Most European banks are in a stronger position now than during the last financial crisis in 2008 - with up to five times more capital. Agreements to not pay dividends and bonuses have further fortified their position, allaying the fears that the pandemic could pose an existential risk to Europe’s major banks.
The situation in Malta is somewhat similar, yet local banks should tread with caution. Whilst individual performance and the impacts of the 2008 economic crisis were not consistent across all local Maltese banks, there was steady growth in the NPL ratios of the entire Maltese banking sector over the period of 2007-2010. Statistics indicate that despite fluctuations in net profit, NPL ratios increased from 5.1% to 7.3% for that same period.
In comparison, the stability of the Maltese banking sector appears to have fared better against the impacts of the current COVID-19 pandemic. According to the Central Bank of Malta (CBM), the interim NPL ratio stood at 3.2% for 2020, a significant improvement upon the situation in 2008. However, there is an expectation for the situation to worsen, with the CMB stating that ‘‘NPLs are expected to increase as the repayment capability of households and private firms will be challenged. This is especially so, if the recovery in economic activity becomes slower than currently projected due to a resurgence of the virus spread.’’ Nonetheless, the prospects of the rollout of the COVID-19 vaccine have been somewhat promising with respect to economic recovery. Therefore, we will likely only be able to understand the true impact of the virus once the rollout is complete and government assistance ceases.
Needless to say, it will take some time before the Maltese banking sector is able to fully recover from the impacts of the coronavirus. Prior to the outbreak of the virus, local banks were struggling to deal with lacklustre profit growth in view of efforts being taken with de-risking exercises resulting from the ever-increasing regulatory scrutiny on financial crime prevention, intrinsic pressures from correspondent banking providers, excess liquidity and competition from digital payment providers located overseas. The pandemic will exacerbate this as it hits the economy, increasing pressure on credit losses.
Where are we today
With the initial crisis management phase of the COVID-19 pandemic coming to an end, banks must quickly shift to a strategic mindset, or risk missing the opportunity to help shape and accelerate industry-wide transformation.
Banks must now double down on a transformation of both the size and composition of their cost bases. The way banks now respond presents an opportunity to accelerate those transformations. It will encourage swifter technology innovation, rapid adoption of new ways of working, changes in the ways customers interact with their bank, and a more advanced approach to risk management and crisis planning. Timing will be a critical element, as failure to adapt efficiently will see some banks miss out on this opportunity.
Moreover, banks must remain mindful of their heightened exposure to cybercriminal activity, in view of the pandemic, which has caused a significant disruption to the way in which businesses and consumers operate and interact. Cybercriminals are using increasingly innovative tactics to target consumers and employees alike, by exploiting the increased dependency on remote working and online transactions due to government enforced lockdowns and social distancing measures to curb the spread of the virus. Banks must take practical steps to remain cyber resilient amid the pandemic, which include but are not limited to investing in robust cybersecurity infrastructures, ensuring the security of their networks and data transfer, and above all else, educate staff on proper cyber hygiene.
What can we learn from the situation?
Reputation and purpose are increasingly important for customers
It is well known that a strong reputation is key to establishing consumer trust and a main influence on consumer loyalty even through hard times. However, reputation goes beyond the number of years of experience and ability to fulfil consumer demands, as we have witnessed a rise in the ethical consumer. These consumers take a more conscious approach to what they consume and who they choose to do business with, and value ethical behaviour and corporate social responsibility just as much as they do cost and quality. Therefore, banks should focus their efforts on establishing a strong and meaningful reputation which dictates what goes on both in front and behind closed doors.
Cost Containment
A key take-away from the pandemic is a greater appreciation for the bare minimum required to actually continue to operate. The pandemic forced businesses across all industries to redirect their attention to cost containment and cost saving strategies as a means of survival, whether it meant permanently closing offices or reducing their staff headcount. Going forward, banks should continue to explore ways to reduce costs and unnecessary expenses, including consideration for aspects such as:
- Accommodating remote working indefinitely, whether it be full or partial, and creating a distributed workforce thereby reducing or eliminating office space.
- Streamlining processes, embrace automation and re-focus marketing tactics.
- Reviewing vendor contracts and agreements and seek to negotiate better deals.
How do we respond?
In our view, there are seven ways in which banks can use the COVID-19 crisis as a catalyst for change:
- Become digital by default
- Embrace simplification
- Focus on generating fee-based income
- Accelerate the growth in digital payments
- Stay alert for smart deals and partnership opportunities
- Professionalise the at-home worker
- Prepare for credit losses and stagnant lending growth
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