Maintaining financial sector resilience during heightened geopolitical uncertainty – CBM report

The Central Bank of Malta has released its 17^th edition of the Financial Stability Report (Report), providing a comprehensive analysis of domestic and global macro-financial dynamics, their transmission channels and their implications for systemic risk, and the resilience of Malta’s financial sector. The Report covers the developments in 2024, with some updates regarding the prevailing macroeconomic context.

Although inflationary pressures eased which led to the start of monetary policy easing in the second half of the year, the euro area’s economic recovery remained sluggish, amid a volatile macroeconomic environment. Despite bouts of volatility driven by geopolitical tensions, shifting monetary policy expectations and concerns over asset valuations, financial markets recorded moderate growth in 2024, but remained fragile. Going forward, downside risks to the macroeconomic environment remain present, in part fuelled by the policy shifts under the new US administration, alongside ongoing financial market volatility. Other cross cutting risks, such as cyber threats and climate-related risks, may also threaten financial stability. Against this background, financial institutions should remain vigilant to address these risks effectively.

Despite these uncertainties, the domestic banking sector remained resilient, supported by ample capital and liquidity buffers. This position is also confirmed from the stress test exercises which are carried out to determine banks’ resilience to extreme shocks under a variety of scenarios. While domestic banks posted mixed profitability results, core domestic banks achieved modest gains. Nonetheless, profitability is expected to moderate spurred by declines in net interest income. The persistently strong dynamics of the domestic residential real estate market contributed to further concentration in property-related lending. Nonetheless, asset quality concerns remained low, supported by robust economic growth and labour market developments, as well favourable developments in financial markets.

In 2024, the domestically-relevant insurance sector remained resilient, well-capitalised and supported by stable liquidity levels. Life insurers benefited from a rebound in premia for index- and unit-linked products, while non-life insurers recorded strong underwriting and investment performance. Investment funds also saw a recovery, largely driven by the strong performance of the equity market in 2024. Leverage remained low, as most of the domestically-relevant funds are UCITS which are subject to leverage limits.

The Report also includes a number of boxed articles, offering updates on the dynamics of the financial cycle and credit gaps and policy considerations of extending the sectoral systemic risk buffer. The Report also contains a box on insights from the quarterly bank lending surveys, and the findings from a survey on the core domestic banks’ sustainability efforts and ensuing lending and investment behaviour. Additionally, the Report also includes a comprehensive assessment of the domestic commercial real estate market, an update on the expected credit loss model, as well as the preliminary findings on the effects of Directive 16.