Financial stability report: interim 2019

The Central Bank of Malta is publishing its Financial Stability Report – Interim 2019, wherein it assesses developments in the financial system for the first half of 2019. The report evaluates the main risks that could potentially affect the stability of the domestic financial system which is being subject to concerns stemming from a fragile global economic and financial environment, particularly of the euro area, the prolonged low interest rate environment and geopolitical uncertainties. Against this backdrop, for the first six months of the year, performance of the Maltese financial system remained solid owing to the robust local economic performance and favourable labour market conditions. Going forward, the impact of new market players powered by disruptive technologies may present the banking sector with challenges as well as opportunities. Domestic uncertainties and a fragile international environment may also impact the performance of the financial sector.

Core domestic banks consolidated further their operations to focus more on principal activities with a domestic economic substance. Liquidity of these banks remained ample while their capital position strengthened further. Despite the low for longer interest rate environment, core domestic banks managed to withstand the growing pressure on their core income, on the back of higher lending volumes. Credit quality of their loans portfolio improved as the downward trend in the non-performing loans (NPL) ratio persisted, standing at 3.3% in June, driven by lower NPLs in the resident corporate sector. Such progress in asset quality largely reflected better performance in the construction and real estate sectors, with related legacy NPLs contracting by almost 14%. Furthermore, these banks are also actively pursuing credit risk mitigation policies.

The financial conditions of the non-core domestic and international banks remained positive, on the back of profits and sustained capital and ample liquidity levels. Similarly, financial stability risks from domestically-oriented insurance companies and investment funds remained contained, despite challenges from the low interest rate environment which is affecting profitability. These institutions, however, continued to perform positively, underpinned by conservative business operations and prudent investment strategies.

Since the publication of the Financial Stability Report 2018, risks to the domestic financial system remained broadly unchanged and mostly attributed to the fragile international economic and financial environment. Therefore, banks ought to maintain prudent lending practices and at the same time continue to reduce legacy nonperforming loans.

Institutions should retain prudent investment practices and their search for yield behaviour should remain in check. Financial institutions should maintain sound governance structures and prudent business models. At the same time institutions should improve their cost efficiencies, without compromising capital and liquidity buffers.