Malta’s financial sector remains resilient amidst global geopolitical risks

Malta’s finance sector saw higher profitability in 2023, with higher interest rates and continued demand for loans – largely related to the purchase of property – leaving a positive impact on many banks’ balance sheets.

However, lending institutions should be wary of the risk of concentration in one particular industry, said the Central Bank of Malta in a new report on the financial sector’s financial stability.

The latest Financial Stability Report, covering 2023, discusses the domestic and global macro-financial developments and their effects on the Maltese financial sector in 2023.

On the domestic front, the Maltese economy recorded one of the highest growth rates in the euro area even though it expanded at a more moderate pace compared to a year earlier. This expansion was supported by the recovery in tourism and robust domestic demand.

The external macro-financial environment however continued to be characterised by elevated geopolitical risks which could have adversely affected financial stability.

For example, in the early part of 2023, the accumulation of vulnerabilities during the previous period of low interest rates led to disruptions in some banks in the United States (Silicon Valley Bank chief among them) and a major bank in Switzerland (Credit Suisse).

Nonetheless, the euro area and domestic financial sector remained resilient. “Domestic banks continued to operate with headroom above regulatory capital and liquidity requirements, providing capacity to absorb shocks,” said the CBM. Meanwhile, the quality of credit did not suffer, with the ratio of non-performing loans declining.

The domestically-relevant insurance firms remained well capitalised, with life insurers reporting increased demand for unit and index-linked products, reflecting financial market improvements throughout the year.

On the back of such recovery, domestically-relevant investment sub-funds recorded their first growth in two years, while operating on limited leverage.

Going forward, the CBM noted that downside risks could develop, especially if economic growth slows down and inflation surprises on the upside.

This year’s stress testing framework therefore contemplated a scenario characterised by stagflation and a delay in the lowering of short-term interest rates.

Overall, the CBM concluded that the domestic banking system remains resilient to the contemplated scenario and assumed shocks, mainly as a result of the strong starting position of banks in terms of both solvency and liquidity.