Bank of Valletta plc - Fitch affirms ‘BBB+’ rating

Tuesday, February 7th, 2012

On Tuesday 7 February 2012 Bank of Valletta plc issued a press release announcing that the international credit rating agency Fitch affirmed the Bank’s rating of BBB+ with a stable outlook. The rating agency stated that its decision reflects BOV’s strong funding base, satisfactory liquidity and adequate profitability. Fitch further mentioned that the rating reflects the Bank’s reliance on Malta’s small and concentrated economy and BOV’s asset quality.

BOV explained that the Fitch report noted that as the largest bank in Malta, BOV continues to benefit from large volumes of stable and inexpensive customer deposits. Fitch confirms that as loans account for just over half of the total assets, the Bank’s liquidity position is satisfactory. The remaining assets are mainly in highly-rated EU sovereign bonds. As at end of September 2011, the Bank had €1.1 billion of securities eligible for ECB refinancing.

As at the end of September 2011, BOV had a core capital ratio of 11.5% which is above the minimum regulatory requirements. The report stated that this level of capital is necessary given BOV’s concentration in its loan book and small absolute size of its equity base.

Fitch added that despite the low interest rate environment, net interest margins continued to be high allowing BOV to absorb the loan impairment charges generated by the subdued credit conditions. Despite the current economic situation, Fitch reported that BOV generated adequate profitability during 2011.

The rating agency commented on the deterioration of the asset quality in 2009 and 2010 which was a result of the weakening conditions in the real estate and construction sectors but asset quality deterioration during 2011 has been more contained than in the previous two years. The real estate and construction sectors account for 15% of the Bank’s total lending. Fitch acknowledged the Bank’s management efforts in improving reserve coverage of problematic loans during recent years but nevertheless considered BOV’s asset quality still to be weak.

Fitch added that the high concentrations in BOV’s portfolio were a constant feature of the bank’s loan book. In the report, Fitch also indicated that BOV’s exposure to Libya was minimal and as a result, the Bank has not been significantly impacted by the recent crisis. However, in the view of Libya’s vulnerability to political unrest, BOV was prudent and increased reserves coverage against possible future consequences.

In reaction to the Fitch rating announcement, BOV’s Chief Executive Officer Mr Charles Borg stated that “the focus of the Bank’s management in sustaining the prudent funding model adopted by BOV has, without doubt, proved to be a core element of the Bank’s success”.

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