Download Banking System Outlook - Malta Financial Services Authority

Banking System Outlook
December 2004
Contact
Phone
Limassol
Nondas Nicolaides
Elena Panayiotou
Adel Satel
357.25.586.586
Malta
Stable outlook reflects domestic banks’ adequate performance within the constraints of
the small and highly concentrated Maltese operating environment
Ratings & Outlook
Country Ceiling for Foreign Currency Bank Deposits/Debt:
Bank of Valletta
Foreign Currency Bank Deposits, LT/ST:
Bank Financial Strength Ratings:
HSBC Bank Malta
Foreign Currency Bank Deposits, LT/ST:
Bank Financial Strength Ratings:
A3/Prime-2
Stable
Baa1/Prime-2
D+
Stable
Stable
A3/Prime-2
D+
Stable
Positive
Summary Opinion
The domestic banking system is dominated by the two rated banks, Bank of Valletta (BOV) and HSBC Bank Malta
(HBM) which together account for around 80% of total banking system assets. Both banks have similar market shares
and dominate the entire spectrum of the financial services industry in Malta. In our view the two banks do not face any
real threat to their franchises from the other domestic banks. However, in light of the recent additions to the saturated
Maltese banking system, we believe that the domestic banks' long-term profitability may be challenged through
tighter interest rate margins and aggressive pricing on the part of the smaller banks in their effort to attract new business. Nevertheless, we expect overall profitability levels to remain adequate, benefiting from higher non-interest
income, in line with management's efforts to improve fee-generating capabilities, together with enhanced efficiencies
achieved through rigorous costs control.
Domestic banks remain constrained by Malta's narrow economic base which limits their lending opportunities
and introduces an element of industry risk to their loan books. Malta is highly dependent on manufacturing and tourism, while other important sectors such as food processing and furniture are regarded as more vulnerable to growing
foreign competition. This is mainly due to reduced protectionism and the abolition of tariff barriers for these sectors as
a result of Malta having become an EU member in May 2004. Such constraining factors in the country's economic
framework limit the upward movement of the FSRs of the rated banks.
Stricter quantitative and qualitative criteria set by the authorities for loan classification and provisioning have
revealed a worse asset quality for the Maltese banking system across the board than previously reported. Management's concerted efforts to arrest the increasing level of problematic exposures bore fruit, with the trend reversing in
2003. Going forward, in light of the expected economic recovery in Malta, combined with enhanced credit approval
and risk monitoring systems that should ensure better risk control, we anticipate a gradual improvement in the banks’
asset quality.
Maltese banks have access to ample liquidity, primarily reflecting their strong retail funding bases as well as the
low level of financial disintermediation in the country. Although these banks maintain high capital ratios, their capital
position is qualified, in Moody’s view, by low provisioning levels. In particular, the significant increase in NPLs which
surfaced in the Maltese banking sector during recent years has not yet been matched by a similar increase in provisioning levels, resulting in an alarming increase in problem loans not covered by provisions.
This can be partly explained by the fact that a significant part of the banks' loan portfolios is secured by immovable
property and that banks take this collateral into account for provisioning requirements.
However, we remain sceptical about the long-term sustainability of the increase in real estate prices and the prudence of relying significantly on property collateral. That said, we understand that the possibilities of relying on other
type of collateral in Malta are quite limited.
Moreover, in view of the industry concentration on the Maltese banks’ credit portfolios and their heavy reliance
on the local economy, we believe that additional provisions may be needed to absorb shocks that are more sectoral in
nature.
Going forward, we expect the banks’ ratings to benefit from a gradual improvement in the banks’ asset quality
reflecting better economic conditions in the country and enhanced credit approval and risk monitoring systems. This
should also lead to an improvement in the banks' profitability levels through lower credit costs, exerting an upward
pressure on the FSRs.
