Traditionally, banks have served as guardians of people's wealth and credit lenders. Over time their role has evolved and expanded and nowadays they are involved in virtually every aspect of our life, from paying for our coffee to managing our wealth. Banks support economic growth and prosperity through solutions aimed at meeting these needs. With such an important and ever-growing role, it is timely to reflect on how Malta's banking sector needs to innovate and adapt in the years to come to continue to meet the needs of all its stakeholders.
The sector is at an inflection point - rapid technological advances, changing customer preferences, increasing competition, heightened regulatory scrutiny as well as the growing importance of funding the transition towards a green economy and integrating Environmental, Social, and corporate Governance (ESG) principles in business models, all against a backdrop of global market volatility and inflation. All these factors contribute to a changing landscape, with uncertainties and challenges that present risks, but which, with effective response and quick adaptation could be turned into opportunities and unlock significant value.
Transformation initiatives were already underway prior to the global pandemic, however Covid-19 has accelerated the pace of change. Digitalisation, sustainable profit and green financing are currently top of the agenda for Maltese banks.
Purpose of the Report
This report, supported by the Malta Bankers' Association (MBA), showcases the role and importance that the Maltese banking sector has in the economy and society, identifies current and upcoming challenges and opportunities, and conveys messages to banks and stakeholders to embrace change and progression on four key pillars, namely:
- Becoming a purpose-led sector
- Securing continued viability
- Ensuring safety and stability
- Driving progressiveness
The report has been developed in consultation with local banking experts and senior industry representatives. It seeks to provide an overview of the sector, explain to the various stakeholders of the banks the current state of flux and present a framework for collaborative and future-focused discussion. There are many factors, challenges and opportunities to reflect on when considering the future of banking in Malta, particularly in the current environment surrounding the sector.
Executive Summary
Malta's banking sector is a key pillar for the economy with a significant contribution to Malta's Gross Value Added (GVA) of 6.2% in 2022, compared to a Eurozone average of 2.8%. The sector operates more than 75 branches, employs over 5,400 persons and holds over €41bn in assets, equivalent to 249% of GDP.
The banking sector came out of the Covid-19 pandemic relatively intact, supporting borrowers and the economy alongside targeted Government initiatives. The sector is now feeling the ripple effects of more recent exogenous shocks, such as the supply chain issues, high inflation rates, rising interest rates and geopolitical tensions as well as the regulatory changes. Faced with these realities, the local sector continues to weather these challenges from a position of strength as a result of the largely traditional operating models, strong capitalisation and well-balanced risk portfolios.
The sector is now at a crossroads – the socioeconomic environment is transforming rapidly resulting in a growing diversity in the needs of stakeholders. Banks are hence faced with the challenge of aligning their strategic objectives with the increasingly dynamic needs of their stakeholders. To this end, Malta's banking sector should continue to build around four core and mutually reinforcing pillars which tackle the needs of the banking sector's ecosystem:
- A purpose-led banking sector which places the customer at the centre of operations to create long lasting relationships, while also balancing the needs of other stakeholder groups and delivering longterm value to all.
- A viable banking sector which ensures sustainable profitability through diversified revenue streams, inspires trust amongst customers, delivers value to shareholders and customers, and remains competitive by investing in technologies.
- A safe and stable banking sector which is robust, secure and transparent from a capitalization perspective, acting in line with the expectations of regulators and in the best interest of customers and shareholders.
- A progressive banking sector which embraces technology, increasing the value delivered to customers and shareholders through analytics, talent and other forms of innovation.
Malta's Banking Sector as Purpose Led
In being purpose-led, the banking sector seeks to define success over the long term by providing value to customers, employees, shareholders and society as a whole in a sustainable manner which seeks to build trust among all stakeholders. Purpose-led banking commands enhanced customer loyalty through long-term value generation. Research has found that organisations operating with a defined purpose beyond the singular goal of profits outperformed the S&P 500 by a factor of 10 over a decade.1 This was driven mainly by stronger investor confidence, increased employee retention rates and increased customer loyalty.
Banks are cognizant of the importance of their role in society as evidenced by growing focus on ESG strategies. Regulators, investors and consumers are becoming increasingly demanding of banks to embrace the green transition, whilst aligning also to social priorities. Many organisations are focusing on establishing their ESG policies and reporting capabilities, as well as articulating an ESG strategy, which is a fundamental framework to benchmark present status, set ambitions and measure incremental progress towards the set targets. A strong ESG strategy drives value creation via top line growth, reduction in costs, higher levels of staff attraction and retention, as well as optimization of assets and capital.
Culture is also an integral ingredient in purposeled banking. A positive culture reduces the risk of misconduct, cultivates positive reputation and public trust, builds loyalty among the customer base, improves employee attraction and retention, and helps increasing the regulators' confidence. A healthy culture within banks requires continuous effort to maintain through clear communication, the right tone from the top, collaborative and exemplary leadership, support for professional development, transparency and rapid but fair conflict resolution.
Malta's Banking sector as Viable
A viable banking sector seeks to deliver products and services efficiently, allocate its capital in an optimal manner to maximise return on investment, and offer a diversified portfolio of services to secure multiple sources of income.
Viable banks are more resilient to economic shocks, compliant with regulation and well-positioned to serve the needs of existing and potential customers.
In recent years Malta's banking sector has delivered a return on equity around the 4% mark, compared to 8% in the European Union (EU). This is mostly due to net interest income accounting for over 70% of total income for Malta's banks, which is circa 15% higher than the EU average, thus highlighting the need to further diversify income streams to secure sustainability and future viability. Viability requires a sustainable business model built on income diversification, cost management and embracing technology, trends and opportunities. For example, growth of revenue streams generated through commissions and other fee-based services will better position the Maltese banking sector against unfavourable market conditions, geopolitical instability and the international decisions that steer the base interest rates.
Technology and digital transformation also present an array of opportunities to enhance the viability of Malta's banking sector. Artificial Intelligence (AI), Automation and Advanced Analytics can be highly effective in streamlining operations, reducing costs, and enhancing the customer experience. The local banking sector may also consider ways to collaborate on the establishment of cross-sector technology driven utility centres that carry out back-office services in areas that do not provide material competitive advantage or are non-core for banks, such as in Know Your Customer checks and achieve greater cost efficiencies at scale.
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Footnote
1. The business case for purpose (ey.com)
Originally Published by Malta Bankers' Association
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