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News - Media Releases 2015

03/09/2015

Publication of Financial Stability Report 2014

The Central Bank of Malta is publishing the seventh edition of its Financial Stability Report. The Report covers the developments in the Maltese financial system during 2014, identifying potential risks and vulnerabilities and, in turn, evaluates the system's resilience to such risks.

The Report first sets the economic scenario in which the financial system is operating, making references to developments in the international financial sector which occurred throughout 2014 and in the early months of 2015. It then analyses the key risks to financial stability faced particularly by the core domestic banks and assesses their resilience against these challenges, considering also stress scenarios. Developments in the non-core domestic and international banks, as well as the insurance companies and investment funds are analysed, separately. The Report concludes with an assessment of the identified risks and proposes recommendations for the mitigation of such risks. This edition also contains special features, specifically an analysis of the Bank Lending Survey results; the implementation of the counter-cyclical capital buffer; the categorisation of banks according to their systemic relevance; and an introduction to the new Corep (Common Reporting) and Finrep (Financial Reporting) for banks.

The Report concludes that the domestic financial system remained sound and resilient supported by a growing Maltese economy. Indeed, compared to 2013, risks to financial stability remained unchanged in substance, with some changing direction and easing in their severity in 2014. Looking ahead the identified risks are anticipated to remain broadly stable with some easing further.

In 2014, the size of the banking sector in Malta expanded by 4.8%, mainly reflecting developments in the core domestic banks category. Non-core domestic banks reported a growth rate of 15.6%, whereas the assets of international banks contracted by 1%. As a result, the overall size of the banking system stood at 664% of GDP. The expansion in the balance sheet of the core domestic banks was mainly propelled by an increase in securities holdings, largely issued by foreign monetary financial institutions. Following the rate cuts in June 2014 by the ECB, which pushed the overnight deposit facility rate into negative territory, the core domestic banks increased their placements with other credit institutions, in search for more favourable returns. Customer lending increased by 4.5% during the year, largely driven by resident household lending. Also, lending to non-financial corporates turned positive, growing by 1.8% in 2014, following two consecutive years of contraction. In terms of funding, customer deposits continued to gain ground, growing by 12.7% to reach 84.8% of the core domestic banks' liabilities. The faster growth in customer deposits than customer loans pushed down the customer loan-to-deposit ratio by 4.8 percentage points to 61.7% by end 2014, as compared to the euro area average of 103.2%. Other sources of funding, particularly wholesale funding, remained low.

Credit risk continued to be a key challenge for the core domestic banks, but such vulnerability was alleviated on the back of improved economic conditions. This, together with a faster growth in credit contributed to the tapering off of the NPL ratio which after peaking in June, fell to 9.3% by December 2014. The NPL ratio is anticipated to improve further in 2015. In addition, core domestic banks continued to augment their loan loss provisions and their 'Reserves for General Banking Risk' as per Banking Rule 09, thus improving further their coverage ratios.

Core domestic banks' capital levels remained healthy exceeding regulatory minima. The core domestic banks' capital adequacy ratio and Tier 1 capital ratio remained strong at 14.1% and 10.5%, respectively. Furthermore, their liquidity position remained ample owing to higher deposits, with the liquidity ratio significantly above the statutory 30% minimum requirement. Profitability remained healthy despite some weakening, owing to the current low interest rate environment coupled with higher non-interest expenses, largely relating to higher regulatory costs and impairment charges. Notwithstanding, profitability ratios still exceed those of other banks of similar size operating in the euro area. The results of the top down stress tests carried out by the Central Bank of Malta reaffirmed the core domestic banks' overall underlying strength to various hypothetical shocks.

Risks arising from the non-core domestic and international banks remained generally contained and low, with their links with the domestic economy remaining limited. The banks' overall performance was mainly affected by group restructuring decisions to downsize their foreign operations, and to a lesser extent due to higher impairment charges relating to bank-specific issues. These banks continued to perform positively operating with high liquidity and adequate capital buffers. With regards to the insurance and investment funds sectors, their performance remained satisfactory governed by prudent practices.

In light of the analysis contained in the Report, the Central Bank of Malta thus encourages banks to increase further their provisioning levels, improve their capital buffers, and maintain prudent dividend pay-out policies. Although the financial sector is continually aligning itself with domestic and international regulations, institutions are still encouraged to take the necessary proactive measures in line with the new upcoming EU Regulations and Directives, particularly the Bank Recovery and Resolution Directive, and any new revisions to the CRR/CRD IV framework.

The Financial Stability Report can be downloaded from www.centralbankmalta.org or obtained in printed form from the Central Bank of Malta.

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