DBRS confirms Malta’s credit rating at A (high), stable trend

● ‘Core banks’ high exposure to real estate market and rapid housing price growth a source of risk’

DBRS Ratings GmbH (DBRS) has confirmed Malta’s Long-Term Foreign and Local Currency – Issuer Ratings at A (high). At the same time, DBRS has also confirmed Malta’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (middle).

The trend on all ratings, DBRS said, is stable.

Apart from positive economic growth, public finances and fiscal surplus, the agency also points to “some judiciary and regulatory changes ongoing that could improve the overall governance, delivery of which may be forthcoming in the next twelve months”.

Malta’s A (high) rating was supported by its euro zone membership, moderate level of public debt, solid external position, and households’ strong financial position.

On the other hand, given its size and openness of the Maltese economy, with sectors such as tourism, gaming and financial services highly reliant on external demand and foreign capital, DBRS said Malta “remains exposed to external demand or confidence shocks”.

In the medium term, potential changes in international corporate taxation, changes to the EU regulatory framework, or weakening perception of the governance framework could reduce Malta’s attractiveness to foreign business.

Malta’s contingent liabilities, stemming from its large non-financial state-owned enterprises (SOEs) and concentrated financial sector, and rising age-related costs are potential sources of vulnerability for public finances.

The Maltese financial system remains sound, according to DBRS, and is underpinned by conservative core banks’ healthy levels of capitalisation, liquidity and profitability.

Core domestic banks, with assets of 194.2% of GDP in Q1 2019, mostly follow a traditional business model based on retail deposits for funding. Core banks’ non-performing loans as a share of total loans, which stood at 3.3% in Q1 2019, continue to decline driven by the overall better economic and housing market conditions as well as tighter regulatory requirements.

International banks, with assets of 131.1% of GDP, and domestic non-core banks, with assets of 21.2% of GDP, have limited or no linkages to the domestic economy. Therefore, potential spillovers to the rest of the system are contained.

“Malta’s core banks’ high exposure to the real estate market and rapid housing price growth since 2014 is a source of risk,” DBRS found.

“While valuation in the housing market is becoming stretched, strong demand has largely been driven by fundamental factors such as rising disposable income, substantial net migration and low interest rates.

“An increasingly responsive housing supply, households’ high levels of financial wealth and liquid assets, and banks’ conservative lending practices mitigate the risks to the banks´ mortgage loan book. New borrower-based macro-prudential measures became effective in July 2019, broadening the authorities’ ability to counter mounting pressures in the housing market, especially in the buy-to-let segment.”

The IMF’s Financial Sector Assessment Program published in March pointed out some supervision capacity and anti-money laundering and counter the financing of terrorism (AML/CFT) implementation and enforcement shortfalls in Malta, DBRS observed.

“Given its many cross-border links,” DBRS said it “considers that a continuation of the government’s efforts to address these concerns will remain important to contain reputational risks that may pose a risk to the Maltese financial system.

“On this front, the government is pursuing strategic action to be implemented by 2020 to enhance its AML/CFT framework, including the creation of national coordinating mechanisms, increasing resources and staffing in the Malta Financial Services Authority and Financial Intelligence Analysis Unit, and the creation of a new financial crime unit, among other initiatives.”