The Central Bank of Malta has urged financial institutions to remain vigilant to new risks and keep a healthy capital and liquidity position.
In a report published on Friday, the CBM said the recovery of the financial sector depends largely on economic recovery, which, in turn, depends on how quickly consumer and business confidence recover.
“This also depends on the timing of the rollout of a vaccine. In the meantime, banks should seek to continue to adopt prudent lending practices and continue to recognise provisions where required, to avoid any possible cliff effects when moratoria expire," the CBM said.
Banks should also seek alternative sources of income and embark on sustainable cost containment measures to improve profitability without compromising their capital and liquidity buffer, it said.
“Meanwhile, investment funds and insurance companies’ investment strategies should remain conservative, particularly in the current uncertain environment.”
The report details how the financial sector was being affected by the COVID-19 pandemic and which “in line with global trends presented unparalleled challenges to both the sector as well as the economy at large”.
“Coupled with pre-existing challenges, such as the low-for-longer interest rate environment and geopolitical tensions, the pandemic continued to exert pressure on the profitability of financial services providers.”
On the containment measures in place to stop the pandemic, the report noted this invariably affected economic activity, bringing a number of sectors to a halt.
“This created uncertainties – particularly about the likelihood of creditors being able to meet their payment obligations.
“In a bid to anticipate any potential losses arising from credit defaults, banks have started to set aside additional provisions, which also adversely affected profitability,” CBM said.
The containment measures to control the spread of COVID-19 had a negative effect on consumption that resulted in lower card usage and payments business, and hence lower fees and commission income. This – coupled with lower credit growth – had a negative effect on banks’ net interest income as this fell for the “first time in many years”.