BusinessToday Previous Editions

5 NEWS 25.11.2021 THE Central Bank of Malta has just published its Interim Financial Stability Report 2021, which assesses the devel- opments in the domestic financial sys- tem that occurred during the first half of 2021. e Report finds that the gradual re- opening of the economy on the back of a successful vaccination programme contributed to the rebound in the per- formance of the domestic financial sec- tor. Banks' profitability rose mainly due to lower loan loss provisions, reversing slightly the extraordinary provisions reported in 2020. eir net income in- creased, in part driven by the pick-up in credit particularly towards the resi- dent household sector. Credit to resident private corporates advanced at a slower pace, reflecting the slowdown in demand for loans under the MDB COVID-Guar- antee Scheme. e assessment also shows that the banks' healthy capital and liquidity positions enabled them to con- tinue supporting the economy coupled with a number of measures including moratoria. Resident deposits continued to flow in, particularly those of house- holds, 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. e stress tests and sensitivity analyses further confirm that the banking system remains resilient to a wide range of pos- sible economic outcomes. Domestically-relevant insurance com- panies also posted better performance, as their profitability recovered, main- ly due to higher investment income, as well as an increase in premia. eir solvency coverage ratios remained well- above regulatory minima, and while the higher investments led to a drop in cash and deposits, their liquidity ratios nev- ertheless remained healthy. Investment funds benefited from the rally in the financial markets and increased their equity holdings. No significant redemp- tions were reported, with the funds' li- quidity profile remaining healthy and leverage contained. e Report highlights that although the economy is recovering; uncertain- ties surrounding the pandemic remain, posing some downside risks for the financial system. While credit risk re- mains under control, asset quality could still deteriorate further by the time gov- ernment support measures are lifted completely, which in turn, could exert more pressure on the profitability of financial institutions. Geopolitical un- certainty 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. e decision by the Financial Action Task Force to place Malta un- der enhanced monitoring could pose some challenges to the financial sector if the time taken to address these rec- ommendations becomes excessive. It is 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. is edition of the Interim Report also features a box on the latest devel- opments on the uptake of moratoria, as well as a Special Feature on the first attempt by the Central Bank of Malta to quantify the financial systems' exposure to climate-sensitive sectors. Table 1.1 SUMMARY OF RISKS Credit/Profitability Cyclical/ Structural ↔ ↑ Credit Structural ↔ ↔ Credit Cyclical/ Structural ↔ ↔ Contagion Structural ↔ ↔ Contagion Structural ↑ ↑ Profitability Cyclical ↔ ↑ Liquidity/Solvency/ Profitability Cyclical/ Structural ↔ ↔ Credit/Solvency/ Profitability Cyclical/ Structural ↔ ↔ Credit/Profitability Cyclical ↔ ↓ Credit/Contagion Cyclical ↔ ↔ Profitability/Contagion Structural ↑ ↑ Credit/Profitability Cyclical ↔ ↓ Contagion Structural ↑ ↑ Profitability Cyclical ↔ ↔ Profitability Cyclical ↑ ↔ ↑ ↔ ↓ Moderate Increased risk Medium Stable risk Elevated Decreased risk Direction of risk Domestically-relevant Insurances Domestically-relevant Investment funds Vulnerabilities outside the financial system Domestic macroeconomic developments Real estate market developments Exposures of the financial sector to domestic sovereign Economic conditions in the euro area and public debt sustainability Geopolitical uncertainties Prolonged low interest rate environment Reassessment in risk premia Risk position Risk assessment one year ahead Vulnerabilities within the financial system Developments related to net income Main vulnerabilities and risks for the financial system Type of risk Nature of risk Change in risk level since FSR 2020 Credit quality of the loan portfolio Concentration in sectoral lending Developments in bank credit growth Interlinkages between banks and the non-bank financial sector Operational risk Key vulnerabilities of the domestic financial sector and how they have evolved since 2020 Uncertainties surrounding COVID-19 still pose downside risks for financial system

• Cover