2
Moody’s Banking System Outlook
Strengths/Opportunities
• A highly concentrated banking system that is dominated by the two major banks, BoV and HBM
• More stringent regulation and supervision should lead to a healthier banking system within the EU in the
long run
• The banks enjoy ample liquidity levels reflecting their strong retail funding base
• Profitability is adequate, underpinned by wide interest rate margins
• Major banks continue to benefit from the available strong external support
Weaknesses/Challenges
• Recent additions to the saturated Maltese banking system may pressure the bank’ long-term profitability
• Small and highly concentrated operating environment limits the banks’ lending opportunities and exposes
their loan portfolios to industry risk
• Very limited opportunities to expand overseas
• Asset quality remains relatively weak calling for higher NPLs coverage
• Heavy reliance on real estate collateral that is vulnerable to a price correction in the Maltese property market
• High regulatory capital but economic capital is reduced by low provisioning levels
Moody’s Banking System Outlook
3
Banking System Overview
A HIGHLY CONCENTRATED BANKING SYSTEM WITH THE DOMESTIC SECTOR DOMINATED BY THE TWO
MAJOR BANKS, BOV AND HBM
As of December 2003, the Maltese banking system comprised 15 credit institutions 7 domestic banking groups and 8
international banks.1
The highly concentrated domestic banking component comprises:
• The two largest domestic banks: Bank of Valletta (BoV) and HSBC Bank Malta (HBM), which together
account for around 80% of total banking system assets
• Two small domestic banks: APS Bank and Lombard Bank (Malta) plc which together control around 8% of
total banking assets
• Three foreign banks: Volksbank Malta Ltd is the largest foreign-owned bank comprising around 8% of system
assets, followed by First International Merchant Bank plc and BAWAG Malta Bank Ltd that share the balance
Having a long-established presence in the market, BOV and HBM — the two rated banks — have similar market
shares and dominate the entire spectrum of the financial services industry in Malta. In our view the two banks do not
face any real threat to their franchises from the other domestic banks and consequently BOV’s and HBM’s ratings are
unlikely to move downwards due to an increase in competition from other domestic banks. However, in light of the
recent additions2 to the saturated Maltese banking system, we believe that the domestic banks’ long-term profitability
may be challenged through tighter interest rate margins and aggressive pricing on the part of the smaller banks in an
effort to attract new business.
The duopolistic domestic banking system has become more competitive and innovative with HBM
leading the way
The purchase of Mid-Med Bank by HSBC in 1999 brought a new element of competition into the Maltese banking
system and helped to introduce new standards. Being part of a strong international financial group, HBM was able to
adopt more stringent criteria in order to better assess current and potential future risks and take the necessary steps to
actively manage them. These moves have enhanced transparency at HBM and have set higher business standards for
the whole banking system. Benefiting from the international know-how, HBM has been able to offer its clients more
sophisticated and developed products and services, giving the bank a competitive edge over its main rival, BOV.
On the other hand, BOV maintains its image as the only ‘Maltese’ bank, and thus remains the only alternative for
clients who do not wish to bank with the ‘foreign’ HBM. Leveraging on its long-established presence in its home market, BoV has stepped up its efforts to enhance its products and services and boost its fee-generating capabilities, making successful inroads in this area. Going forward, given the full privatisation plan for BoV,3 Moody's will be assessing
the potential opportunities and challenges for the bank’s franchise including the possible impact on its image as the
“Maltese” bank, if the new majority shareholder is a foreign institution.
