Malta’s banking system remains resilient to a wide range of possible economic outcomes, according to stress tests and sensitivity analyses conducted by the Central Bank of Malta.
The clean bill of health was included in the Central Bank’s Interim Financial Stability Report 2021, which assesses the developments in the domestic financial system that occurred during the first half of 2021.
The report found that the gradual reopening of Malta’s economy on the back of a successful vaccination programme contributed to the rebound in the performance of the domestic financial sector. Banks’ profitability rose mainly due to lower loan loss provisions, reversing slightly the extraordinary provisions reported in 2020.
The assessment also shows that the banks’ healthy capital and liquidity positions enabled them to continue supporting the economy, coupled with a number of measures including moratoria.
Resident deposits continued to flow in, particularly those of households, which strengthened further the banks’ liquidity buffers.
Domestically-relevant insurance companies also posted better performance, as their profitability recovered, mainly due to higher investment income, as well as an increase in premia.
Investment funds benefitted from the rally in the financial markets and increased their equity holdings. No significant redemptions were reported, with the funds’ liquidity profile remaining healthy and leverage contained.
The report highlighted that although the economy is recovering, uncertainties surrounding the pandemic remain, posing some risks for the financial system. While credit risk remains under control, asset quality could still deteriorate further by the time Government support measures are lifted completely, which in turn, could exert more pressure on the profitability of financial institutions.
Indeed, the Malta Financial Services Authority has urged banks to be watchful for warning signs of clients’ potential credit deterioration once COVID support measures are phased out.
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