A report by the Central Bank of Malta shows that despite the high uncertainty surrounding the global economic climate, banks reported improved asset quality owing to both reduced NPLs and higher loan volumes. The latter was largely driven by increased mortgages as lending to corporates was solely driven by the Malta Development Bank’s COVID-19 Guarantee Scheme.
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 amidst increasing inflationary pressures. Similarly, domestically-relevant insurance companies also benefitted from the general upswing in financial markets as they raised their exposures 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 finds 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. The cybersecurity landscape is always shifting with more sophisticated threats emerging. Financial institutions should therefore remain at the forefront for the adoption of the latest technological advancements to safeguard themselves against cybersecurity risks.
This edition of the Report features for the first time a climate risk related adverse scenario for the macro stress testing framework. The scenario seeks to assess the impact on banks’ capital from heightened transitional risks following oil price hikes to disincentivise its use and reach net zero emissions by 2050. The impact of the climate related test on the overall capital of the banks is not low but does not indicate any specific needs for recapitalisations. The significance of the test is, however, to shed light on banks’ preparedness under such a scenario and thus, on the importance of assessing risks related to exposures linked with high CO2 emissions and associated climate-related costs going forward.