02/12/2016

Publication of Interim Financial Stability Report 2016

The Central Bank of Malta has published its Financial Stability Report - Interim 2016, which covers developments in the banking, insurance and the investment funds sectors, making references to the economic backdrop within which these institutions operated during the first half of 2016. The Report also includes the main regulatory and policy-related decisions adopted by the Macro-Prudential Authority, mainly concerning the Countercyclical Capital Buffer, Other Systemically Important Institutions Buffer, and reciprocity to policy measures taken by other jurisdictions.

Since the publication of the Financial Stability Report 2015 no new risks have emerged, whereas those related to credit risk and exposures to the domestic sovereign have abated further as non-performing loans (NPL) continued to decline while the credit rating of the domestic sovereign was upgraded by credit rating agencies. In the first half of the year risks to financial stability remained low with a positive outlook for the second half of the year.

The global economy continued to face challenges, with the euro area economic recovery remaining modest and divergences across Member States. This was compounded by the uncertainty generated by the result of the UK's referendum concerning membership in the EU. The Maltese economy continued to show resilience in the face of this challenging international environment and continued to outperform most euro area countries and remained supportive of the domestic financial system.

The core domestic banks reported further growth in their balance sheet, buttressed by the sustained flow of resident customer deposits. Lending growth remained subdued, mortgages continued to be the main driver of resident credit growth, albeit decelerating somewhat, whereas lending to non-financial corporates (NFCs) contracted further, though showing signs of an incipient recovery. The declining trend in NPLs continued, supported by the improved credit-worthiness of NFCs on the back of robust economic expansion accompanied by strong employment growth. The resilience of the core domestic banks was sustained through higher provisioning levels and prudent lending practices. The profitability of the core domestic banks remained strong and grew further, on the back of lower non-interest expenses coupled with higher non-interest income. Net interest income, which remained the prime source of revenue, stood broadly unchanged despite the low interest rate environment and subdued overall credit growth. The capital and liquidity positions of the core domestic banks remained strong and well above the regulatory minima. The robustness of the capital and liquidity positions was also confirmed by the results of the stress tests conducted by the Central Bank of Malta.

The financial conditions of the non-core domestic and international banks remained healthy and no systemic risks have been identified, mainly on account of their limited links with the domestic economy. The domestic insurance companies and investment funds continued to report sound capital positions, despite lower returns because of the prolonged low interest rate environment.

Despite the positive developments reported by the Maltese financial system in the first half of the year, the recommendations proposed in the Financial Stability Report 2015 remain relevant and are reaffirmed to maintain a sound and resilient banking system. Specifically, these require banks to preserve and enhance capital buffers; to continue adopting prudent lending practices; and to mitigate further credit risk.

The Financial Stability Report - Interim 2016 can be downloaded from www.centralbankmalta.org.

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