HSBC Bank Malta plc - Full-Year Results

On 24 February, HSBC Bank Malta plc published its preliminary full-year results for the financial year ended 31 December 2013.

Performance Overview

During 2013, net interest income fell by 6.3% to €124.7 million mainly due to the 7.2% drop in gross interest income to €162.1 million reflecting lower average lending balances and a decline in interest earned on investments as higher yielding maturing bonds were reinvested at lower rates. This was only partially offset by the 10% decline in interest expense to €37.4 million as customers opted for shorter term deposits which carry a lower interest rate.

Non-interest income was also under pressure during the year under review with a 3.5% drop to €62.3 million largely due to the €5 million drop in the pre-tax profit registered by the Group’s life assurance subsidiary to €13 million reflecting the higher investments returns registered during 2012 due to the favourable equity market performance. Furthermore, net fee and commission income also fell by 3.1% to €29.5 million. On the other hand, trading profits (related to foreign exchange activities) grew by 2.2% to €9.5 million and net gains on disposal of available for sale financial instruments amounted to €4.3 million.

Overall, the net operating income of HSBC Malta contracted by 5.4% to €187 million.

On the expenditure side, HSBC Malta registered a 3.6% decline in operating expenses to €93.3 million reflecting the non-occurrence of the €6 million provision accounted for in 2012. In fact, excluding this extraordinary item, operating costs increased by more than 2% (equivalent to €3 million) as the cost savings from the review of processes was offset by higher compliance, regulatory, security and fraud-risk related expenses as well as the on-going investment in technology. Given the larger decrease in income than in overall costs, the cost to income ratio deteriorated to 49.9% from 49% in 2012.

As a result, HSBC Malta’s operating profit before impairment allowances retreated by 6.7% to €93.7 million. After accounting for an impairment charge of €3.3 million (2012: €5.1 million), the 2013 pre-tax profit amounted to €90.5 million representing a 5.1% drop from the previous year’s comparable figure. The tax charge for the year under review amounted to €31.8 million (2012: €33.7 million) leading to a net profit of €58.7 million compared to the €61.6 million registered in the previous financial year.

The Statement of Financial Position shows a 2.8% drop in total assets to €5,721 million mainly reflecting the 17.1% drop in loans and advances to banks to €564.8 million as well as the 1.6% drop in loans and advances to customers to a new 4-year low of €3,301 million. In this respect, the Directors noted that demand for new commercial loans from businesses remained subdued as companies continued to use surplus cash to repay borrowings and delay investments in times of uncertainty. Meanwhile, the residential mortgage portfolio continued to register steady growth.

Similarly, total liabilities dropped by 3.4% to €5,298.5 million mainly due to the 83.8% drop in deposit by banks to €41.8 million, further highlighting the Group’s focus on retail funding. In fact, customer deposits were relatively unchanged at €4,517.9 million despite competitive pressures. Given the drop in loans and advances, the loans to deposit ratio fell to 73.1% from 74.3% in 2012.

Shareholders funds’ grew by 5.6% to €423 million following the profit registered during the period under review. The preliminary results also highlighted the improvement in the capital adequacy ratio to 12.9% (2012: 12.4%) mainly due to the significant improvement in Tier 1 Capital to 9.4% from 8.3% in 2012. It is also noteworthy to highlight that the pre-tax return on equity dropped to 22% – the lowest level since 2003. Similarly, the post-tax return on assets dropped 7 basis points to 1.56%.

Dividend

The Directors recommended a final gross dividend of €0.052 per share representing a 34.2% decline from the previous years’ final dividend. The reduced dividend is a combination of the lower profit levels registered during the year as well as the impact of the new Banking Rule 09 (BR09) which came into effect in December 2013. The amended rule requires banks to hold a ‘Reserve for General Banking Risk’ calculated as a percentage of non-performing loans. This reserve is required to be funded from planned dividends. The rule allows for a transitory three-year period with 40% of the required balance to be set aside in the first year. In the case of HSBC this amounted to €4 million. The balance will be set aside in two equal instalments over the next two years. Therefore, HSBC Malta anticipates that there will be lower levels of distributions to be made to shareholders over the next two years. In fact, the payout ratio for 2013 was reduced from 55% to 49.1%.

Combining the final dividend with the interim dividend, the total gross dividend in respect of the 2013 financial year amounts to €0.152 per share representing a 15.1% drop from the previous year’s total dividend.

Shareholders as at the close of trading on 12 March will be eligible to receive this dividend on 25 April 2014 subject to shareholder approval at the upcoming Annual General Meeting scheduled to be held on 16 April 2014.

Bonus Issue

The Directors also recommended a 1 for 9 Bonus Issue to all shareholders as at the close of trading on 24 April 2014 through the capitalisation of €10 million from the Bank’s retained earnings. This is also subject to shareholder approval at the next Annual General Meeting.

Outlook

HSBC Malta CEO Mr Mark Watkinson stated that although global conditions are expected to remain difficult for the medium term, initial signs of growth are being registered as the market becomes more optimistic.

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HSBC Bank Malta plc – Preliminary Results for the financial year ended 31 December 2013