SMALL AND HIGHLY CONCENTRATED OPERATING ENVIRONMENT LIMITS THE BANKS’ LENDING
OPPORTUNITIES AND EXPOSES THEIR LOAN BOOKS TO INDUSTRY RISK
Operating in the confines of Malta’s small and highly concentrated environment limits the domestic banks’ lending
opportunities, while introducing an element of industry risk to their loan book, primarily in the manufacturing, tourism and construction sectors. With a population of around 389,000 and a GDP per capita approximating €8,000,
Malta is the smallest EU economy (see Appendix 2). The Maltese economy is dominated by the manufacturing sector
which comprises around 25% of GDP, while tourism represents another significant driver of economic growth. The
government’s involvement in the local economy remains high, with public administration accounting for about 15% of
GDP and employing around 35% of the country’s total workforce. Other important economic segments in Malta
include food processing and furniture, sectors which are regarded as more vulnerable to growing foreign competition
due to reduced protectionism and the abolition of tariff barriers as a result of Malta having become an EU member in
1.
2.
3.
4
Our analysis focuses on the domestic sector. The international banks are primarily Turkish and Austrian banks that deal with mainly non-residents in foreign currency
and were established in Malta for tax optimisation purposes. The off-shore regime is wound down with all off-shore banking licences being converted to international
with the result that all credit institutions are subject to the same regulatory requirements. Please refer to Appendix 1 for more details.
The recent additions to the domestic banks are the foreign banks: Volksbank Malta Ltd (from November 2002), BAWAG Malta Bank Ltd (from October 2003) and First
International Merchant Bank plc (from October 2003).
BoV’s primary shareholders – the Maltese government holding a 25% stake in the bank and Banco di Sicilia with another 15% – have recently agreed to privatise the
bank and jointly sell their combined stake to a strategic investor.
Moody’s Banking System Outlook
May 2004. While such factors in the country’s economic framework are incorporated in the banks’ ratings, they nevertheless limit the rapid upward movement of the FSRs.
Expansion outside Malta remains very limited
Maltese banks’ operations are heavily reliant on the country’s narrow economic base. While BoV plans to expand operations in the North African markets through its representative offices, we expect the bank to maintain its conservative
approach given the higher risk in these operating environments. In the case of HBM, we believe that expansion outside
Malta is fairly unlikely, as the bank has to follow global development policies outlined by HSBC.
In our view moderate expansion outside Malta that is part of a logical strategy could be a positive diversification
factor, that is however unlikely to have any material impact on the banks’ FSRs.
LEVERAGING ON MALTA’S EU ACCESSION, DOMESTIC BANKS ARE POSITIONING THEMSELVES FOR
FURTHER GROWTH IN SME LENDING
Given the limited lending opportunities, the banks are increasingly targeting small and medium-sized enterprises
(SMEs) in Malta. With funds channelled from the EU to stimulate small businesses in the country, the banks try to
position themselves in this segment which has growth potential in the local leveraged market. While we believe that
such efforts can be positive for the banks’ diversification efforts, relatively poor financial disclosure in the SME segment may be a challenging factor for credit underwriting. In our view, this calls for adequately functioning credit policies and procedures to prevent the banks from assuming unnecessary and non-rewarding high credit risks. The banks
seem to be aware of these risks and are adjusting their credit policies and procedures to ensure better risk control in
dealing with this segment.
CREDIT EXPANSION IS PRIMARILY FUELLED BY RETAIL GROWTH WHICH IS EXPECTED TO REMAIN THE
MAIN GROWTH DRIVER
Credit expansion in the past few years was mainly fuelled by increased household lending which has been growing at an
average 39% in the last three years, compared to the average growth rate of 14% for overall credit growth. Given the limited growth opportunities in the Maltese saturated corporate market combined with the low interest rate environment
and the continuing rise in real estate prices, domestic banks have been expanding their mortgage portfolios, which comprised three-quarters of total household lending and contributed 19% to the banks’ overall credit portfolio at end-2003.
Going forward we expect to see the banks making further inroads into the retail segment, which is aggressively
targeted by most banks. While on one hand we welcome the banks’ efforts to further penetrate this sector that historically carries low delinquency rates, we remain concerned about the heavy reliance on real estate collateral for granting
such loans.
In particular, we remain sceptical over the long-term sustainability of the increase in real estate prices and the prudence of relying significantly on property collateral, as its value and its potential recovery is rather difficult to quantify.
