The resilience of the Maltese banking sector has improved and the sector entered the pandemic phase with healthy capital levels and strong liquidity. This was the assessment of the Central Bank of Malta in its Financial Stability Report.
The CBM said that domestically-oriented insurance companies reported strong solvency positions and improved profitability. Meanwhile, investment funds continued to adopt prudent investment strategies. Similar to banks, the low interest rate environment is posing challenges for insurance companies, impacting their profitability. This notwithstanding, the Report highlights that the recent surge in global financial market volatility may trigger a resurgence of a re-pricing of risk premia and a consequent increase in liquidity risks for the domestic investment fund sector.
The analysis confirms that the domestic financial system remained resilient to a number of key challenges in 2019, buttressed by favourable domestic macroeconomic conditions. In addition, financial stability risks from real estate were abating on the back of more moderate growth in real estate prices coupled with a contraction in the number of dwelling permits. Moreover, household debt-to-GDP remained relatively stable and somewhat lower than the previous years’ highs.
Nevertheless, going forward, the COVID-19 outbreak is expected to exert unprecedented pressure on key sectors of the economy, which in turn, is very likely to affect the domestic financial system.
Profitability will come under further pressure, whilst banks and insurances will strive to seek alternative sources of income or reduce costs to maintain a healthy profitability. The low interest rate environment, which is expected to persist, will also affect their income generation from investments and the direction of credit markets is still uncertain. While slower growth in credit demand, particularly for mortgages, may impact their income from intermediation, this could be partly compensated by higher short-term demand for corporate loans to finance working capital requirements.
At the same time, asset quality is expected to weaken as those creditors affected directly by the pandemic crisis, may be unable to meet their debt repayments. However, swift action taken by the supervisory authorities including the ECB, the Maltese Government, and the Central Bank of Malta are all expected to alleviate some of the risk to the sector.
Against such a background, the Central Bank of Malta recommends that banks continue to adopt prudent lending practices while at the same time exercising caution in taking on additional risks through the further easing of credit standards. Financial institutions are encouraged to maintain conservative investment strategies, and to continue to improve cost synergies to ensure sustainable profitability in the longer term and strong capital buffers.
