The MFSA lifts Restrictions on Dividend Distributions and Share Buy-Backs for Credit Institutions

In April 2020, the Malta Financial Services Authority (the ‘MFSA’), in light of the economic shock brought by the Covid-19 pandemic, called upon all credit institutions licensed in terms of the Banking Act (Chapter 371 of the Laws of Malta) to refrain from paying out or irrevocably committing to pay out dividends and/or conducting share buy-backs aimed at remunerating shareholders until at least 30 September 2021 following European Central Bank’s recommendations (the ‘Recommendations’). These restrictions were deemed necessary for boosting banks’ capacity to absorb losses and to support lending to the real economy.

Despite ongoing challenges, the latest ECB macroeconomic projections illustrate reduced uncertainty and an overall resilience of the European banking sector. The ECB, in close cooperation with the European Systemic Risk Board (the ‘ESRB’), having acknowledged the improved reliability of banks’ capital trajectories, decided not to extend its Recommendations on temporary suspension of all cash dividends and share buy-backs beyond September 2021.

To this end, as of 1 October 2021, the MFSA has lifted the restrictions placed upon credit institutions with regards to dividend distributions and share buy-backs. As a result, the MFSA will be assessing capital trajectories and dividend or share buy-back plans of each credit institution in the context of the regular supervisory process.

Although the lifting of such restrictions represents a generally positive development in the banking industry, the MFSA and other European regulatory authorities have cautioned that, a continued prudent approach remains essential as the impact of the Covid-19 pandemic on credit institutions’ balance sheets may not have manifested itself in full. In particular, considering that credit impairments come with a temporal lag, credit institutions may still be benefiting from several public support measures. Hence, credit institutions have been strongly encouraged to adopt a prudent and forward-looking approach when deciding on remuneration policies based on their stress testing, capital plans and business model sustainability evaluation.

Deloitte Malta will be monitoring developments in the banking industry both locally and overseas.