In addition, we are concerned about the speed of court decisions — which despite some slight improvement remains
less efficient than other markets — as well as the execution of these decisions in the event of a bank choosing to take
legal action against non-paying borrowers. Future potential corrections in the real estate market may have an adverse
impact on the banks’ asset quality and may put negative pressure on the ratings.
MORE STRINGENT CRITERIA FOR REGULATION AND SUPERVISION SHOULD LEAD TO A HEALTHIER
BANKING SYSTEM IN THE LONGER RUN
During the last few years, the banking regulation and supervision functions have continued to improve and strengthen in
an effort to bring them in line with EU standards (see Appendix 3). Moody’s views positively the introduction of quantitative criteria for provisioning for problematic loans, whereby banks have to create specific provisions to cover potential
losses whenever a loan falls in arrears by more than 90 days. Moreover, the banks are also required to classify as non-performing the entire relationship with a client even if only one facility falls into arrears, an approach common in more
developed markets. Although these measures reveal a weaker asset quality for the banks in the short term, they should
lead to a healthier banking system in the medium to longer term, bringing it in line with international best practices.
Creation of a single independent regulator should strengthen the quality and effectiveness of supervision
We view positively the authorities’ efforts to strengthen the supervisory framework in line with international standards
and codes; in 2002 the banking supervisory function was transferred from the Central Bank of Malta (CBM) to the
Malta Financial Services Authority (MFSA), with the latter becoming the single financial services regulatory body in
Moody’s Banking System Outlook
5
the country. The majority of the banking supervision staff was transferred from the CBM, ensuring a continuity of
established supervisory methods/processes, while retaining staff experience. The CBM retains the responsibility for
supervising the payment systems and for monitoring the financial system’s overall stability through its analysis.
DEPOSIT RATINGS OF RATED BANKS CONTINUE TO BENEFIT FROM SOME LEVEL OF EXTERNAL SUPPORT
In the case of HBM, we expect that HSBC, the bank’s majority shareholder, would provide the necessary support,
should there be a need. Our expectation is based on the fact that HSBC owns 70% of HBM and has management control, with senior posts being held by HSBC’s executives, which exposes it to a significant reputational risk. Furthermore, in view of HSBC’s vast resources, compared with the possible level of support that could be required by HBM in
an extreme situation, we believe that such support would be available. Hence, the bank’s deposit ratings are rated at the
ceiling for such instruments in Malta.
BOV’s foreign currency debt and deposit ratings, which were recently downgraded to Baa1/P-2 from A3/P-2,
reflect our view that with Malta becoming a full member of the European Union, the ability of the authorities to provide timely support to the bank in an event of need could be constrained by stricter EU regulations regarding state
support and competition. Nevertheless, BOV’s importance to the banking system and its assimilation into the Maltese
economy as a whole, makes it too important to be allowed to fail. As such
we maintain our view that the authorities would support the bank if it were to encounter financial difficulties, as
failure to do so could not only destabilise the entire financial system but also have severe effects on the domestic economy. Hence the bank’s debt and deposit ratings continue to benefit from some level of implicit support from the state
and are pushed up by a few notches than would otherwise be the case if they were based on the bank’s stand-alone
intrinsic financial strength.
Financial Performance Of the Banking System
ALTHOUGH IMPROVING, ASSET QUALITY REMAINS WEAK…
Stricter quantitative and qualitative criteria set by the local authorities for loan classification and provisioning revealed a
worse asset quality for the Maltese banking system across the board than previously reported, with the NPLs to gross
loans ratio jumping to 18% at end-2001. Banks’ concerted efforts to arrest the deteriorating asset quality through
strengthening of credit risk management capabilities and improved internal controls bore fruit, with this ratio reverting
to 13% at end-2003. At this level, however, the system’s asset quality remains weak. Going forward, in light of the
expected economic recovery in Malta, combined with enhanced credit approval and risk monitoring systems that should
ensure better risk control, we anticipate a gradual improvement in the banks’ asset quality. An improvement in the credit
quality to the extent that significantly affects the banks’ profitability levels could exert an upward pressure on the ratings.
