Malta's banking sector is seven-times the size of its economy and proportionally bigger than that of Cyprus, but Fitch Ratings said it is less at risk in the short-term, in a report out on Tuesday. However, the credit rating agency warned that Malta could still fall foul of EU leaders' crackdown on outsized and offshore bank sectors.
Maltese banks have total assets worth 789 percent of gross domestic product (GDP), making Malta's banking sector the euro zone's second largest after Luxembourg. The country also outstrips Cyprus, where the banking sector made up 672 percent of GDP in the first half of 2012, the report stated in its comparison of the two island nation's banking industries.
Cyprus' banking sector was bailed out in March by international lenders and a tax imposed on deposits worth 100,000 euros or more.
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"The events in Cyprus have triggered a 'who's next' game by drawing attention to other small euro zone countries with sizable banking sectors," wrote Michele Napolitano, the director of sovereigns at Fitch Ratings.
"These countries could be most at risk of a depositor/senior unsecured creditor bail-in in the event of a crisis. Malta, in particular, has been subject to scrutiny given its geographical location and large banking sector relative to GDP," he added.
However, Napolitano said Malta's banking sector does not face the same risks as pre-bailout Cyprus, as it is far less dominated by domestic banks, and has stronger asset quality and more effective financial supervision.
According to Fitch, domestic Maltese banks account for three-times the country's GDP, less than the euro zone average. In comparison, Cyprus's domestic banks are 4.7-times the size of the Cypriot economy.
As the Maltese government is only likely to bail-out core domestic banks it considers systemically important, its contingent liability risk is smaller than that of Cyprus, said Napolitano. In addition, HSBC Bank Malta, worth 90 percent of GDP, would likely be bailed-out by its parent-company, rather than the sovereign.
"So the contingent liability that potential bank support places on the Maltese sovereign - around 128 percent of GDP - is significantly lower than in Cyprus, where the domestic banking sector, accounting for 466 percent of GDP, proved too big for the sovereign to support," said Napolitano.
Plus, while Maltese banks assets have deteriorated since 2008, the bank sector is less exposed than Cyprus was to peripheral euro zone debt.
"The key problem in Cyprus was the sector's exposure to Greek government bonds and to the Cypriot and Greek private sectors, which delivered a blow to the banks' asset quality," said Napolitano. In Malta, euro zone assets only accounted for around 8 percent of holdings in Maltese core domestic banks at the end of June 2012.
Deutsche Bank strategist Francis Yared concurred that that similarities between the banking sectors of Cyprus and Malta – and indeed, Luxembourg – are less than they might first appear.
"Our analysis of the size and structure of the banking systems suggests that Cyprus was indeed an outlier in terms of the size of its domestic banking system, deposit base and lack of alternatives in terms of bail-in instruments," Yared wrote in a note at the end of March.
"The large banking systems in Luxembourg and Malta are dominated by subsidiaries of foreign banks, which even in the case of Cyprus, have not been involved in the bail-in."
The analysts' more upbeat outlook on Malta is supported by the International Monetary Fund (IMF)'s latest GDP forecasts. The economic body predicts Malta will grow by 1.3 percent in 2013, rising to 1.8 percent in 2014.
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However, Napolitano warned that in the wake of the Cypriot events, recent EU rhetoric suggests its leaders are becoming decreasingly tolerant of outsized financial hubs.
"In Malta, financial services are a significant source of value added, employment and tax revenues. Should initiatives at EU or global level to shrink offshore banking sectors intensify, the Maltese economic model could be tested in years to come," he said.
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Malta's financial model could also be undermined by the euro zone's banking union agenda. "One feature which appears to be certain is that the European Central Bank will have unprecedented powers to monitor and intervene in the banking sector. For example, should there be significant changes to taxation for banks with significant cross-border operations; this could undermine the status of Malta as an international financial center," said Napolitano.
"There is no doubt that each country will try to protect its interests; for example, Germany has already made clear it wants to keep small savings banks outside the scope of the banking union. However, for smaller countries like Malta, negotiations will undoubtedly be more difficult."
--By CNBC's Katy Barnato