News - News Releases 2017


Publication of Financial Stability Report 2016

The Central Bank of Malta is publishing the ninth edition of the Financial Stability Report, wherein it assesses developments in the Maltese financial system during 2016. The Report also evaluates the financial system's resilience against key potential risks inherent to the system and those stemming from the overall macroeconomic environment within which the financial system operates.

The Report discusses key risks, policy recommendations and measures taken to mitigate such risks. It provides an analysis of the salient trends in the international and domestic economic environment, focusing on key developments across major economic sectors in Malta and households' financial conditions. The Report includes an assessment of the banking sector and its resilience to related risks distinguishing between core domestic banks, non-core domestic banks and international banks. This assessment is supported by top-down stress tests. The Report discusses developments in the insurance and investment funds' business relevant for the domestic economy. Special features in this edition include an analysis of the Bank Lending Survey results together with an overview of core domestic banks' profitability in the last decade and a box with the latest developments on the minimum regulatory requirement for own funds and eligible liabilities (MREL) applicable to all EU banks.

In 2016, total assets of the core domestic banks expanded further, to reach 220% of gross domestic product (GDP). Mortgage lending and placements with other banks and the Eurosystem contributed to this growth, financed by a consistent flow of customer deposits. Lending to non-financial corporates (NFCs) remained weak, on the back of signs of disintermediation by the corporate sector, which is increasingly resorting to the domestic capital market for its financing needs. The muted growth in the core domestic banks' total loans pushed down the loan-to-deposit ratio to a record low of 56.0%. Asset quality improved further with the non-performing loans (NPL) ratio dropping to 5.3% in 2016, from 7.1% a year earlier. Concurrently, core domestic banks continued to build provisions, pushing up the coverage ratio to 46.0%. Profits rose further in 2016 with net interest income holding its place as the main source of revenue for core domestic banks; this took place against the background of weak credit growth and a prolonged low interest rate environment continuing to exert pressure on profitability.

Nevertheless, in 2016, the return on equity (ROE) rose by 0.3 percentage point to 10.2%, while the return on assets (ROA) edged up by 0.1 percentage point to 0.8%, exceeding the average for small banks in the euro area.

Core domestic banks continued to operate with ample liquidity buffers, as the Liquidity Coverage Ratio (LCR) stood well above the fully-phased-in requirement. Capital levels of the core domestic banks remained healthy, with the Capital Adequacy Ratio and the Tier 1 Capital Ratio standing at 16.0% and 13.4% respectively as at end 2016, both well above the regulatory minima. The business model of this group of banks remained generally focused on traditional banking and continued to invest in high investment grade securities.

The non-core domestic and international banks maintained their international business orientation, with limited or virtually inexistent links with the domestic economy. The size of the non-core domestic banks remained largely unchanged at 25% of GDP whereas that of international banks narrowed to 222.7% of GDP, largely reflecting developments in the two large branches of foreign banks. The funding of these two groups of banks originates predominantly from abroad, whereas exposures largely relate to foreign assets. Both non-core domestic and international banks reported positive profits in 2016, with capital and liquidity levels remaining above the minimum regulatory requirements. Overall, risks stemming from the operations of these two groups of banks remained low.

Similarly, financial stability risks from the domestically-oriented insurance companies and investment funds were assessed to have remained low and contained. These institutions continued to perform positively, underpinned by conservative business operations and prudent investment strategies.

The analysis confirms that the domestic financial system remained robust and resilient to a number of key challenges, buttressed by favourable domestic macroeconomic conditions. Moreover, the resilience of the financial system was enhanced by a number of macro-prudential measures implemented in 2016, including the revision of the Banking Rule 09/2016 which targets credit risk. This risk has abated on the back of improved creditworthiness together with some write-offs of legacy loans. Potential real estate related risks due to rising property prices driven by a recovery of this sector, are contained by the further accumulation of households' wealth and favourable labour market conditions, and the banks' conservative lending policies. Sluggish credit growth coupled with a persistent low interest rate environment, remain a key challenge for banks.

The financial stability outlook remains positive, with some of the identified risks anticipated to abate further in 2017. Notwithstanding, the Central Bank of Malta recommends that banks continue to adopt prudent lending practices while at the same time exercise caution in taking on additional risks through easing of credit standards. Financial institutions are encouraged to continue pursuing cost efficiencies while tapping alternative income sources to ensure sustainable profitability in the long term, and maintain strong capital buffers.

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

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