Abdul Haleem Abdul Latheef
As we worry about the brewing news on subsequent bank failures following the Silicon Valley Bank (SVB) crisis, I thought it would be a good idea to do a health check on our banking system. The simple conclusion is that our banking system is sound, and a bank run is unlikely.
SVB woes stemmed from its exposure to bonds, which are interest rate sensitive financial instruments. The exposure of Maldives banks to sensitive financial instruments is negligible. Most of the bank assets comprise of direct loans, with highest exposure to tourism sector (close to 35%). Of cause, the concentration is very high at this level, the positive loan to value ratio of this industry and the projected above average industry growth rate are counterbalancing factors for the short to medium term at least.
I have relied on MMA’s data in this analysis. The analysis is for the industry, not on a specific bank.
Banks have very high level of own funds to protect depositors
In Maldives, the banks are subject to what is called prudential regulations. MMA maintains a check on the health of the banking sector through their very strict supervision regime.
Our banks are very well capitalised and have set aside sufficient reserves to absorb shocks. This means, banks have their own finances to honour depositors in case there are loan default issues.
Banks have maintained very healthy capital buffers (reserves). The regulatory minimum requirements in 12% (red line) . As you can see, even during worst times, the bank’s capital buffers are well above the minimal threshold.
In fact, with the current level of capital adequacy, our banking system is well capitalised as it exceeds 15% mark, which is used to classify banks into this category.
Banks have adopted very prudent lending practices
Think about a situation where all deposits are lent. In this scenario, risk to the deposits will be higher compared to say, 60% of deposits having been lent. The banks used to have very high level of loans to deposit. However, the loan to deposit ratio has been declining since 2019 and is currently at below 60%. The banks have adopted less aggressive lending practices and have improved the loan recovery significantly as well.
Banks have implemented effective loan recovery processes.
One of the measures used to understand the recovery rate of loan is the non-performing loan ratio (NPL). The rate of non-performance (default) is also very important to understate the banks’ effectiveness. The default rate has also been improving significantly in the banking system.
The non-performing loan issue was a major issue back in 2012. The rate stood at staggeringly high, at above 21%.
However, things have improved significantly since then, in 10 years’ time, the banking sector have done well in recovering loans. Now the non-performing loan with respect to total loan is just below 6%.
Banks are highly liquid
The banks are quite liquid, meaning they can honour withdrawal requests without much of a hassle under normal circumstances. The ability of banks to honour depositor’s withdrawal request is understood by the liquidity ratio.
During the last 10 years, banking sector has become very liquid and now liquid assets to short-term liabilities is above 71%. This wasn’t just a temporary liquidity improvement, but a consistent improvement over the years from a very low liquidly level of just above 35% during 2012.
Currency mismatch could pose challenges
Banks foreign currency liabilities relative to total liabilities, remain almost at the same level over the 10 years, with a moderately declining trend. The foreign currency assets of banking sector were above that of the foreign currency liabilities until 2018 (Q2). Since then, it has been falling and stood at little below 45%.
The foreign currency liabilities relative to total liabilities reached close to 55% while that foreign asset reached close to 44% by the end of 2022 (q3). The decline of foreign currency assets relative to total asset may challenge banks as the currency mismatch widens if this trend continues.
Personal Loans on the raise
Of the total loan portfolio of the banks, the personal loans have reached over 14% as 2022 (Q3), the third largest exposure followed by Tourism and construction. The majority of which is credit card and consumer finance loans. Student loans also come under this category.
The growth of personal loans is astoundingly high, with CAGR of 130% over the 7 years. In 2015 the personal loans is just above MVR 735 million. This has reached over MVR 4.5 billion. Unlike commercial loans, personal loans are normally uncollateralised.
Overall, our banking system is healthy, except for the possible currency mismatch challenges and increasing exposure to personal debt.
Before making any financial decision, it’s important to weigh in several factors and avoid the tendency to rush into things. Risk is part of life, understanding your own risk appetite is important before making decisions. Rushed actions will lead to unnecessary complications and make a situation worse than it is.
Please Note: My analysis should not be taken as an investment advice. The analysis is general and without knowledge of individual circumstances.
Abdul Haleem Abdul Latheef is the Co-founder and Chief Investment Officer at First National Finance Corporation.
Haleem started his career as an academic and held the position of Head of the Department of Accounting and Finance of the now Business School of Maldives National University.
He served as the CFO at Pension Office for eight years, leading the investment management, investment operations, and financial management functions. Haleem worked in the banking, insurance and consulting practice before setting up First National.
He is also the current President of Maldives Red Crescent and a Board Member of the Pension Fund.