24/12/2015

Publication of Interim Financial Stability Report 2015

The Central Bank of Malta has published its Interim Financial Stability Report 2015, which covers developments in the banking, insurance and the investment funds sectors for the first half of 2015.

This Interim Report sets the economic climate within which the Maltese financial system was operating. International economic developments remained muted, particularly in the euro area despite some improvement, while emerging market economies showed signs of a slowdown. The Report includes an analysis of the different segments of the financial system and assesses their resilience to potential risks. Since the publication of the Financial Stability Report 2014, no new risks were identified that could affect the stability of the Maltese financial system. The outlook for financial stability is improving and is expected to remain positive for the medium term, supported by a robust domestic economic performance and favourable labour market conditions.

In the first six months of the year, the core domestic banks reported improved profitability, owing both to higher net interest income and non-interest income, though non-interest expenses also rose, driven in part by higher regulatory costs. The balance sheet of the core domestic banks expanded, mainly funded by higher customer deposits. Such banks continued to experience ample liquidity levels. Capital positions remained healthy and above the minimum regulatory requirements. The stock of non-performing loans (NPLs) has started to decline, reversing the upward trend reported after the start of the global financial crisis, while at the same time core domestic banks continued to increase provisioning levels, thus strengthening further their coverage ratios. The univariate stress tests, carried out on core domestic banks' solvency and liquidity positions, reaffirmed the banks' overall adequate loss absorption capacity, which continued to improve. Financial conditions of non-core domestic and international banks also remained healthy, with potential systemic implications arising from these two groups of banks remaining contained at low levels. Moreover, no new risks were posed by the performance and solvency of the insurance and investment funds sectors.

Despite their positive performance, banks need to remain cautious, particularly to reduce further NPL levels and at the same time continue to strengthen their coverage ratios. In this light, the recommendations proposed in the Financial Stability Report 2014 are reaffirmed; namely for banks to continue in their endeavours to reduce NPLs and improve further their coverage ratios; enhance collateral valuation practices, and to maintain prudent dividend policies with the objective of further strengthening capital buffers. The latter is especially encouraged in view of the upcoming implementation of combined capital buffers proposed under the CRR/CRD IV framework, transposed in the Banking Rule 15/2015 and the Central Bank of Malta's Directive 11 - Macroprudential policy, as amended in 2014, as well as fulfilling the minimum requirements for own funds and eligible liabilities (MREL).

The Interim Financial Stability Report 2015 can be downloaded from www.centralbankmalta.org

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