Asset Quality Indicators for Domestic Banks
25
20
15
10
5
0
Dec-98
Dec-99
Dec-00
NPLs/Total loans
Source: Central Bank of Malta
6
Moody’s Banking System Outlook
Dec-01
Dec-02
Coverage ratio
Dec 03
…AND CALLS FOR AN INCREASE IN NPLS COVERAGE
Although on an upward trend, the banks’ NPLs coverage ratio (23% at end-2003) remains very low by international
standards. This can be partly explained by the fact that a significant part of the banks’ loan portfolio is secured by
immovable property and that banks take this collateral into account for provisioning requirements. However, given the
increase in property prices in Malta during the last few years, we remain sceptical about the adequacy of provisions,
given that collateral values may be vulnerable to a price correction in real estate prices. Moreover, in view of the industry concentration in the Maltese banks’ credit portfolios and their heavy reliance on the local economy, we believe that
additional provisions may be needed to absorb shocks that are more sectoral in nature.
ALTHOUGH REGULATORY CAPITAL IS HIGH, ECONOMIC CAPITAL IS REDUCED BY LOW PROVISIONING
LEVELS
The capital adequacy ratio of domestic banks approximated a strong 18% at end-2003, while the system’s Tier 1 capital ratio stood at a high 16%. Although these levels suggest a strong capitalisation, in Moody’s view the banks’ economic capital is weakened by low provisioning levels. In particular, the significant increase in NPLs witnessed in the
Maltese banking sector during recent years has not yet been matched by a similar increase in provisioning levels, inflating the banks’ capital levels through enhanced reserves.
In our view, the banks need to address their low provisioning levels, as their solvency position remains vulnerable
to any future increases in NPLs.
DOMESTIC BANKS ENJOY AMPLE LIQUIDITY LEVELS
Domestic banks have access to ample liquidity, primarily reflecting their strong retail funding bases and the low level
of financial disintermediation in the country.4
The liquid asset ratio for the domestic banks stood at a comfortable 47% in December 2003, which is well above
the 30% minimum ratio set by the local authorities. Moreover, Maltese banks hold a sizeable debt securities portfolio,
consisting mainly of government and bank securities both local and foreign — which are highly liquid and carry low
risk weight, making them attractive investment instruments for the banks.
Domestic banks face contractual mismatches in their balance sheet, with the bulk of customer deposits falling due
within the 1-year bucket, compared to only one-third of credit exposures. However, the stickiness of customer deposits
mitigates our concern over their short maturities.
IMPROVING PROFITABILITY UNDERPINNED BY WIDE INTEREST RATE MARGINS
Lower credit costs resulting from provisioning write-backs by a few banks for some corporate exposures boosted the
banks’ bottom-line profitability, with the average return on average assets ratio totalling an adequate 0.9%. Domestic
banks enjoy wide interest rate margins, reflecting the predominance of retail banking activities in their loan books,
with net interest income contributing a dominant 73% to their operating income in 2003. Moreover, given the declining interest rate environment in Malta in the last few years and the short-term nature of the banks’ deposits, they have
been able to boost their margins as liabilities repriced faster than assets.
Going forward, we expect interest rate margins to be somewhat pressured given the growing domestic competition and the local banks’ efforts to attract new business. However, we expect overall profitability levels to remain adequate, benefiting from higher non-interest income — in line with management’s efforts to improve fee-generating
capabilities and enhanced efficiencies achieved through rigorous costs control.
Related Research
Country Analysis:
Malta, November 2003 (# 80022)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
4.
