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January 29, 2018

IMF published its staff report and selected issues report in context of the 2017 Article IV consultation with Malta. A key conclusion of the Article IV consultation is that the domestic banking system remains well-capitalized and profitable, but faces several challenges.

The staff report highlights that, going forward, profitability of banks remains subject to headwinds from subdued lending to the nonfinancial corporations, a prolongation of the ECB’s accommodative monetary policy stance, and upcoming regulatory changes, which may require higher loan-loss provisions (IFRS 9) and may lead to higher funding costs (MREL). Further challenges stem from the elevated legacy nonperforming loans (NPLs), especially among small banks, and the high and increasing concentration of property-related loans. High legacy corporate non-performing loans represent a persistent challenge for the banking sector, despite the continued improvement in asset quality of banks. Key policy recommendations of the IMF are to:

  • Reduce legacy NPLs in the corporate sector further and continue improving the insolvency framework
  • Ensure a robust governance structure and well-designed origination rules to contain risks related to the operations of Malta Development Bank
  • Monitor the growing importance of nonbank financing to the non-financial corporate sector and close related data gaps
  • Ensure that the financial regulator has adequate resources to preserve its independence and continue with effective supervision
  • Sustain efforts to safeguard the financial system’s integrity

One of the key focus areas of the selected issues report is the issue of limited access of Maltese corporates to bank lending segment, while the banking system focuses on balance sheet repair from legacy NPLs. The report highlights that alternative funding channels to bank credit have developed, with intercompany lending taking the most prominent share of financing. In addition, direct issuance of debt securities and credit from nonbank financial institutions have been growing rapidly, albeit from a low base. This calls for close monitoring and consideration of supervisory and macro-prudential measures to this part of the financial sector while its size is still small and vulnerabilities have not materialized.

 

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Keywords: Europe, Malta, Banking, NPLs, IFRS 9, IMF​

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