HSBC Bank Malta plc - Full-Year Results

Monday, February 23rd, 2015

On 23 February, HSBC Bank Malta plc publishes its preliminary results for the financial year ended 31 December 2014.

Performance Overview

During 2014, net interest income fell for the second consecutive year by a further 3.6% to €120.2 million mainly due to the 5.4% drop in gross interest income to €153.4 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 11.1% decline in interest expense to €33.2 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 14.8% drop to €53.1 million (the lowest level in the last 10 years) largely due to the €4 million drop in pre-tax profits registered by the Group’s life assurance subsidiary to €9 million reflecting the negative impact of the prevailing decline in yields and lower technical reserve releases which offset the 10% growth in new insurance business. Furthermore, net fee and commission income also fell by 3.7% to €28.5 million given the winding down of the Bank’s fund administration and custody businesses in early 2014. Similarly, trading profits (related to foreign exchange activities) dropped by 7.7% to €8.8 million and net gains on disposal of available for sale financial instruments was considerably lower at €1.7 million compared to €4.3 million in 2013.

Overall, the net operating income of HSBC Malta contracted by 7.4% to €173.3 million.

On the expenditure side, HSBC Malta registered a 5.4% increase in operating expenses to €95.4 million largely reflecting the additional compliance and regulatory costs (associated with the build-up of the compliance function, the ECB’s Comprehensive Assessment and higher regulatory fees) as well as a €1 million increase in early voluntary retirement costs. In fact, excluding these extraordinary items, operating costs were flat as the cost savings from the simplification and re-engineering of processes counterbalanced the adverse impact of the annual increase in staff salaries, the impact of inflation and continued investment in technology. Given the larger increase in overall costs than in income, the cost to income ratio deteriorated to 56.8% from 49.9% in 2013.

As a result, HSBC Malta’s operating profit before impairment allowances shrunk by 20.4% to €74.7 million. Impairment allowances were raised sharply to €22.5 million (2013: €3.3 million) as the Bank adopted a cautious approach on the value of the property held as collateral against existing non-performing commercial loans.

Overall, the 2014 pre-tax profit figure amounted to €52.1 million representing a 42.4% drop from the previous year’s comparable figure and the lowest level since 2002. The tax charge for the year under review amounted to €18.5 million (2013: €31.8 million) leading to a net profit of €33.6 million compared to the €58.7 million registered in the previous financial year.

The Statement of Financial Position shows a 25.8% growth in total assets to €7,199 million mainly reflecting the aggregate €1,179 million increase in financial assets designated at fair value and financial investments which offset the 0.8% decline in loans and advances to customers to a new 5-year low of €3,273 million as well as a 22.1% drop in ‘Balances with Central Bank of Malta, Treasury Bills and cash’ to €118 million in view of the prevailing low interest rate scenario and the negative interest rates offered by the Central Bank. In connection with the decline in the amount of loans, the Directors noted that demand for new commercial and retail loans was subdued as customers continued to use surplus cash to repay borrowings in times of uncertainty. Meanwhile, the residential mortgage portfolio continued to show positive net growth.

Similarly, total liabilities expanded by 27.5% to €6,753.9 million mainly due to the aggregate growth in ‘Liabilities under investment contracts’ and ‘Liabilities under insurance contracts’ of over €1,000 million to €1,623.3 million in addition to the 7.7% increase in the Bank’s customer deposit base to €4,867.1 million. Given the drop in loans and advances, the loans to deposit ratio fell to 67.3% from 73.1% in 2013.

Shareholders funds’ grew by 5.2% to €445.1 million following the 21% increase in revaluation reserves (comprising the revaluation of the Malta Government Stocks held) and the profit registered during the period under review. The preliminary results also highlighted the improvement in the capital adequacy ratio to 10.6% (2013: 9.9%). It is also noteworthy to highlight that the pre-tax return on equity dropped to 12% – the lowest level since HSBC took over the operations of Mid-Med Bank in 1999. Similarly, the post-tax return on assets dropped 75 basis points to 0.81%.

Dividend

The Directors recommended a final gross dividend of €0.026 per share representing a 44.4% decline from the previous years’ final dividend reflecting the drop in profitability.

Combining the final dividend with the interim dividend (paid on 4 September 2014) of €0.045, the total gross dividend in respect of the 2014 financial year amounts to €0.071 per share representing a 48.1% drop from the previous year’s total dividend. Furthermore, the payout ratio for 2014 was reduced from 49.1% to 44.5%.

The reduced dividend distribution 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. To date HSBC have already set aside €7 million representing 85% of the currently estimated reserve. The remaining 15% will be set aside in 2015.

Shareholders as at the close of trading on 18 March will be eligible to receive this dividend on 24 April 2015 subject to shareholder approval at the upcoming Annual General Meeting scheduled to be held on 22 April 2015.

Bonus Issue

The Directors also recommended a 1 for 9 Bonus Issue to all shareholders as at the close of trading on 27 April 2015 through the capitalisation of €11 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 despite the difficult operating conditions, the aim is to continue to build a long-term sustainable business that will serve the best interest of customers, staff, shareholders and the community.

Download

HSBC Bank Malta plc – Preliminary Results for the financial year ended 31 December 2014.

 

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