Deposits to GDP ratio stood approximated a high 220% at end-2003
Moody’s Banking System Outlook
7
Appendices
Appendix 1
STRUCTURE OF THE MALTESE BANKING SYSTEM AT END-2003
Assets
Million
Domestic banks
International banks
MTL 4,701 (EUR 9,550)
MTL 2,356 (EUR 5,152)
Market Shares
Loans
66%
34%
Source: Central Bank of Malta
LIST OF CREDIT INSTITUTIONS OPERATING IN MALTA:
Domestic banks
•
•
•
•
•
•
•
•
Bank of Valetta plc
HSBC Bank Malta plc
APS Bank Ltd
Lombard Bank (Malta) plc
HSBC Home Bank Loans (Malta) Ltd (part of the HSBC Bank Malta plc)
Volskbank Malta Ltd (from Nov. 2002)
BAWAG Malta Bank Ltd (from Oct. 2003)
First International Merchant Bank plc (from Oct. 2003)
International banks
•
•
•
•
•
•
•
•
8
Akbank TAS
Disbank Malta Ltd
Erste Bank (Malta) Ltd
Investkredit International Bank Ltd
Izola Bank Ltd
Raiffesenbank Malta plc
Sparkasse Bank Malta plc
Turkiye Garanti Bankasi AS
Moody’s Banking System Outlook
Deposits
82%
28%
Appendix 2
Country Rating and Rating Outlook: Malta
RATINGS
Country Ceiling: Long- and Short-Term Foreign Currency Debt
Country Ceiling: Long- and Short-Term Foreign Currency Bank Deposits
Republic of Malta: Senior Secured – Domestic Currency
Republic of Malta: Issuer Rating
A3/ P-2
A3/ P-2
A3
A3
OPINION
Credit Strengths
Credit strengths for Malta are:
- EU accession in May 2004
- small open service-oriented economy
- relatively good performance of tourism sector
- stable manufacturing base
- manageable external debt and adequate foreign liquidity
Credit Challenges
Credit challenges for Malta are:
- growing public debt
- high public deficits
- need for structural reforms of health and welfare benefits
- vulnerable current accounts
Rating Rationale
The referendum and general election which took place in early 2003 both secured irrevocably Malta’s future in the European Union (EU). This historical decision signals new development opportunities for the small island economy. While
election results provide a clear new mandate to the government to press forward with the EU harmonisation effort, crucial
progress is still needed in certain sensitive areas that promote the further liberalisation of the economy to comply with the
EU acquis communautaire.
The challenges faced by the island are mainly of a fiscal nature: Malta has registered sizable deficits in recent years,
and government debt has exceeded the 60% ceiling set by the Maastricht criteria. Public finances are still overburdened
by generous social benefits, though pension and healthcare reforms will be addressed in 2005 as per the recent budget
release. The government's privatisation plans should accelerate because of EU membership rules pertaining to economic
liberalisation, competition policy and state aid. Yet adopting these rules will be politically challenging as it will bring the
government into direct conflict with the politically powerful ship related unions, who are important social partners. The
persistent current account deficits during the last several years reflect flat exports in the electronics sector and a diminished contribution from tourism due to world events.
In the medium and long run, Malta should be able to develop higher valued-added technology-based industries and
services. Its workforce is relatively well educated, and new promising niche activities could include super yachts repair,
back office administration and special interest tourism
Rating Outlook – Stable
The rating outlook is stable. Far-reaching structural reforms — most of which are guaranteed by compliance with EU
requirements - will support the country's A3 rating over the medium term.
What Could Change the Rating – UP
Improved fiscal indicators coupled with the further liberalisation of the economy.
What Could Change the Rating – DOWN
If structural reforms (especially those pertaining to the public sector and social benefits system) are not implemented in a
timely fashion, the likelihood is high that the economy will remain uncompetitive, and public finances will deteriorate further.
