Bank of Valletta plc - Interim Results

Friday, April 28th, 2017

On 27 April, Bank of Valletta plc published its interim results covering the six months ended 31 March 2017.

Performance Overview

During the period under review, the Bank registered a 2.9% drop in net interest income to €72.7 million (H1 2016: €74.9 million) as the low level of benchmark interest rates continued to exert pressure on interest margins. Gross interest income decreased by 2.6% to €104.5 million reflecting BOV’s strong liquidity buffers, which include significant balances held with the European Central Bank that are charged at negative interest rates and that continued to increase during the period under review. This was only partially offset by the 1.9% drop in interest expense to €31.8 million.

BOV also reported a 15.3% drop in non-interest income to €50.5 million reflecting lower profits on foreign exchange activities (-1.7% to €9.9 million) as well as the 63.6% drop in fair value movements and gains on vestment securities to €6.3 million. On the other hand, net fee and commission income rose by 5.8% to €33.8 million (H1 2016: €31.9 million) reflecting strong performances on fund management, fund services, stockbroking and bancassurance.

As a result, total operating income dropped by 8.4% to €123.2 million (H1 2016: €134.5 million).

On the expenditure side, BOV registered an 8.5% increase in operating costs to €63.4 million (H1 2016: €58.4 million) mainly attributable to higher costs related to its employees and IT infrastructure. The Bank explained that the increase in employee costs is attributable to additional recruitment of personnel in IT, anti-financial crime roles as well as salary increases agreed upon in the Collective Agreement signed in December 2015.

In sharp contrast to the corresponding period last year, BOV recorded a net reversal of impairment losses amounting to €5.34 million (H1 2016: net impairment charge of €8.1 million) following the settlement of a number of non-performing loans during the period under review, which has also led to a decrease in the Group’s non-performing exposures, and thus to an improvement in the credit quality of the loan book.

BOV also benefitted from a marked increase in the share of results of equity-accounted investees (namely Mapfre MSV Life plc and Mapfre Middlesea plc) which jumped to €8.88 million when compared to just €0.54 million in H1 2016.

Overall, BOV reported a pre-tax profit figure of €74.03 million representing an 8.1% increase over the €68.48 million recorded in the previous comparable six-month period. After accounting for a tax charge of €23.4 million (H1 2016: €23.65 million), the BOV Group’s net profit for the period under review amounted to €50.65 million compared to €44.56 million in the six months ended 31 March 2016. This translates into an earnings per share of €0.121 compared to €0.106 in the first half of the previous financial year.

The Statement of Financial Position as at 31 March 2017 shows a 5.4% increase in total assets to €11.31 billion compared to the figures as at 30 September 2016. This increase largely reflects the 21.6% growth in loans and advances to banks to €2.55 billion as well as the 2.5% growth in loans and advances to customers to €4.1 billion. Similarly, total liabilities grew by 5.6% to €10.55 billion mainly due to the 5.3% increase in customer deposits to a record €9.67 billion, leading to an advances to deposit ratio of 42.4%. Overall, shareholders’ funds expanded by 3.3% to €0.75 billion mainly reflecting the profit registered during the period under review. This translates into a net asset value per share of €1.737 compared to €1.736 as at 30 September 2016.

Dividend

The Directors declared an improved gross interim dividend of €0.045 per share (net: €0.0293) representing a 23.9% increase over the previous year’s interim dividend of €0.0363 per share. Furthermore, at 24.3%, the payout ratio is almost two percentage points higher than that in the previous comparable period. The interim dividend is payable on Friday 26 May to those shareholders as at close of trading on Tuesday 9 May.

Outlook

Looking ahead, the Directors noted that the Group has embarked on an intense programme comprising a number of initiatives including a comprehensive review of the Group’s business model and its attitude towards risk as well as replacing its core IT system whilst also reconfiguring and rationalising its branch network, amongst others. These initiatives, which will be implemented over a 3-year period, should strengthen the Group’s fundamentals and ensure a robust business model to support the feasibility and profitability of BOV into the 2020s and beyond.

The Directors also noted that this programme will be implemented in a challenging financial and regulatory environment whilst at the same time continue to meet shareholders’ legitimate expectations of a fair return on their investment. Therefore, the Directors explained that it is critical for BOV to not simply de-risk its business model but to make up for income lost through de-risking by exploring and securing new and diversified sources of revenue.

The interim report also makes reference to IFRS9, a new accounting standard that will significantly change the way in which banks account for impairment losses, which is expected to result in a negative material impact on Group reserves once its adopted. Furthermore, in view of more stringent capital requirements and the required investment in the Group’s core IT system, the Group is anticipating a situation where the retention of profit will not suffice and must be supplemented by fresh issues of capital. In this respect, BOV is planning to issue €150 million in new share capital over an approximate one-year period.

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Bank of Valletta plc – Interim Financial Statement for the six months ended 31 March 2017.

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