18/12/2014

Financial Stability Report Update for 2014

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 2014. The Update observes that the external macro-financial risks remain elevated, on the back of idiosyncratic risks which developed across different economic regions. Nevertheless, the domestic economy remained resilient, outperforming the euro area average. This, in conjunction with a sound financial system, has ensured and further safeguarded the stability of Malta's financial system. The Update does not identify new risks and vulnerabilities to financial stability. However, credit risk continued to increase owing to deterioration in the quality of certain assets. The measures identified in the Financial Stability Report 2013, namely to strengthen further capital buffers mainly in view of the more stringent CRR/CRD IV rules and increased loan loss provisioning, remain relevant.

During the first six months of 2014, the core domestic banks' balance sheet grew by 4.5%, mainly reflecting higher securities holdings and interbank exposures. Placements with the Central Bank of Malta decreased considerably as the deposit facility rate turned negative. The loan portfolio, however, remained the predominant asset component, and continued to be funded by customer deposits.

The loan portfolio expanded further, mainly driven by mortgage lending as, otherwise, consumer credit and lending to non-financial corporates declined. The latter, partly reflected credit standards which remained tight with respect to certain economic sectors. Core domestic banks continued to maintain healthy liquidity positions and stable capital buffers. The profitability of the core domestic banks remained strong despite lower reported earnings. The other components of the domestic financial sector, namely non-core domestic banks, international banks, insurance companies and investment funds are not deemed to pose any risks to financial stability.

The key challenge to the banking sector remained the upward trend in non-performing loans. This was partly driven by the weak performance of some economic sectors which rely heavily on domestic bank credit. In response, banks increased their provisions which resulted in an amelioration of the coverage ratio. The banks also continued to apply conservative valuations of collateral, backing their lending portfolio, and the loan-to-value ratios continued to be kept at a prudent level. The balance sheet strength and resilience to certain economic shocks of the banks, which were included in the ECB Comprehensive Assessment, were also demonstrated by the fact that following the assessment, their CET1 ratios remained above the baseline and adverse thresholds which were set at 8% and 5.5%, respectively.

Looking ahead, external pressures, particularly those arising from weak euro area economic growth, low inflationary pressures and a prolonged low interest rate environment, may be expected to exert a marginally higher negative impact.

The Financial Stability Report Update can be downloaded from the Central Bank of Malta's website.

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