Malta’s domestic banks saw a windfall last year, generating close to half a billion euro in profits on the back of the interest rate hikes effected by the European Central Bank to combat inflation.

Starting in 2022, inflation ripped through the eurozone, largely caused by a global shipping crisis and an energy price shock.

The latter was a consequence of Russia’s invasion of Ukraine and the ensuing sanctions imposed on the aggressor nation by the European Union.

As freight, oil and gas prices soared, the impact snaked its way through the economy and led to steep increases in the price of everyday goods.

The response from the European Central Bank was decisive. It increase interest rates to their highest-ever levels in successive decisions that fundamentally altered the European monetary landscape.

The result, for Malta’s banks, was a major increase in their net interest income, as the increased interest rates were not passed on to their depositors. In fact, most offered no increase on short term accounts, only offering better rates on certain fixed term deposits.

On the flipside, the cost of borrowing remained low – becoming the lowest in the eurozone for home loans. This decision allowed Malta’s economy to continue growing without feeling the braking effect the ECB’s rate hikes should have been.

Malta’s open and import-dependent economy means that inflation is largely an imported phenomenon, and inflation did in fact go down despite the country having the eurozone's lowest pass-through rate of the ECB’s monetary policy.

The bottom line, for Malta’s domestic banks, was that they were able to capitalise on the situation to generate record levels of interest income.

Malta’s largest bank alone, Bank of Valletta, generated a quarter of a billion euro in profits, a 65.5 per cent increase over the previous year.

These were the best-ever results for a listed Maltese company.

The country’s second largest bank, HSBC Bank Malta, saw the largest increase with a 141 per cent increase over the previous year’s profits to reach €134 million.

APS Bank, meanwhile, saw its profit before tax grow by 93 per cent to €30.2 million, while BNF registered a moderate 6.75 increase to €13 million in pre-tax profits.

Lombard Bank was the only domestic bank to register a decline in profitability, which practically halved to €14.5 million. However, this reflected a one-time write back in provisions for expected credit losses in 2022, which had a major impact on that year’s results. When allowing for that adjustment, the banks’ 2023 results saw higher net interest income, leading to an increase in operating income.

MeDirect is headquartered in Malta but has major operations in Belgium. It also entered the Dutch market in 2023. Its combined results show a 56 per cent increase in its profit before tax to €14.3 million.

This month, the ECB decreased its key interest rates by 0.25 per cent. However, BOV Chairman Gordon Cordina said he expects that “any eventual unwinding of the tightening cycle is likely to keep interest rates at levels which are higher than those which prevailed throughout [the last] decade.”

While it remains to be seen whether Malta’s banks will be able to repeat 2023’s results, which saw them generate a combined €457.5 million in pre-tax profits, the outlook is certainly positive.