The application of apposite financial indicators to test the stability and sustainability of the retail banking sector : a retrospective approach

Abstract

The main aim of the study was to prove whether the late-2000 financial crisis had, in some way affected the integrity and operations of local banks in Malta. The financial reports for the period 2007 -2010, of three local established banks, and which collectively hold circa 80% of the total domestic assets, were analysed. Financial ratios were used to examine and measure trends in operational performance and systemic risk before and after the crisis, targeting capital, asset quality, liquidity and operations. Values obtained for financial ratios during this period were compared with values for 2002. Results reveal that the banks' concerted efforts to arrest the deteriorating asset quality after 2008 by strengthening of credit risk management capabilities and improved internal controls were paying off and that capital adequacy ratio of domestic banks was still strong even after the impact. Tests for credit, market, liquidity risk and operational risk revealed that Equity: Total Assets ratios were higher, and the Equity: Liabilities ratios were lower than the values reported for the 2002 figures. The banks have liquidity, but the Net Loans: Total Assets ratios remain perched at unsustainable levels. The rate of increase of the inter-bank ratios in the recent years implies that the participating banks are net borrowers. The values for Cost: Income ratios, Net Interest Revenue: Average Asset ratios, Net Interest Revenue: Net Income ratios, Other Operating Income: Average Asset ratios, Return on Average Asset ratios, Cost to Income ratios for the period 2007-2019 were slightly but consistently higher than those obtained in 2002, indicating that over the years the banks managed to gain ample operational efficiency even in a densely competitive market. Information disclosure remains the limiting factor to develop a better early-warning or forecasting model. Disclosures of asset valuation methodologies should be more comprehensive and provide a much more detailed picture of underlying risks and potential returns.