getting a Development Bank.

He replied that the government has set up a task force which has already had discussions with the Commission to avoid the risk of being found to have infringed the State Aid rules.

A report on the state of play has been drawn up especially to find out if SMEs are being disadvantaged. The proposed Development Bank will not be in competition with the banks but rather will seek to complement them.

In other countries, development banks do exist, such as in Germany, France and Italy and their limits are clear.

A Development Bank does not have to be 100% government-owned. Malta is somewhat backward in this regard. A Development Bank could, for instance, take over all the social housing in the country and manage it.

It can also get funds from supranational organisations as against relying solely on the government funds and/or the EU funds.

Very near the virtuous countries

Earlier, in the section dealing with the macro-economic situation of Malta in the wider context of Euroland economies, Prof. Bonnici showed charts which point out that Malta's budgetary situation is now so much improved that Malta can be seen to be very near to making it to the category of the most virtuous countries in Euroland.

In the two charts, the countries are divided by colour with red denoting those countries most at risk, yellow for those countries in between and green for those countries which are beyond stresses.

In the first table, that regarding budgetary position, Malta is placed nearest the green group with regards to its debt situation. With debt now being in the region of 64%, it is but a short step for Malta to be promoted to the green band, those whose debt is less than 60%.

With regards to the deficit figures, Malta, again, is the last country in the yellow band, with a deficit of less than 3%, getting ready to jump into the green category where the deficit is less than 3%.

Over the years, Malta's yields have declined, although they have remained slightly above those of the euro area. There is a reason for this: our small size although on the other hand, our banks mostly borrow locally while big countries such as Germany borrow outside the country as well.

Later on, during the question and answer session, Prof. Bonnici said that only between 4 and 5% of Malta's debt is owed to non-Maltese banks.

GDP growth on 2010 level

As confirmed by credit rating companies and by the Commission, Malta's GDP growth is robust and continues to outpace that of the euro area.

Despite the still uncertain external background, the Maltese economy continued to

outperform the euro area, with real GDP growth accelerating to 3.5% in 2014, from

2.7% a year earlier. Domestic demand growth was the main driver behind the

expansion in 2014, as private investment, private consumption and government

expenditure all increased strongly. The contribution of net exports to growth was

slightly negative.

It was noted from the charts presented that Malta's GDP growth at around 3.9% is on the same level as that achieved by the Maltese economy in 2010.

Considering 2008 as the zero point, at the beginning of the crisis, the rate of economic growth attained by Malta has persistently exceeded the euro area's as a whole, with a 13% growth registered from 2008 to 2014.

As regards fiscal developments, the Bank estimates that the general government

deficit in 2014 narrowed to 2.2% of GDP, while government debt is estimated to have

declined to 68.4% of GDP.

Inflation in Malta remains low although above that of the euro area, both that of stressed countries and that of the non-stressed countries.

The unemployment rate in Malta has reached the lowest level on record with the registered unemployed trending downwards.

As for the components of GDP growth, a comparison between GDP growth and its components in 2011 and that in 2014 is instructive. In 2014, investment plays a big part, both public and private investment. Among the former one must include EU funds but there is too a high level of private investment.

Compared to 2011, government consumption is up quite substantially.

As regards exports, net exports have declined. Some attribute this to changes in oil re-exports, but there has been a drop in the goods components.

There may be a less evident reason: over the past years, Malta has been changing from an economy based on manufacturing to one more based on services. Services require less imports and are more labour-intensive but they create more exports and thus help the balance of payments. In this regard, Malta is not like Germany but more like the UK where the same shift to services has occurred.

There is not much to say about inbound tourism and GDP growth. Inbound tourism has continued to register a buoyant performance year after year and it is now the off-peak months where the biggest increases in tourist presence are taking place.

The depreciation of the euro has also improved Malta's external competitiveness. There has been a depreciation against the sterling of 12% since January 2014 and a depreciation against the Dollar of 20% since January 2014.

Central Bank operations

Finally, Governor Bonnici spoke about the Central Bank's own operations.

CBM has reached an agreement with the Banca d'Italia procuring its statistical information solution. The implementation of this will be phased in over two years, starting in June 2015.

The Central Bank is also upgrading its research capacity and publications. Incentives for published research and analysis have lead to a higher volume of research papers in CBM publications and website. The Central Bank has also added a new monthly Economic Update to its publications.

An HR skills assessment process to identify the competencies and any skill gaps in the bank is being carried out and addressed.

The national strategy for electronic payments has been launched by the CBM in collaboration with the Ministry of Finance and has been mentioned in the last Budget Speech. Malta is behind other countries in the use of electronic payments.

Finally, the Governor announced that the ECB Governing Council will be holding, for the first time, a monthly meeting in Malta. This will take place on 21 October followed by the very important press conference held immediately afterwards by its head, Mario Draghi.