Assets of the core domestic banks expanded by 5.3% in 2016, 1.7 percentage points higher than in the previous year. This growth outpaced that reported by banks in the eurozone by 4.5 percentage points.

With total assets of €21.8 billion, the size of core domestic banks was equivalent to almost 220% of gross domestic product (GDP). This is lower than the EU average of about 260%.

This was some of the key information emerging from a report on financial stability released today by the Central Bank of Malta.

In 2016, pre-tax profits of core domestic banks would have fallen by about 9% in 2016, adjusted for exceptional events over the past two years, namely a retirement scheme by one bank in 2015 and the sale of a business line by one bank in 2016.

Pre-tax profits of core domestic banks would have fallen by about 9% in 2016, adjusted for exceptional events over the past two years

This is partly because banks recently embarked on voluntary processes to clean up their loan portfolio, writing off legacy non-performing loans (NPL), with the ratio going down to 5.3% from 7.1% a year earlier. Net impairment losses fell by 14.1%, owing to lower specific allowances, while write-offs and collective provisioning allowances increased.

Core domestic banks continued to rely extensively on customer deposits as their main funding source, representing more than four fifths of their total balance sheet value. As a result, the share of resident household deposits to total customer deposits rose by 0.8 percentage point to 58.7%, financing almost half of the total assets.

Nevertheless, the return on equity (ROE) rose by 0.3 percentage point to 10.2%, outperforming euro area peers which reported ROE of 4.7%.

Credit growth remained weak in 2016, growing by just 1.3%. At €9.9 billion by end 2016, the loan portfolio remained the main asset component of the core domestic banks’ balance sheet, accounting for 45.7%, almost two percentage points lower than in 2015.

Core domestic banks reduced their domestic sovereign debt by 11.2%

Another interesting trend is that collectively, core domestic banks reduced their domestic sovereign debt (bonds and Treasury Bills) by 11.2% to reach €1.6 billion. As a result, the share of domestic sovereign debt to total assets fell by 1.4 percentage points to 7.4%, while their share in total securities dropped by 2.3 percentage points to 25.9%.

The lower exposure towards domestic sovereign debt was substituted by higher holdings of foreign sovereign debt, up by almost 22% reaching €1.2 billion and accounting for around a fifth of the total securities portfolio.