Economy is recovering, but risks remain – Central Bank

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Although the economy is recovering, uncertainties surrounding the pandemic remain, posing some downside risks for the financial system, an Interim Financial Stability Report by the Central Bank of Malta found. The Bank noted how the decision by the Financial Action Task Force to place Malta under the so-called grey-listing procedure could pose some challenges to the financial sector if the time taken to address these recommendations becomes excessive.

The CBM noted that 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. Geopolitical uncertainty is also on the rise, which could also affect the performance of markets and corporates. Furthermore, cyber security risks increased as more activity was taken online. The Bank noted that it was important that financial institutions adapt quickly to this overall challenging operating environment and continue to preserve their capital and liquidity buffers. It is also important for banks to continue monitoring their provisioning requirements, to mitigate any potential rise in credit risk.

The Report finds that the gradual reopening of the 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. Their net income increased, in part driven by the pick-up in credit particularly towards the resident household sector. Credit to resident private corporates advanced at a slower pace, reflecting the slowdown in demand for loans under the MDB COVID-Guarantee Scheme. 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. Asset quality remained in check with the overall NPL ratio unchanged at 3.5%, as the increase in NPLs following the expiration of moratoria was minimal. However, loan exposures with forbearance measures increased further, though a large part of these loans were reported as performing.

The stress tests and sensitivity analyses further confirm that the banking system remains resilient to a wide range of possible economic outcomes.

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. Their solvency coverage ratios remained well-above regulatory minima, and while the higher investments led to a drop in cash and deposits, their liquidity ratios nevertheless remained healthy. 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.

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