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News - Media Releases 2018

10/08/2018

Publication of Financial Stability Report 2017

The Central Bank of Malta is publishing its tenth edition of the Financial Stability Report, in which it assesses developments in the Maltese financial system during 2017. The Report evaluates the main risks that could potentially undermine the financial system and any policies proposed or implemented with the aim to enhance the system's resilience. Such assessment is also supplemented by a number of stress tests which evaluate extreme but plausible events. The analysis focuses on the Maltese banking sector which is segmented into core domestic banks, non-core domestic and international banks, as well as domestically-focused insurance and investment funds. The Report includes a number of boxes on EU policy initiatives to address non-performing loans (NPLs); a review of the corporate bond market in Malta; developments in lending to non-financial corporations, as well a box detailing the results of the Bank Lending Survey.

The strong momentum of the Maltese economy continued to support the soundness and resilience of the domestic financial system. Against this background, core domestic banks maintained healthy profits despite challenges arising from the prolonged low interest rate environment, subdued credit growth, and changes in regulatory requirements. Their return on assets and equity stood at 9.3% and 0.68%, respectively, outperforming their European peers.

Credit risk abated further, mirroring enhanced creditworthiness and better debt repayment capabilities of borrowers on the back of robust economic growth. Banks have actively continued to clean their balance sheets which also contributed to the fall in outstanding NPLs. The NPL ratio for the core domestic banks dropped further to 4.1%, mostly driven by the improvement in the corporate loan book. The amended MFSA Banking Rule 09/2016, which came into force in January 2017, is anticipated to continue to drive further down the level of outstanding NPLs.

Core domestic banks strengthened further their capital positions with the total capital ratio and the Common Equity Tier 1 capital ratios standing at 16.8% and 14.7%, respectively, meeting the minimum requirements and other capital add-ons, where applicable. They also continued to operate with ample liquidity buffers as evidenced with the Liquidity Coverage Ratio (LCR) of around 184%, well above the fully-phased-in requirement.

Non-core domestic and international banks' links with the domestic economy remained contained, resulting in limited potential systemic implications. Their business model is largely diversified ranging from transacting in wholesale markets to niche services offered to retail customers; reflecting their diverse asset composition and funding sources. Banks within these two categories held strong capital buffers which exceeded regulatory minima and operated with abundant liquidity, mitigating potential idiosyncratic risks.

Similarly, risks from domestic insurance companies were assessed to have remained low. In spite of the challenges from the introduction of the Solvency II risk-based framework, the domestic insurance companies continued to operate with a strong capital base without the need to change their investment strategies. Furthermore, these insurance companies reported considerable improvements in their profitability levels owing to better underwriting business.  Meanwhile, domestic investment funds remained prudent, with their investment portfolio largely invested in bonds. Risks stemming from this sector are deemed to be contained.

Since the publication of the Financial Stability Report 2016, the level of risk attenuated further as a result of sustained positive economic developments. The domestic financial system remained robust and resilient to a number of external challenges such as the potential risk repricing and debt sustainability concerns in some European countries, amid geopolitical uncertainties. On the domestic front, the potential direct adverse implications of a 'hard Brexit' on the Maltese financial system are deemed to be limited. Debt sustainability concerns abated for domestic corporates and households, with the latter's wealth rising further on the back of favourable labour market conditions. Subdued credit growth, particularly to non-financial corporates, continued to impact banks' profitability. Nevertheless, banks should continue to remain prudent in their lending behaviour, strengthening further their capitals buffers, contain costs, while exercising continued efforts towards addressing their stock of legacy non-performing loans.

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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