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Financial Stability Report Update for 2013

The Central Bank of Malta has published on its website the Update to its Financial Stability Report, which covers developments in the first half of 2013. The Update observes that the external macro-financial conditions remain challenging, although a gradual improvement is anticipated. Nevertheless, a resilient domestic economy, sustained by positive economic growth, remains supportive of the financial system in Malta. The analysis contained in the Update indicates that no new risks and threats to financial stability have been identified. However, asset quality continued to deteriorate resulting in an increase in credit risk.

During the first six months of 2013 the core domestic banks’ balance sheet contracted slightly, reflecting lower interbank exposures, as customer deposits increased further. Meanwhile, the flow of credit contracted marginally partly reflecting demand-driven factors, but also tight credit standards for certain economic sectors. Domestic banks continued to maintain healthy liquidity positions and their mid-year profit improved over that of a year earlier, contributing to further strengthening of solvency ratios, which remained well-above regulatory requirements.

The other components of the financial sector, namely non-core domestic banks, international banks, insurance companies and investment funds continued to maintain healthy capital and liquidity levels during the first half of the year. The links with the domestic economy of non-core and international banks remained limited, despite their relatively large balance sheet size.

Credit risk continues to be a source of vulnerability for the financial sector in Malta due to the core banks’ exposure to certain economic sectors, in particular the construction and real estate sector, that rely extensively on domestic bank borrowing and which continued to experience weak business activity. As the level of non-performing loans continued to increase during the first half of the year, despite an increase in loan-loss provisions, banks are still encouraged to focus their efforts to mitigate further their exposure to credit risk.

The Financial Stability Report Update can be downloaded from the Central Bank of Malta’s website - www.centralbankmalta.org