Maltese financial system remains resilient despite headwinds from external environment, CBM says

The Central Bank of Malta on Friday published its latest Interim Financial Stability Report (FSR) which assessed the financial stability risks in Malta for the first half of 2023. This assessment found that the domestic financial sector has remained sound, despite uncertain external macro-financial environment, elevated geopolitical risks and volatility in international markets.

The banks continued to strengthen their capital. Banks’ profitability improved further driven by sustained credit growth, somewhat wider margins and increased interest income from placements held with the Central Bank of Malta.

Credit quality continued to improve with the NPL ratio decreasing further while liquidity remained ample. The stress tests results featured in the report corroborated this positive assessment on the banks.

The risks to the non-bank financial sector remained contained, supported by robust capital and liquidity positions. Lower demand for life insurance products persisted, while inflation may pose challenges to the nonlife insurance business. Investment funds continued to largely hold liquid assets and operated with limited leverage, while their cash and deposit reserves declined.

While risks for financial stability remained low in Malta, the Interim FSR referred to evolving challenges to the financial system, including those stemming from climate change and an increasingly growing digitalised economy.

The report also includes three boxed articles and a special feature. The articles look at the structure of the banks’ capital framework, an updated assessment of the financial sector’s exposure to climate-sensitive sectors and a revised methodology for the selection of domestically-relevant insurance companies. The Special Feature relates to the construction of a semi-structural credit gap based on a multivariate filter, which is an additional tool used by the bank in its assessment of cyclical risks.