The Central Bank of Malta in an update to its 2010 Financial Stability Report, said today that there has been an improvement in the non-performing loan (NPL) ratio attributed to households since the ratio of non-performing loans for consumer credit transactions decreased while that associated with mortgages remained stable. In contrast, the total corporate non-performing loans ratio deteriorated marginally
In its Update, the Central Bank said that since credit and concentration risks were identified as two main vulnerabilities, it was calling for enhanced resilience-building, primarily through higher capital retention by the banks and more prudent loan-loss provisioning.
The Report Update says that despite the challenging economic and financial conditions abroad, the local financial system remains resilient.
"No new risks appear to have emerged and the risk of a rapid increase in interest rates as mentioned in that Report has attenuated, with official interest rates likely to remain stable in the short term. Furthermore, the risks associated with the sovereign debt crisis are generally contained in view of the local banking system’s limited aggregate exposure to those euro area countries currently following an EU-IMF programme," the Central Bank said.
This notwithstanding, the Report Update emphasises that credit risk remains 'elevated' in view of the fact that some sectors of the economy, such as construction, continue to lag behind, despite the sustained pace of overall economic activity.
The Report Update notes that as a result of favourable conditions in the labour market, reflected in higher employment levels, the amount of household loan repayments in arrears declined slightly during the first half of 2011.
In addition there was an improvement in the non-performing loan (NPL) ratio attributed to households since the ratio of non-performing loans for consumer credit transactions decreased while that associated with mortgages remained stable.
In contrast, the total corporate non-performing loans ratio deteriorated marginally as NPLs related to certain sectors such as construction and real estate services offset the improved NPL ratios of other sectors such as manufacturing and wholesale and retail trade.
During the first six months of 2011, banks recorded higher profits than in the same period of 2010, which mainly reflected higher net interest income. At the same time, their liquidity and solvency ratios remained positive and significantly above the regulatory requirements.
Against a background of uncertainty in international markets and increasing signs of a downturn in global economic activity, the Report Update continues to urge banking institutions in Malta to remain vigilant in order to safeguard Malta’s generally stable financial environment in the face of ongoing challenges. Owing to the sustained level of credit and concentration risks that currently characterise the local banking system, the Report Update continues to recommend an increase in the level of loan loss provisioning and a further strengthening of the banks’ capital base. These measures would enhance the stability of the financial system and enable the banks to commence their preparations aimed at meeting the more demanding regulatory requirements that will come into force in the next few years.
The Financial Stability Report Update can be downloaded from the Central Bank of Malta’s website - www.centralbankmalta.org.
See report at http://www.centralbankmalta.org/updates/Downloads/pdfs/fsrupdate_2011.pdf