The domestic financial system remained sound and resilient on the back of a fast-growing Maltese economy, according to the Central Bank of Malta’s Financial Stability Report for 2015.
This resilience is also supported by newly-introduced macro-prudential measures that are designed to mitigate potential systemic risks.
The report points out that potential vulnerabilities identified in 2014 remained relevant in 2015, although some risks have eased in 2015.
“The outlook for financial stability is positive, with some of the identified risks anticipated to ease further in 2016.”
It says the recommendations of the Central Bank of Malta proposed in 2014, namely prudent dividend pay-out policies, higher provisioning levels and enhanced collateral valuation processes remain relevant.
Furthermore, the Central Bank also recommends that banks should tackle, through orderly resolution, their stock of dated non-performing loans.
In 2015, total assets of core domestic banks expanded by 3.5 per cent to reach almost 235 per cent of GDP. This growth was mainly underpinned by higher placements with the Eurosystem and mortgage lending, which in turn was financed by a sustained flow of customer deposits.
Overall, growth in total loans was rather muted on account of a contraction in lending to non-financial corporates, largely impacted by a reduction in lending to the public sector and to non-residents. The faster growth in customer deposits relative to lending reduced further the loans-to-deposit ratio to 58.3 per cent by end 2015, which is significantly lower than the euro area average of 101 per cent.
The Central Bank of Malta also recommends that banks should tackle, through orderly resolution, their stock of dated non-performing loans
The core domestic banks sustained the improvement in their asset quality, with the non-performing loans (NPLs) ratio dropping by 0.4 percentage point to 7.2 per cent by the end of 2015. This improvement was driven by non-financial corporate firms, especially those operating in the construction sector.
While such developments in the banking sector are positive, credit risk nevertheless remains a key challenge for the core domestic banks on account of the stock of legacy NPLs, which calls for further improvement in coverage ratios.
In 2015, core domestic banks continued to increase provisions, thus improving the coverage ratio to 43.5 per cent.
During 2015, the profits of core domestic banks recovered, on the back of higher net-interest income, as well as from trading and non-trading gains.
However, profitability remained stable compared to the previous year, with the return on equity standing at 9.9 per cent and the return on assets at 0.7 per cent in 2015, thus remaining higher than the average for small banks in the euro area.
The capital levels of the core domestic banks remained healthy, with the total capital ratio and the Tier 1 capital ratio standing at 15.0 per cent and 12.2 per cent, respectively as at end 2015, both well above regulatory minima.
Similarly, liquidity levels remained robust, as indicated by the various regulatory ratios. The results of the top-down stress tests carried out by the Central Bank reaffirmed the core domestic banks’ overall underlying strength to various hypothetical shocks.
Risks from the non-core domestic and international banks remained contained, with links to the domestic economy remaining limited.
The total assets of non-core domestic banks stood at 26.8 per cent of GDP in 2015.
At the same time, total assets of international banks contracted somewhat, amounting to 275.3 per cent of GDP.
This contraction was mainly underpinned by developments in two large branches of non-EU banks. Both categories of banks reported higher profits during 2015, with the overall profits of the non-core domestic banks returning to positive territory. Capital and liquidity levels remained above the minimum regulatory requirements.
Insurance and investment funds sectors continued to perform favourably, underpinned by conservative business operations and prudent investment strategies.