The sixth edition of the Financial Stability Report, issued today by the Central Bank of Malta, has given a positive overview of the domestic banks and the banking system in Malta, although there was an increase in non-performing loans.
The report covers developments in the Maltese financial system, identifying potential risks and vulnerabilities and evaluating the system’s resilience to such risks.
During 2013, the balance sheet size of the overall banking system contracted from 774.8% of GDP to 697.3% of GDP. This was mainly the result of voluntary reduction in operations of a small number of international banks owing to consolidation of activities.
The balance sheet of the core domestic banks expanded by 2.5% reflecting to a large extent a rise in deposits which resulted in higher holdings of securities, and an increase in placements with the Central Bank of Malta. The loan portfolio, which remained the main asset component, rose marginally, as lending to households increased, partly offset by higher net loan repayments to the non-financial corporate sector.
The core domestic banks continued to maintain prudently diversified investment portfolios. Customer deposits remained the main funding source for the core domestic banks, rising by 5.8%, reaching almost 85% of total liabilities. As a result, the loan-to-deposit ratio stood at 66.5%, significantly below the euro area average of 105.8%. Wholesale and euro system funding declined and remained low.
Credit risk remained a key challenge for the banks arising particularly from specific weak performing sectors. Non-performing loans of the core banks reached 9.2% of total loans by the end of the year, reflecting mainly a drop in the quality of corporate loans. In response the banks increased their provisioning levels further, resulting in improved coverage ratios.
During 2013, the core domestic banks’ capital buffers improved further, with the capital adequacy and Tier 1 capital ratios reaching 14.9% and 11.1%, respectively, well-exceeding the regulatory thresholds.
Furthermore, the core domestic banks’ liquidity position remained ample, with the liquidity ratio significantly above the statutory 30% minimum requirement. During the year, the profits of the core domestic banks declined by 8.6%, generally owing to lower net interest income. However, profitability ratios still compared well with historical averages, and are significantly better than those of their EU counterparts.
The results of the top down stress tests undertaken by the Central Bank of Malta reaffirmed the banks’ overall underlying strength to various hypothetical shocks.
Risks arising from the non-core domestic and international banks remained generally low and stable.
The Report also gives a summary of the main vulnerabilities and risks faced by the local financial sector. During the year, risks from the local economy have eased, driven by the positive growth trends reported in 2013 and early 2014. Risks from the EU sovereign debt crisis abated.
Credit risk arising from specific economic sectors, increased due to higher levels of non-performing loans but this was mitigated by higher provisions and capital buffers.
The Financial Stability Report can be downloaded from www.centralbankmalta.org or obtained in printed form from the Central Bank of Malta.