Malta Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Financial services play an important role in the Maltese economy. In 2018, they directly accounted for around 6% of gross value added, while also generating activity in other professional services, such as law, accountancy, audit and management.

The banking sector, which lies at the heart of the Maltese financial system, is resilient. At the end of 2018, there were 24 banks in Malta, with total assets equivalent to over 350% of GDP. Six core domestic banks mainly provide retail banking services to the Maltese economy, while 13 banks predominantly serve international customers. Five relatively small institutions are considered to be 'non-core' domestic banks.

The Maltese banking system is well-capitalised, with an average total capital ratio of almost 22% at the end of 2018. At these levels, the banking system is sufficiently well capitalised to be able to absorb losses even in the event of severe adverse shocks. Maltese banks are also highly liquid, while profitability remains healthy. A Financial Sector Assessment Program by the International Monetary Fund confirms this state of affairs.

Growth of bank lending to residents strengthened during 2018, driven mainly by mortgage lending, while credit growth to firms turned positive. Meanwhile, asset quality improved further, with non-performing loans falling to around 3% of the total loan portfolio. This improvement is mainly attributable to regulatory requirements that oblige individual banks with a non-performing loan ratio above 6% to adhere to a multi-annual reduction plan, although a buoyant economy is also contributing positively.

Rapid growth in demand for mortgages has led to an increase in the concentration of banks' exposures to property-related lending. In response, in July 2019 new borrower-based measures aimed at strengthening the resilience of lenders and borrowers to developments in the residential real estate market were implemented.

Despite its underlying strengths, the Maltese banking system faces a number of challenges. A prolonged low interest rate environment will continue to erode profitability, which will also be weighed down by increasing regulatory costs. Maltese banks are also facing competition from alternative sources of external finance, including the capital markets. Competitive pressures may also arise from technological developments allowing payments to bypass the banking sector entirely. From an operational perspective, Maltese banks are increasingly aware of risks posed by cybercrime.

The authorities are stepping up their efforts to combat fraud, tax evasion and money laundering, while encouraging the development of innovative technologies in the financial sector. A comprehensive update of the National Risk Assessment was also carried out to identify related threats and vulnerabilities and form the basis of Malta's National AML/CFT Strategy.

As regards other market players, Maltese insurers and investment services firms focus mainly on serving foreign customers, taking advantage of the freedom to provide services across the EU. Nevertheless, the local market is also well served by a wide choice of domestically-oriented firms.

At the European level, the completion of Banking Union and of the Capital Markets Union would strengthen Europe's banks and deepen its financial markets, enhancing efficiency while promoting financial stability.