HSBC Bank Malta plc - Interim Results

Monday, July 31st, 2017

On 31 July 2017, HSBC Bank Malta plc published its half-year results covering the six months ended 30 June 2017. It is important to highlight that the comparable figures for the six months ended 30 June 2016 included the one-off gain of €10.8 million relating to the disposal of the shareholding in VISA Europe.

Performance Overview

During the period under review, HSBC Malta reported a 5.6% drop in net interest income to just below €60.3 million largely reflecting the 8% decline in gross interest income to €66.4 million which was only partially offset by the 26.7% decline in interest expense to just over €6 million. The announcement explained that the drop in interest income is a combination of the continued adverse effects of the low interest rate environment, loan repayments from corporate clients which sought alternative sources of funding including local bond issues as well as downward pressure on lending margins due to sustained competition. This was only partially offset by further growth in mortgages. Meanwhile, net interest expenses contracted on the back of the 2.6% reduction in deposits.

HSBC Malta also reported a 33% decline in non-interest income to €22.2 million largely representing the one-off gain of €10.8 million reported in the previous comparable period in relation to the disposal of the shareholding in VISA Europe which was not repeated during the first six months of this year. Nonetheless, HSBC Malta still reported an 11.1% drop in net fee and commission income to €11.8 million and an almost 30% reduction in trading profits to €2.75 million both reflecting the risk management actions undertaken by the bank to align its portfolio with the established risk appetite and high compliance standards. On the other hand, other operating income increased by 7.6% to €1 million and the Group’s life assurance subsidiary reported a pre-tax profit of €4.4 million compared to €2 million in the first half of 2016. The improved performance of the life assurance business largely reflected an increase in premium income following the number of new single premium policies written.

Overall, net operating income dropped by almost 15% to €82.5 million. Excluding the aforementioned one-off item, the decline would have been 4.3%.

On the expenditure side, HSBC Malta reported a 0.8% increase in its cost base to €52.2 million as the continuous investment in the Group’s regulatory and financial crime compliance and the 5% annual pay increase offset the positive impact of the savings achieved from the early voluntary retirement programme that was implemented in 2016.

Impairment allowances during the period under review amounted to €4.3 million representing an 11.1% increase over the comparable figure for the first half of 2016 largely due to elevated impairment charges in relation to a number of long outstanding mortgage exposures (the bank reportedly holds adequate collateral against these exposures and expects to have recoveries in the future). The announcement also makes reference to the self-imposed remediation process related to the sale of complex financial instruments. The Directors noted that the process is expected to commence shortly and the related costs are fully covered by the provision raised in the 2016 financial statements.

Overall, pre-tax profits dropped by 37.3% to €25.9 million – the lowest level of pre-tax profits since 2003. Excluding the aforementioned one-off item record in the first half of 2016, the drop would have been around 15%. After accounting for a tax charge of €9.1 million (H1 2016: €14.5 million), the net profit for the period under review amounted to €16.85 million representing a 37.2% drop from the previous comparable period or a 15% decline on an adjusted basis. This translates into an earnings per share figure of €0.0468 (H1 2016: €0.0745).

The Statement of Financial Position shows a 3.3% drop in total assets to €7,068 million compared to the figures as at 31 December 2016. The contraction in total assets is largely attributable to the 3% decline in loans and advances to customers to €3,221.9 million and to a lesser extent due to a drop of 11.1% in loans and advances to banks to €958.2 million. Customer loans largely contracted due to further repayments from corporate clients which was only partially offset by the continued growth in mortgages.

Similarly, total liabilities contracted by 3.6% to €6,589.8 million largely reflecting the repayment of one of the Bank’s subordinated bonds amounting to €58.2 million as well as a 2.6% drop in customer deposits to €4,870.2 million (mainly due to the withdrawal of a limited number of large corporate deposits which were temporarily placed with the bank and in turn offset the €75 million increase in retail deposits). The Bank’s loan to deposit ratio was relatively unchanged at 66%.

Overall, the equity base of HSBC Bank Malta plc edged 0.9% higher to €477.9 million reflecting the profit registered during the period under review. This translates into a net asset value per share of €1.326 (Dec 2016: €1.31). The announcement also noted that the Bank’s Tier 1 capital ratio further strengthened to 13.9% from 13.2% as at 31 December 2016 driven principally by lower risk-weighted assets. The Bank also noted that this ratio continues to be well above the transitional and fully-loaded regulatory requirements.

Commenting on the results, HSBC Malta’s CEO Mr Andrew Beane explained that the Bank’s first half performance was in line with management expectations as profits trended lower due to the ongoing adverse impact of negative interest rates as well as the Bank’s prioritisation of compliance actions. Mr Beane further noted that while these actions can reduce profitability in the short-term, they are fundamental to protect long-term value for shareholders and to fulfil HSBC’s obligation to protect the integrity of the financial system and its connections to international markets on which the country’s economy depends.

Dividend

The Directors declared an interim gross dividend of €0.047 per share (net: €0.03) representing a 33.8% drop from the dividend declared in respect of the 2016 interim results. This dividend will be paid on 11 September to all shareholders as at the close of trading on 8 August 2017. In his commentary, the CEO noted that the Bank’s robust capital and liquidity position complimented by the Bank’s conservative risk culture enables the Bank to sustain a 65% payout ratio.

Outlook

Looking ahead, the CEO noted that HSBC Malta is making good progress to enhance its customer propositions for both business and personal customers. In this respect, a number of notable announcements related to new and enhanced HSBC services will be made in the second half of 2017. The expected innovations should build on the good progress achieved within the Group’s life assurance subsidiary which is already benefiting from recent improvements in its product range.

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HSBC Bank Malta plc – Half-Year results covering the six months ended 30 June 2017

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