The impact of COVID-19 on expected credit losses of Maltese banks

Abstract

PURPOSE: The research objectives of this this study were to analyse the impact of the COVID-19 pandemic on ECLs of Maltese core domestic banks, to identify the processes used by banks to determine the level of provisioning and to understand the challenges faced by the preparers of the financial statements. DESIGN: To fulfil the research objectives, a mixed methodology approach was adopted. A content analysis was carried out to obtain quantitative data. One-to-one semi-structured interviews were conducted with seven senior bank officials to collect qualitative data. FINDINGS: The study revealed that the outbreak of the COVID-19 pandemic had a significant impact on ECLs of Maltese core domestic banks. While the pandemic had an adverse effect on profits, the quality of collateral remained stable. The study shows that the MDB COVID-19 Guarantee Scheme was beneficial for customers and banks alike. The study suggests that back testing should be performed in a few years’ time to assess whether companies managed to overcome challenges posed by the COVID-19 pandemic. Other findings pertain to signs of recovery, the use of judgement, the application of management overlays and the challenges faced by the preparers of financial statements. CONCLUSIONS: The study concludes that although the COVID-19 pandemic had a significant impact on the ECLs of Maltese core domestic banks, early signs of recovery are evident. Maltese banks managed to overcome the challenges posed by the outbreak of COVID-19, thus exhibiting their strength and resilience. VALUE: The strength of this research lies in the fact that it is the first study assessing the impact of COVID-19 on ECLs of Maltese core domestic banks. This study provides insights on the impact of the COVID-19 pandemic and the challenges brought about. Recommendations put forward include the performing of back testing in a few years’ time and the ongoing review of the credit portfolio.