Almost half of the potential bad debts owed to domestic banks are in the construction and real estate sector, according to the Central Bank of Malta.

In June 2013, the so-called “non-performing loans” in property and building were responsible for 46 per cent of all such at-risk debt – the same as a year earlier.

The sector was also responsible for half of the increase in non-performing loans held by banks in the first six months of the year.

Banks remain well capitalised, profitable and characterised by ample liquidity

Non-performing loans are defined as borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days.

The figures form part of the CBM’s ‘Financial stability report update 2013’ released on Friday.

They show that until June, bad debts amounted to nine per cent of the banks’ loan portfolio, up from 8.2 per cent a year before.

Apart from construction, the hotel and food services sector was responsible for a quarter of the increase in bad debts, with households accounting for 13 per cent.

The CBM said although the credit risk had increased as a result of more non-performing loans, this was mitigated by higher loan loss provisions by the banks.

A deeper analysis shows that the construction and real estate sector accounted for 15 per cent of the loans issued by banks, more than double the amount taken out by the manufacturing sector.

By far the largest beneficiaries of loans are households, which account for 46 per cent of all bank lending. Households came third behind the construction and hotel sectors for their share of bad debts, which accounted for 17 per cent of non-performing loans.

The CBM defines non-performing loans as “doubtful and irrecoverable” loans. According to banking rules, doubtful loans are credit facilities whose capital and interest are overdue by more than three months. They also include loans which may not have overdue repayments but are considered by the banks as giving rise to doubts regarding their recoverability.

But the CBM noted that in the first half of the year banks remained “well capitalised, profitable and characterised by ample liquidity”. It said the economy continued to grow underpinned by a financial sector that was “sound and stable”.

However, the CBM also sounded a warning that credit risk remained the main weakness for the banking sector in view of the rising level of non-performing loans, mainly in the construction and real estate sectors.

“There is... a need for banks to focus their efforts on strengthening their coverage ratios,” the CBM said.

But although the risk up to June was deemed to be elevated, in its risk outlook for the second half of 2013, the CBM was not seeing a further deterioration in non-performing loans.

ksansone@timesofmalta.com

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