Standard and Poors on Wednesday 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 statement, S&P Global Ratings referred to allegations of money laundering against Pilatus Bank and its “perception of poor transparency at some banks” on the island.

Malta previously scored a four on the S&P Global Ratings banking industry risk score, but this has now been raised to 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 is now at BBB-, rather than BBB.

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”.

Last month, the European Banking Authority found that Malta’s FIAU failed to impose effective sanctions against Pilatus Bank.  

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.

Central Bank says sector is strong and profitable

In reaction, the Central Bank of Malta said 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.

The credit ratings agency also lowered Bank of Valletta’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 €363 million frozen by an Italian court as precautionary warrant, and on Tuesday the bank informed shareholders that it was setting aside €75m for litigation costs and would not be issuing an interim dividend.

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.

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. 

 

MFSA statement

Reacting to the report, the Malta Financial Services Authority (MFSA) reaffirmed “that the banking sector in Malta remains resilient and profitable with local banks benefiting from a steady operating environment and an expanding economy.”

“Bank of Valletta plc is subject to direct supervision of the ECB, although the MFSA engages on an ongoing basis both with the ECB and Bank of Valletta.

The MFSA is confident that all de-risking measures including potential risks relating to legacy litigation are being addressed strategically by BoV within a long term view of the business.

With reference to S&P’s comments regarding the governance of the financial services sector in Malta, the MFSA has always supervised the banking sector very closely and continues to do so within a dynamic regulatory environment. In efforts to continue strengthening the Authority, major reforms are underway in its organisational infrastructure including investment in top tier supervisory technology, increase in human Resources and technical capacity in order to enhance the efficacy and governance of the sector but also to address current and future challenges particularly in the RegTech and FinTech space.”