15/07/2024 08:55:00

Resilient Financial Sector Amidst High Global Geopolitical Risks

The Central Bank of Malta published its sixteenth edition of the Financial Stability Report (Report), which discusses the domestic and global macro-financial developments and their effects on the Maltese financial sector in 2023.

The Report finds that the external macro-financial environment continued to be characterised by elevated geopolitical risks which could have adversely affected financial stability. While central banks tightened their monetary policy stance, inflation expectations started to point towards a continued slowdown, with market participants expecting monetary authorities to start lowering interest rates in early 2024. This positively impacted financial markets, as equities and bonds rallied strongly, especially late last year.

The domestic financial sector remained resilient. Domestic banks continued to operate with headroom above regulatory capital and liquidity requirements, providing capacity to absorb shocks. At the same time, profitability rose through higher net interest income, buoyed by higher interest rates as well as sustained credit demand. The latter, however, remains largely driven by property-related loans, thereby increasing further concentration risk on domestic banks' loan books. Credit quality indicators remained benign as reflected in lower NPL ratios.

The domestically-relevant insurance firms remained well capitalised, with life insurers reporting increased demand for unit and index-linked products, reflecting financial market improvements throughout the year. On the back of such recovery, domestically-relevant investment sub-funds recorded their first growth in two years, while operating on limited leverage.

The Report is complemented with a number of boxed articles delving into various topics, including an analysis of further tools adopted to measure the credit gap of Maltese corporations, to methodological updates in both the Macro Stress Testing framework and the liquid assets ratio for insurance and investment funds. The Report also analyses the non-bank financial intermediation sector, developments in deposits as a result of diverging monetary policy passthrough, and an assessment on the significance and effectiveness of O-SII buffers in Malta.

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