Annus horribilis for property market as non-performing loans increase

Overvalued properties and sluggish sales saw the construction sector account for over 66% of non-performing loans, the Central Bank's updated financial stability report said today.

Malta's macroeconomic and financial conditions remain "supportive" of financial stability, despite the hostile global environment, but the Central Bank is advising money lenders to exert caution in the light of a persistently challenging environment mainly characterised in particular by weak activity in the construction and real estate sectors.

"Despite the increase in non-performing loans, the concentration of bank lending, and collateral holdings in the property market, the level of credit risk is deemed to have remained stable on account of improved coverage and capital buffers," the Bank said, referring to the amount of defaulting loans on property.

The total Non-Performing Loans (NPL) ratio rose from 7.3% as at end-2011 to 8.2% in June 2012 as deterioration was reported across both corporates and households.

The construction and real estate sectors contributed to two-thirds of the increase in the overall NPL ratio.

The resident corporate sector's NPL ratio rose from 10.7% to 12.3%, with loan quality deteriorating across a number of sectors. The main exception was the manufacturing sector, whose NPL ratio declined.

Credit risk remained elevated owing to exposure to the construction and real estate sectors at a time when their business activity remained subdued. These sectors collectively accounted for 16% of total resident loans but for 47% of total NPLs.

Respondents to the Central Bank of Malta's Real Estate Market Survey (REMS) indicated lower sales and perceptions in the market that property prices were still overvalued. On the other hand, the quality of resident household loans, which amount for 44.1% of total resident lending, remained stable with the NPL ratio of the household sector standing at 3.2% (2011: 3%).

This reflected the fact that the average quality of mortgage loans remained intact, while that of consumer loans deteriorated slightly.

"In an environment of sluggish economic growth, banks resorted to further loan rescheduling by stretching the repayment horizon. Rescheduled loans increased by 7% since December 2011, amounting to 2.3% of banks' total loan portfolio. The construction and real estate sectors continued to account for the highest proportion of rescheduled loan facilities," the Central Bank said.

Credit risk arising from the deteriorating quality of loans was however mitigated by an additional allocation of loan loss provisions by banks. As a result, the banks' estimated value of collateral available to back NPLs stood at 78.6%, leaving only around 1.3% of NPLs uncovered as at June 2012 - down from the level of 4.1% registered in December 2011.

Despite the increase in defaulters, banking profits remain solid. The banks' half-yearly profits were just over €112 million, 18.2% higher than during the first six months of 2011. The return on equity (ROE) and return on assets (ROA) ratios improved from 19.5% and 1.3%, respectively, in December 2011, to 20.6% and 1.4%, in June 2012.