Recent Developments
The 2005 budget recently presented to Parliament continues Malta's efforts to narrow its fiscal deficit to meet the euro
convergence criteria. While no income tax or VAT increases are planned, citizens will face an increase in water and electricity rates, as well as an extension of taxes to several new products. The size of the public sector should contract from
both privatizations and the reduction in the number of government employees through the replacement of essential personnel only. On the economic side, tax exemptions on research and development have increased, and other incentives
also are included to attract both domestic and foreign investment. The tourism sector continues to be a priority, and will
retain the preferential tax rates it has received in the past.
Sovereign Analyst: Tristan Cooper
Moody’s Banking System Outlook
9
Appendix 3
Relevant Banking Regulations
Starting in 2002 the Malta Financial Services Authority (MFSA) became the single financial services regulatory body
in Malta after the transfer of the banking supervisory function from the Central Bank of Malta (CBM). The majority
of the banking supervision staff was transferred from the Central Bank of Malta, ensuring a continuity of established
supervisory methods/processes, while retaining staff experience. The CBM retains the responsibility for supervising
the payment systems and for monitoring the financial system’s overall stability through its analysis
A number of banking directives have been issued, covering the application requirements and licensing of banks,
large exposures, own funds, solvency and capital adequacy ratios, liquidity requirements, submission of statutory information, publication of audited financial statements, loan-loss provisioning and consolidated supervision. Some of the
main regulations are listed below:
• Minimum capital for establishing a credit institution stands at MTL2 million.
• BD/02: Large exposure of credit institutions authorised under the Banking Act 1994: a large exposure is an
exposure to one customer or a group of connected customers that equals or exceeds 10% of a credit institution’s own funds. Total large exposure to an individual or a group of connected customers must not exceed
25% of a credit institution’s own funds. The aggregate limit of large exposures cannot exceed 800% of a credit
institution’s own funds.
• BD/04: Solvency Ratio of Credit Institutions authorised under the Banking Act 1994: credit institutions must
maintain a ratio of own funds to risk-weighted assets and off-balance sheet items of at least 8%. The MFSA
may set a higher minimum level for any particular institution should it deem such a move necessary.
• BD/05: Liquidity requirements of credit institutions authorised under the Banking Act 1994: credit institutions should maintain a minimum liquidity ratio requirement of 30%. Furthermore, institutions should maintain continuous adequate liquidity and monitor the maturity structure of their receivables and payables for
matching purposes.
• BD/09: Credit and country risk provisioning by credit institutions licensed under the Banking Act 1994: loans
are graded according to performance, and specific loan-loss provisions have to be made to cover the shortfall
between classified loans and liquid collateral. Government-guaranteed loans do not require specific or general
loan-loss provision. Interest being suspended over and above the collateral cover can be claimed against tax.
Provisions become tax-deductible only when the loan is written off;
• A bank’s investment in a non-financial company must not exceed 15% of its own funds, and such investment
must not exceed 5% of the share capital of the investee company.
• The aggregate open position should be limited to 20% of own funds, while individual currency maximum
limits are set at 5% of own funds, except in the case of the euro, which has a limit of 12%.
