Although the European Central Bank expects the banking sector in the euro area to withstand the pandemic-induced stress, stakeholders within the sector have pointed to the continued challenges which lie ahead, as a result of COVID-19, with former Bank of Valletta Chairman and economist, Joseph F.X. Zahra, saying that the interim results of Malta’s two big banks for the first half of 2020 are but “a glimpse of what is to come”.

The economist, who chaired Bank of Valletta between 1998 and 2004, said banks, including the big ones in Malta, cannot be taken for granted, even if, so far, they have shown resilience: “But the impact of the present crisis is still at the very early stages.

“We are still coping with the serious health crisis, when the economic impact staggers behind and when there is an expectation of growing social frustration as the Government’s wage supplement measures tail off in autumn, resulting in more workers on reduced hours with an uncertain future and growing unemployment.”

The interim results of the country’s two big banks for the first six months of the year have been characterised by an increase in demand for overdrafts and loans, Mr Zahra outlined. Profits are drastically down, and dividend distribution has been suspended, he also noted.

He predicted the banks will be under even greater pressure with an expected surge in demand for cash flow support in the coming months and as defaults rise because uncertainty over loan losses will trail on throughout 2021.

“The real test for banks is still to come… banks need to prove they are adaptable to the new normality. Much depends on the creativity of the banks’ leadership besides the resilience of their capital base,” Mr Zahra asserted.

Bank of Valletta CEO Rick Hunkin pointed out that although the €13.8 million pre-tax profit for the first half of the year is lower than that posted in 2019, the reduction is mostly attributable to the COVID-19 pandemic, which impacted all the bank’s business lines.

“It is difficult to predict exactly what will happen in the coming current situation and will continue to take all the necessary measures to safeguard our customers and staff members,” he said.

Bank of Valletta was instrumental in supporting the business community and partnered with the Malta Development Bank, he continued.

Through the COVID-19 guarantee scheme, the bank has, to date, extended over €140 million in loans with attractive rates of interest to nearly 200 business customers facing liquidity shortages and bank financing for working capital requirements.

The bank also granted loan moratoria to nearly 3,000 customers, 70 per cent of whom were retail customers.

“These are challenging times for Malta and for Bank of Valletta but we are rising to the occasion by supporting businesses, customers and the wider Maltese community. As COVID-19 is affecting all the local economic sectors, an impact on the BOV Group is inevitable.

“However, we will come out of this together and, as Malta’s leading bank, we are committed to continue giving our full support to help the Maltese economy recover and thrive once again,” Mr Hunkin pledged, praising bank staff for demonstrating “great professionalism and resilience”, despite the difficulties.

Speaking also on behalf of the Malta Bankers’ Association, which he chairs, Mr Hunkin said that local banks, irrespective of their operating challenges, worked hard to ensure services were available to meet the needs of the community and businesses with the least possible disruptions.

“From an operational standpoint, the Malta Bankers’ Association feels banks should strive to continue to use such flexible arrangements as remote working within their new operating practices, Mr Hunkin noted, saying that the association witnessed a rapid behavioural shift by consumers and retail businesses towards a digital payments environment, saying this should, hopefully, spur on the completion of the National Strategy for Electronic Payments.

“Overall, the Maltese banking sector has played an important role in recent months and is in a unique position to play a vital role in restoring the social and economic well-being of our communities,” Mr Hunkin commented.

This is an extract of a feature first carried in the August edition of The Malta Business Observer