A report by the Central Bank of Malta reviewing the country’s domestic financial stability for 2021 found that despite challenging times stemming from the pandemic and geopolitical tensions, Malta’s financial sector has shown strong resilience in 2021.
The Financial Stability Report covers activities of banks and domestically relevant insurances and investment funds.
Wider market conditions
It was noted that the macroeconomic environment in the EU improved over a year ago, as vaccination programmes aided the reopening of economic activity.
Recovery has been uneven across sectors, the report found, “partly due to supply bottlenecks, coupled with the emergence of new COVID variants which led to the reintroduction of containment measures”.
Russia’s war against Ukraine was highlighted as an additional risk on the geopolitical front, which is further exacerbating inflation, particularly for “energy and commodity prices with potential ramifications on growth prospects going forward”.
On public debt, the bank’s report noted that in 2021 COVID aid continued to be meted out, increasing government debt levels and increasing potential debt sustainability concerns “for some jurisdictions, particularly due to the strengthening of links between governments, banks and corporates”.
A spotlight on Malta
Domestically, despite “high uncertainty surrounding the global economic climate,” banks reported “improved asset quality owing to both reduced Non-Performing Loans (NPLs) and higher loan volumes”.
The latter was found to be largely driven by increased mortgages as lending to corporates was solely driven by the Malta Development Bank’s COVID-19 Guarantee Scheme.
This edition of the Report also carries a Special Feature which assesses the potential drivers of cyclical risks, highlighting the increased concentration towards property-related loans within the loan portfolio.
“Such developments reaffirm the need for continuous monitoring of increasing concentration risk in the banks’ loan portfolios for the timely adoption of targeted policy measures if the need arises. The profitability of banks recovered strongly reflecting lower provision charges and, to a lower extent, higher fees and commission income. Yet, the banks’ main source of income remained related to net interest income.”
The CBM’s report found that the “overall solid performance of financial markets in 2021 had a positive impact on domestically relevant investment funds as their holdings of equities rose, which were partly offset by lower bond holdings amid increasing inflationary pressures”.
Similarly, domestically relevant insurance companies also gained from the general uptick in financial markets as they raised their exposure in equities and investment funds.
“As a result, the profitability of this sector also improved, coupled with a general increase in premia, supported, in turn, by the overall economic recovery.”
Overall, the report found that the domestic financial sector has shown strong resilience in 2021 despite challenges for certain sectors.
The findings are corroborated by results of the liquidity and solvency stress test exercises, which reveal an overall resilient financial system.
“Nevertheless, going forward, financial stability risks remain, mainly due to the war between Russia and Ukraine, largely through second-round effects, as the direct exposure to these two countries is limited.
“Furthermore, inflationary pressures and downside risks to economic growth could possibly impact debt servicing capabilities, which in turn, could test the resilience of the domestic financial sector. This highlights the importance for credit institutions not to engage in excessive risk taking and set aside adequate provisions whilst maintaining healthy liquidity and capital buffers.”
With a note on cybersecurity and the risk it is posing to business’ operations, the report noted that the landscape behind security is “always shifting with more sophisticated threats emerging”.
On this, the report cautioned that financial institutions should therefore remain at the forefront for the adoption of the latest technological advancements to safeguard themselves against cybersecurity risks.
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