The Maltese financial system remained resilient to the adverse global macroeconomic developments and the heightened geopolitical risks due to the war in Ukraine, the Central Bank said in its Interim Financial Stability Report 2022.

The report assesses the developments in the domestic financial system that occurred during the first half of 2022.

The report noted that inflation rose sharply, with central banks around the world tightening their monetary policy stance in a bid to anchor medium-term inflationary expectations. 

Notwithstanding, the Maltese economy continued to grow rapidly and recover from the pandemic, although going forward, growth is expected to be closer to its potential.

The report noted that the measures taken by the government are aimed at keeping energy prices stable to protect consumers and cushion the impact on domestic demand, and businesses from higher costs.

However, tighter financing conditions will impact repayment costs and, possibly debtors’ repayment capabilities.

The report carries an analysis of the potential impact of rising interest rates on households’ mortgage repayments.

The loan portfolios of Maltese banks have so far not shown any signs of credit quality deterioration, with their overall NPL ratio narrowing to 2.9%, while additional provisioning to mitigate any adverse implications arising from possible future credit impairments were observed.

The report said Maltese banks remained adequately capitalised and underlying profitability improved, as they reported higher earnings both from intermediation as well as from dividends and fees and commissions.

Furthermore, the Central Bank of Malta’s stress tests show that Maltese banks remained resilient mainly due to their strong solvency and liquidity positions.

However, going forward, any gains earned from rising interest rates could be offset by lower credit volumes or additional needs to step up further provisioning.

During the period analysed, credit remained strong, largely driven by sustained growth in mortgages.

The report highlights the increased concentration risk in the banks’ loan portfolios, reflecting this growth in mortgages, coupled with other systemic cyclical risks emanating from real estate market developments. 

High inflation and market volatility also affected financial markets which, in turn, impacted domestically-relevant insurance companies and investment funds.

Insurance companies reported lower profits owing to losses on their investments. High inflation could increase claim costs for non-life insurance companies, while life insurance companies could benefit from interest rate rises in terms of their longer-term investment products.

Despite these challenges, their solvency and capital positions remained strong. Similarly, investment funds reported lower net asset valuations but nonetheless, they continued to operate on sound key metrics, with limited leverage. Their cash and deposits also rose which mitigates any liquidity concerns for these funds. 

The Central Bank said that while the Maltese banking sector is sound, downside risks from the external environment and the confluence with existing vulnerabilities could threaten progress in its profitability.

For non-banks, investment funds need to continue monitoring possible excessive liquidity mismatches, whilst insurers need to keep an eye on market and liquidity risks, amidst high market volatility and uncertainty.

The severity and extent of the materialisation of risks in the euro area depends on the macroeconomic environment, the duration of the energy crisis across the EU and other consequences of the Russian invasion of Ukraine. 

The report recommends that the Maltese financial sector should remain vigilant to ensuing risks, including those stemming from operational risks such as cyber threats, as well as developments related to climate change.

Furthermore, banks should continue to exercise caution and prudence in classifying loan performance, in the implementation of provisioning levels, and distribution of dividends to enhance capital buffers.