Both banks and non-bank financial institutions continued to operate prudently limiting excessive risk-taking despite a challenging low interest rate environment, according to the Central Bank of Malta.

In its Financial Stability Report – Interim 2017, it noted that the banking system posted healthy profitability levels, with the core domestic banks maintaining such returns through stable interest margins.

However, lower returns from fixed-income investments coupled with more onerous financial supervisory regulations are exerting pressures on profitability.

Concurrently, credit growth remained mute on account of a sustained contraction in lending to non-financial corporations (NFCs). In contrast, mortgage lending remained buoyant, with banks keeping prudent lending policies and stable credit standards.

The NPL ratio for the core domestic banks dropped further to 4.6% in June 2017

Credit risk abated, further mirroring improved creditworthiness on the back of an expanding economy. Write-offs by the core domestic banks during the late months of 2016 and in first quarter of 2017 also contributed to the fall in the outstanding amount of NPLs.

Accordingly, the NPL ratio for the core domestic banks dropped further to 4.6% in June 2017, with the largest improvement recorded in the loan performance of NFCs. The amended MFSA Banking Rule 09/2017 introduced in January 2017 is anticipated to drive further down the level of outstanding NPLs.

The banking sector continued to be characterised by adequate capital buffers meeting the minimum requirements and other capital add-ons, such as the other systemically important institutions (OSII) buffer and other Pillar II capital add–ons, where applicable. Furthermore, the level of liquidity remained substantial owing predominantly to the inflow of customer deposits.

Systemic implications from the non-core domestic and international banks remained contained as their operations remained predominantly oriented towards international business. Similarly risks from the insurance and investment funds sector remained low.

Since the publication of the Financial Stability Report 2016, no new risks have emerged, with the overall risk attenuating further. Subdued credit growth remained a key challenge impacting the banks’ performance. On the external front, geopolitical developments and the prolonged low interest rates in the euro area are the most prominent vulnerabilities surrounding the financial sector in Malta. Against these challenges, banks need to preserve their prudent lending policies, strengthen further their capital buffers and continue to address their stock of legacy non-performing loans.

The Financial Stability Report – Interim 2017 can be downloaded from www.centralbankmalta.org.