The Central Bank of Malta is publishing on its website the fourth edition of its annual Financial Stability Report, covering the year 2011 and the first months of 2012.
The Report assesses the financial system in Malta. It also seeks to promote awareness of the structure and workings of the financial system in Malta and of related financial stability issues. The analysis and information contained in this Report is based on the activities of those financial institutions which play a significant role in the economy.
In this edition of the Report a new methodology has been introduced to classify credit and financial institutions into categories which highlight their links to the domestic economy. The main focus in the Report is on the first category of banks, referred to as the core domestic banks, while developments in the other two categories of banks are analysed in a separate section.
The Report first describes the macro-financial external and internal environment within which the financial system operated in the period under review. It then considers the challenges to financial stability and the resilience of the financial system. The Report concludes with an assessment of the risks identified and the respective recommendations to address them.
An overview, in the introductory part of the Report, summarises the main issues discussed in the Report.
Overall the Report concludes that the local financial system remained resilient during 2011, supported by positive economic growth and low unemployment. However, it observes that, in the light of unfavourable international economic conditions, financial stability considerations continued to be challenging.
Against this negative international background, the Maltese macroeconomic environment remained supportive of financial stability conditions, with core domestic banks unscathed as they continued to focus on domestically-oriented intermediation activities.
Thus, during 2011 bank assets expanded by around 5.2%, with credit contributing to over half of this growth. Mortgage and consumer lending registered an increase of 8.6% and 1.2%, respectively, over the previous year while lending to the corporate sector increased by 2.6%. Funding and liquidity levels also remained robust. The main sources of funding remained readily available to the banking system with customer deposits being the major one for the core domestic banks.
The Report observes that during 2011 the core domestic banks’ capital adequacy was maintained at well above the regulatory limit of 8% for the Capital Adequacy Ratio and 4% for the Tier 1 capital ratio. These ratios stood at 13.5% and 9.5%, respectively at the end of the year. Higher net interest income and low direct exposures to the debt of the most stressed euro area sovereigns were factors contributing to good profit results for the year.
The Report also notes that, on the basis of stress tests applied by the Central Bank of Malta to the core domestic banks, the loss-absorbing quality of their capital remained high during the past year.
With regard to the main risks to financial stability, from within the financial system, the Report identifies the level of non-performing loans and the concentration of lending and collateral on property.
The most significant risks from outside the financial system emanate from the banks’ exposure to economic sectors experiencing weak business activity, namely the construction and real estate sectors.
Thus, credit exposure, primarily to the property market, remains the main source of risk for core domestic banks. In this regard therefore an increase in provisioning levels is warranted in order to strengthen the core banks’ resilience.
Furthermore, the Report notes that rescheduling practices should only be applied where the underlying loan quality has remained fully intact. In the longer term, measures should be taken to better diversify the lending portfolio of banks. Consequently, ahead of the introduction of more stringent regulatory requirements under the Capital Requirements Directive IV, banks are encouraged to strengthen further their capital buffers and to continue to lengthen the maturity profile of their liabilities to better match that of their assets.
For the rest of the financial system, the Report observes that the level of systemic risk is low. Despite its large size, the international banking sector remained largely focused on transactions with non-residents, while non-core domestic banks’ links with residents remained limited. Such banks maintained high solvency and liquidity ratios. On the other hand, risks and vulnerabilities in the domestic non-bank financial sector remained relatively contained.
The Financial Stability Report can be downloaded from www.centralbankmalta.org [1].