BOV share price stages relief rally

Article #583 by Edward Rizzo - Published Weekly

The annual financial reporting season is currently in full swing and while most observers of the Maltese capital market would correctly expect strong performances by most companies given the robust dynamics of the Maltese economy (in fact the large majority of companies are reporting encouraging figures and some companies are recommending high dividend payments to shareholders), developments within Bank of Valletta plc over the past 12 months may have led to a certain build-up of anxiousness among the investing public ahead of the bank’s reporting date.

BOV published its annual financial statements on 15 March and while at first glance one generally looks out for some key performance indicators once a company’s financials are released, the litigation provision was surely the main item that most analysts and shareholders would have looked out for in the BOV company announcement.

In the first half of the 2018 financial year, BOV had accounted for a litigation provision of €75 million which naturally hugely impacted the overall financial performance and, for the first time in its history as a publicly traded company, this led the bank not to declare an interim dividend to shareholders. At the time of the publication of the 2018 interim financial statements on 31 July, the bank had also warned its shareholders that it did not intend recommending a final cash dividend for the 2018 financial year following “extensive discussions with regulators”.

The extent of the litigation provision as well as the cancellation of the dividend in summer 2018 left a deep impact on investor sentiment towards BOV. This had already been weakening following the announcement exactly one year ago (on 27 March 2018) that the bank had received notice that the Italian Tribunal had issued a precautionary warrant (“sequestro conservativo”) for €363 million against the bank related to the Deiulemar case which, in turn, was first revealed on 2 April 2015 when BOV had issued an unexpected announcement on Maundy Thursday.

The share price of BOV has been negatively impacted by the series of announcements over the past twelve months. At the start of 2018, the equity had started to edge higher following the successful €150 million rights issue in December 2017 reaching a 2018 high of €1.91 on 26 March 2018. The share price however quickly entered into bear territory in the following months as the strong financial performance registered in 2017 was overshadowed by other developments shortly after the publication of the 2017 financial statements on 23 March 2018 related to the issue of the precautionary warrant.

The equity managed to hold on to a tight range above the €1.70 level for a couple of months prior to the release of the 2018 interim financial statements in July even though it was revealed on 20 July that the Italian court had rejected the bank’s appeal and confirmed the issue of a precautionary warrant of €363 million.

As the bank published its interim financial statements on 31 July that also included a litigation provision of €75 million and a decision to halt dividend payments for the 2018 financial year, the share price tanked. The equity performed negatively throughout the rest of 2018, at first momentarily supported at the €1.50 psychological level until mid-September, but then dropping below this level and reaching a 2018 low of €1.30 before partially rebounding to end the year at the €1.33 level. This represented a drop of 26.1% during the 2018 calendar year and the negative trend in the equity continued during the start of 2019 with the share price dropping to a multi-year low of €1.235 on 18 February 2019 before ending the month at €1.26.

The equity staged a relief rally following the 2018 financial results announcement on 15 March 2019 as BOV confirmed that it did not account for an additional provision during the second half of 2018 and it generated a profit of €146.2 million (excluding the litigation provision of €75 million) which represents an increase of 5.8% over the annualised profit for 2017. The share price jumped by 17.5% within a few days to a high of €1.48 before easing partially to a current price of €1.45.

Although the bank’s operational performance remained strong in 2017 and in the first half of 2018 and the latest financial statements for the 2018 full-year proved this once again, the market was indicating a high level of uncertainty related to the bank’s various litigation cases over recent months. The recent upturn in BOV’s equity is therefore possibly attributed to the fact that no further provisions were taken in the second half of 2018.

Following the strong operational performance by BOV in 2018 and the amount of profits being retained within the bank since no cash dividends are being paid, BOV’s CET 1 ratio as at 31 December 2018 improved to 18.3% which is a high capital ratio and should reassure shareholders given the extent of the ongoing litigation issues.

Another very important highlight included within the recent announcement was the capital raising plans. BOV stated that it intends to issue an instrument amounting to €150 million, eligible for additional Tier 1 (“AT1”) capital. Moreover, the bank intends issuing a new subordinated bond during the third quarter of 2019 to replace the existing €50 million 5.35% subordinated bonds which are due for repayment on 15 June 2019.

The ‘additional Tier 1’ bonds are deeply subordinated bonds that count as regulatory capital and these have become common instruments used by banks across international financial markets. Two banks in particular made headlines in this respect in recent weeks. In November 2018, UniCredit SpA placed USD3 billion of AT1 bonds at a coupon of 7.83% in a private deal with Pimco and a few weeks ago, the Italian bank easily raised an additional €1 billion of AT1 bonds at a coupon of 7.5% (with an issuer call after seven years). Moreover, last month, Banco Santander became the first bank which did not exercise the call option at the first opportunity and it extended its €1.5 billion 6.25% perpetual Additional Tier 1 bond.

The success or otherwise of the issuance of additional capital (both the €150 million in AT1 bonds and the €50 million in subordinated bonds) could be one of the determining factors behind the resumption of dividend payments by BOV. In a recent meeting with financial analysts, BOV’s Chairman indicated that dividends will be reinstated ”when prudent to do so”. Any approval by the regulators for the resumption of dividends will possibly be dependent on developments related to the litigation issues, namely the Deiulemar case, as well as the success of BOV’s capital raising plans.

The last subordinated bond issued by BOV was in November 2015 and at the time there were new procedures required by financial intermediaries since these bonds were classified as ‘complex financial instruments’. Under MiFID II regulations effective as from January 2018, the distribution of complex financial instruments to retail investors poses additional challenges since such investors are prohibited from applying for these bonds unless they are able to demonstrate a level of knowledge and experience in the technicalities of ‘subordination’ and the EU’s bank recovery and resolution directive (‘BRRD’). Given these issues, it would therefore be interesting to gauge investor appetite for these new complex financial instruments in the next few months.

Given the need for BOV to issue a sizeable amount of new capital in the months ahead, it would be ideal for the bank to follow best practice and reconsider the reinstatement of the semi-annual publication of the Interim Directors’ Statement in May and November. This should help keep BOV’s numerous stakeholders well aware of ongoing business developments including any comments by the international credit rating agencies who were quick to react to developments over the past 12 months.

  Print This Page

The article contains public information only and is published solely for informational purposes. It should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in this article. Rizzo, Farrugia & Co. (Stockbrokers) Ltd (“Rizzo Farrugia”) is under no obligation to update or keep current the information contained herein. Since the buying and selling of securities by any person is dependent on that person’s financial situation and an assessment of the suitability and appropriateness of the proposed transaction, no person should act upon any recommendation in this article without first obtaining investment advice. Rizzo Farrugia, its directors, the author of this article, other employees or clients may have or have had interests in the securities referred to herein and may at any time make purchases and/or sales in them as principal or agent. Furthermore, Rizzo Farrugia may have or have had a relationship with or may provide or has provided other services of a corporate nature to companies herein mentioned. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security mentioned in this article. Neither Rizzo Farrugia, nor any of its directors or employees accepts any liability for any loss or damage arising out of the use of all or any part of this article. Additional information can be made available upon request from Rizzo, Farrugia & Co. (Stockbrokers) Ltd., Airways House, Fourth Floor, High Street, Sliema SLM 1551. Telephone: +356 2258 3000; Email: info@rizzofarrugia.com; Website: www.rizzofarrugia.com © 2021 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved. This article may not be reproduced or redistributed, in whole or in part, without the written permission of Rizzo Farrugia. Moreover, Rizzo Farrugia accepts no liability whatsoever for the actions of third parties in this respect.

This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.