10
Moody’s Banking System Outlook
Appendix 4 - Global Comparisons
Average* Bank Financial Strength Ratings by Country
December 2004
E
E+
D-
D
D+
C-
C
C+
B-
B
B+
A-
Denmark
Netherlands
United Kingdom
Sweden
United States
Spain
Canada
Andorra
Belgium
Liechtenstein
Finland
Singapore
Switzerland
France
Ireland
Australia
Norway
Portugal
Luxembourg
Italy
Austria
Hong Kong
Global Universe
New Zealand
Iceland
Chile
Jordan
Jersey
South Africa
Bermuda
Germany
Estonia
Slovenia
Greece
Israel
Hungary
Saudi Arabia
Mexico
Czech Republic
Kuwait
United Arab Emirates
Bahrain
Bahrain - Off Shore
Morocco
Malaysia
Taiwan
Latvia
Croatia
Cyprus
Lebanon
Malta
Panama
Trinidad & Tobago
Qatar
Poland
Mauritius
Oman
Guatemala
Peru
Slovak Republic
Colombia
Brazil
India
Egypt
Bulgaria
Turkey
Japan
Philippines
Korea
Kazakhstan
Romania
Tunisia
Thailand
Russia
China
Pakistan
Dominican Republic
Ukraine
Venezuela
Indonesia
Argentina
Bolivia
Uruguay
* Weighted by Assets
Moody’s Banking System Outlook
11
Country Ceilings For Long-Term Bank Deposits
December 2004
C
Alderney
Australia
Bahamas - Off Shore Banking Center
Canada
Cayman Islands - Off Shore Banking Center
Denmark
Eurozone
Guernsey
Iceland
Isle of Man
Japan
Jersey
Liechtenstein
New Zealand
Norway
Sark
Singapore
Sweden
Switzerland
United Kingdom
United States of America
Bermuda
Panama - Off Shore Banking Center
Bahrain - Off Shore Banking Center
Cayman Islands
Slovenia
Taiwan
Czech Republic
Estonia
Hong Kong
Hungary
Macao
Botswana
China
Cyprus
Israel
Kuwait
Latvia
Poland
United Arab Emirates
Bahamas
Korea
Lithuania
Malta
Qatar
Slovakia
Bahrain
Chile
Malaysia
Thailand
Barbados
Mauritius
Mexico
Oman
Panama
Saudi Arabia
South Africa
Tunisia
El Salvador
Bulgaria
Croatia
Kazakhstan
Russia
Trinidad & Tobago
Costa Rica
Egypt
India
Morocco
Colombia
Fiji Islands
Guatemala
Jordan
Philippines
Peru
Romania
Brazil
Jamaica
Lebanon
Pakistan
Papua New Guinea
Suriname
Turkey
Ukraine
Belize
Honduras
Indonesia
Turkmenistan
Venezuela
Vietnam
Bolivia
Bosnia and Herzegovina
Dominican Republic
Uruguay
Argentina
Cuba
Ecuador
Moldova
Nicaragua
Paraguay
12
Moody’s Banking System Outlook
Caa3
Caa1
B2
Ba3
Ba1
Baa2
A3
A1
Aa2
Aaa
Average* Long-Term Bank Deposits by Country
December 2004
C
Caa3
Caa1
B2
Ba3
Ba1
Baa2
A3
A1
Aa2
Aaa
Denmark
Netherlands
United Kingdom
France
Singapore
Switzerland
United States
Sweden
Belgium
Canada
Spain
Andorra
Liechtenstein
New Zealand
Luxembourg
Finland
Australia
Ireland
Germany
Norway
Global Universe
Portugal
Estonia
Italy
Austria
Czech Republic
Iceland
Hong Kong
Japan
Slovenia
Hungary
Israel
Kuwait
United Arab Emirates
Poland
Taiwan
China
Greece
Jersey
Malta
Qatar
Slovak Republic
Bermuda
Korea
Bahrain
Chile
Cyprus
Malaysia
Thailand
Latvia
Mauritius
Mexico
Saudi Arabia
South Africa
Tunisia
Bahrain - Off Shore
Oman
Croatia
Panama
Trinidad & Tobago
Kazakhstan
Bulgaria
Egypt
India
Morocco
Russia
Colombia
Guatemala
Jordan
Philippines
Peru
Romania
Lebanon
Pakistan
Turkey
Ukraine
Brazil
Indonesia
Venezuela
Dominican Republic
Uruguay
Bolivia
Argentina
* Weighted by Assets
Moody’s Banking System Outlook
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Report Number: 90381
Authors
Editor
Production Specialist
Elena Panayiotou
Nondas Nicolaides
Patricia Radnor
Ida Chan
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Moody’s Banking System Outlook