Banks are facing heightened credit risks because of large exposures to the real estate sector, the latest Central Bank’s Financial Stability Report warns.
The property market is cause for concern in the report, which analysed financial data for 2010 and the first months of 2011.
Concerns appear highest in the commercial property market as more residential dwellings come onto the market in a situation where demand is low.
Loans backed by commercial property account for about 30 per cent of bank loans and estimates show that a number of large construction projects in progress will supply nearly 2,000 additional residential units, which are slightly less than half the total property transactions in Malta for 2009.
“The slowdown in the property market reflecting an ongoing structural adjustment raises the credit risk associated with these projects.
In particular, additional supply of housing units may extend the period of lull in property prices,” the report said.
The Central Bank warned that it was unlikely that the property market would return to buoyancy in the short to medium term.
Survey results from real estate agents indicated that house prices remained overvalued, the report said, although by less than what had been perceived the previous year.
“This notwithstanding, housing affordability remained relatively stable, owing to sluggish house prices and still low mortgage rates,” the report said.
In 2010, private housing investment was significantly lower when compared to 2009 and the number of building permits issued by the Malta Environment and Planning Authority dropped by 16 per cent.
The report also noted that official statistics indicated that the number of contracts of sale registered with the Inland Revenue Department in 2008 and 2009 dropped by 18.1 per cent and 3.9 per cent respectively while replies to the Bank’s real estate market survey conducted in early 2011 confirmed that the volume of sales continued to decline.
The report says that the financial system exhibited “a high degree of resilience” last year although it noted that not all economic sectors benefitted from the economic recovery. Financial stability prospects in Malta will remain challenging this year and certain risks could heighten further.
The Central Bank urged banks to expand their provisioning levels commensurately with the heightened credit risk and reduce concentration risk by further strengthening their capital buffers. “This could be achieved either through a review of dividend policies or through the fresh issue of equity,” the Central Bank said.
The Financial Stability Report provides an up-to-date assessment of the main risks and vulnerabilities present in the financial system. It also highlighted the North African crisis as cause for concern.
“The debt-servicing capacity of some sectors may also come under pressure depending on the duration of the current geopolitical tensions in the North African region and the future path of interest rates,” the report said.