25/08/2016

Publication of Financial Stability Report 2015

The Central Bank of Malta is publishing its eighth edition of the Financial Stability Report. The Report covers developments in the Maltese financial system during 2015, identifying key challenges and potential vulnerabilities for the financial system and evaluates its resilience to such risks.

The Report first gives a broad overview of the domestic and international economic scenario, with particular focus on the euro area, setting the context within which the Maltese financial system was operating during the period under review. It then analyses the key risks to financial stability faced by the banking sector in Malta and its resilience against such risks, incorporating also top-down stress tests. The analysis of the banking sector distinguishes between core domestic banks, non-core domestic banks and international banks. Developments in insurance companies and investment funds are also assessed. Included in the Report is also an overview of the main macro-prudential policy measures implemented during 2015. The Report concludes with an assessment of the identified risks and proposes recommendations for the mitigation of such risks. This edition also contains special features, including an analysis of the Bank Lending Survey results; an overview of the updated univariate stress test for liquidity risk; an introduction to the Macro Stress Testing framework; and an outline on Solvency II.

In 2015, total assets of core domestic banks expanded by 3.5% to reach almost 235% of GDP. This growth was mainly underpinned by higher placements with the Eurosystem and mortgage lending, which in turn was financed by a sustained flow of customer deposits. Overall, growth in total loans was rather muted on account of a contraction in lending to non-financial corporates, largely impacted by a reduction in lending to the public sector and to non-residents. The faster growth in customer deposits relative to lending reduced further the loans to deposit ratio to 58.3% by end 2015, which is significantly lower than the euro area average of 101%. The core domestic banks sustained the improvement in their asset quality, with the non-performing loans (NPL) ratio dropping by 0.4 percentage point to 7.2% by the end of 2015. Such improvement was driven by non-financial corporate firms, especially those operating in the construction sector. While such developments in the banking sector are positive, credit risk nevertheless remains a key challenge for the core domestic banks on account of the stock of legacy NPLs, which calls for further improvement in coverage ratios. In 2015, core domestic banks continued to increase provisions, thus improving the coverage ratio to 43.5%.

During 2015, the profits of core domestic banks recovered, on the back of higher net-interest income, as well as from trading and non-trading gains. However, profitability remained stable compared to the previous year, with the Return on Equity standing at 9.9% and the Return on Assets at 0.7% in 2015, thus remaining higher than the average for small banks in the euro area. The capital levels of the core domestic banks remained healthy, with the Total Capital Ratio and the Tier 1 Capital Ratio standing at 15.0% and 12.2%, respectively as at end 2015, both well above regulatory minima. Similarly, liquidity levels remained robust, as indicated by the various regulatory ratios. The results of the top-down stress tests carried out by the Central Bank of Malta reaffirmed the core domestic banks' overall underlying strength to various hypothetical shocks.

Risks from the non-core domestic and international banks remained contained, with links to the domestic economy remaining limited. The total assets of non-core domestic banks stood at 26.8% of GDP in 2015. At the same time, total assets of international banks contracted somewhat, amounting to 275.3% of GDP. This contraction was mainly underpinned by developments in two large branches of non-EU banks. Both categories of banks reported higher profits during 2015, with the overall profits of the non-core domestic banks returning to positive territory. Capital and liquidity levels remained above the minimum regulatory requirements.

Insurance and investment funds sectors continued to perform favourably, underpinned by conservative business operations and prudent investment strategies.

The Report concludes that the domestic financial system remained sound and resilient on the back of a fast growing Maltese economy. This resilience is also supported by newly-introduced macro-prudential measures which are designed to mitigate potential systemic risks. Potential vulnerabilities identified in 2014 remained relevant in 2015, although some risks have eased in 2015. The outlook for financial stability is positive, with some of the identified risks anticipated to ease further in 2016. In light of the analysis contained in the Report, the recommendations of the Central Bank of Malta proposed in 2014, namely prudent dividend pay-out policies, higher provisioning levels and enhanced collateral valuation processes remain relevant. Furthermore, the Central Bank of Malta also recommends to banks to tackle, through orderly resolution, their stock of dated NPLs.

The Financial Stability Report can be downloaded from www.centralbankmalta.org or obtained in printed form from the Central Bank of Malta.

 

 

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