27/11/2024 10:27:00

Interim Financial Stability Report 2024

Domestic financial sector shows strength despite heightened geopolitical tensions

The Central Bank of Malta published its latest Interim Financial Stability Report 2024 (Report), which assesses the current macro-financial situation in Malta and abroad covering the first half of the year.

Although the global economy appears to be heading for a soft landing, the Report notes that geopolitical risks continued to pose a heightened threat to financial stability. As inflation eased, monetary authorities lowered interest rates with market expectations pointing towards further cuts going forward. Nevertheless, the timing and extent of future interest rate cuts will largely depend on the inflation path and overall economic conditions. Such uncertainties have the potential of spurring financial market volatility, especially for those instruments with stretched valuations.

Despite the uncertain external macroeconomic environment, the domestic financial sector remained robust. Domestic banks continued to operate with strong capital buffers and ample liquidity space. Against this backdrop, profitability remained healthy although this could be peaking, in light of looser monetary policy. Although resident credit slowed down marginally, it is still considered strong, highlighting a diverging credit cycle when compared with the euro area. Similarly, diverging developments were also reported in the real estate sector, where house prices in Malta continued to increase at a strong rate, while in the euro area prices continued to decline until the first quarter. Credit quality remained benign, as reflected by the lower NPL and forbearance ratios. The domestically-relevant insurance companies reported strong profitability while maintaining ample capital buffers. Similarly, domestically-relevant investment funds experienced further growth, driven by the strong equity market performance and recovering bond markets.

Financial stability risks remained limited and largely originating from abroad, spurred mainly by the intensification of geopolitical risks. The Report mentions the importance for financial institutions to remain vigilant to such ongoing risks, including cyber and climate-related risks. This, coupled with conservative lending practices and dividend payouts should ensure that capital is preserved, further buttressing the resilience of the domestic financial system.

The Report is supplemented by three boxed articles exploring various topics of interest. The first box highlights a forecasting framework for core domestic banks, while the second introduces a reverse stress test that is based on one of the liquidity stress testing frameworks. The third article provides an overview of the pension funds registered in Malta. 

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