Banks remained well capitalised and highly liquid throughout 2012, exceeding regulatory requirements on reserves, according to the Central Bank of Malta.
But the Financial Stability Report released yesterday reiterated that the highest credit risk came as a result of banks’ high exposure to the construction and real estate sector.
The Central Bank noted that non-performing loans in the construction sector increased slightly but this was mitigated as banks made the necessary provisions.
In a separate analysis of the property market, the Central Bank registered a slight increase in prices, which, however, was not sufficient to offset the downward movement that occurred in recent years.
The Central Bank said the Maltese property market contrasted sharply with continuous depressed conditions in real estate markets in several euro area countries.
The cautionary note on property-related loans is the damp squib in an otherwise clean report that shows how core domestic banks improved their capital adequacy ratio to 14.3 per cent from 13.5 per cent a year earlier.
This ratio is significantly higher than the eight per cent minimum threshold required by regulations.
The core banks are the most important segment of the banking sector because they have direct and significant linkages to the domestic economy.
The Central Bank said mortgage lending remained the main driver of credit activity, increasing by almost seven per cent. But this was slightly offset by a contraction of 1.2 per cent in personal lending and 1.1 per cent in corporate credit.
While banks remained relatively shielded from the troubles of the financial markets in the eurozone, the Central Bank encouraged them to continue monitoring their loan books, increase provisions and to periodically assess customer creditworthiness.
The outlook of non-core banks, which have no linkage to the domestic economy but are responsible for increasing the banking sector’s share of GDP, was also good.
The Central Bank said non-core institutions maintained high capital adequacy ratios and were also very liquid. Operations continued to focus on transactions with non-residents.
Insurance firms and investment funds, the non-bank sectors of financial services, also had a robust performance last year.
ksansone@timesofmalta.com