Bank of Valletta plc - Rights Issue Details

Wednesday, November 1st, 2017

On 1 November 2017, Bank of Valletta plc published a Prospectus dated 30 October 2017 in connection with a Rights Issue amounting to approximately €150 million.

The salient details of the Rights Issue are as follows:

Amount Offered:

105 million new ordinary shares with a nominal value of €1.00 each

Offer Ratio:

1 new share for every 4 shares held

Rights Issue Price:

€1.430

Use of Proceeds:

The net proceeds from the Rights Issue are principally earmarked for the further strengthening of the Bank’s Common Equity Tier 1 (“CET1”) capital.

Rights Issue Period:

Wednesday 8 November – Wednesday 6 December 2017

Listing:

Official List of the Malta Stock Exchange

Admission to Listing:

9 January 2018

Download:

Bank of Valletta plc – Rights Issue Prospectus dated 30 October 2017

Risk Factors:

Prospective investors are urged to read the Prospectus issued by Bank of Valletta plc dated 30 October 2017 including the risk factors which are found in Section 6 – “Risk Factors” of the Registration Document on pages 40 to 49 and in Section 3 – “Risk Factors” of the Securities Note found on pages 130 to 133. The below is a summary of the risk factors as contained in the Summary Note which, however, DOES NOT replace the need for prospective investors to read all the risk factors listed and explained in the Prospectus as aforesaid.

An investment in the New Shares involves certain risks. Prospective investors should carefully consider, with their own independent financial and other professional advisers, the following risk factors and other investment considerations as well as all the other information contained in the Prospectus before deciding to invest in the New Shares.

The Prospectus contains statements that are, or may be deemed to be “forward-looking statements.” They appear in a number of places throughout the Prospectus and include statements regarding the intentions, beliefs or current expectations of the Issuer and/or the Directors concerning, amongst other things, the Issuer’s strategy, current expectations of the Issuer and/or the Directors concerning, amongst other things, the Issuer’s strategy and business plans, results of operations, financial condition, liquidity, prospects, dividend pay-out approach and the market in which it operates.

Prospective investors are advised to read the Prospectus in its entirety and, in particular, the sections entitled “Risk Factors” in the Registration Document and Securities Note, for an assessment of the factors that could affect the Issuer’s future performance.

The value of investments can go up or down and past performance is not necessarily indicative of future performance. An investment in the New Shares involves certain risks, including those described below.

An investment in the Issuer and the New Shares may not be suitable for all recipients of the Prospectus and prospective investors are urged to consult an independent investment adviser licensed under the Investment Services Act (Cap. 370 of the laws of Malta) as to the suitability or otherwise of an investment in the New Shares before making an investment decision.

The risk factors set out below are a summary of the principal risks associated with an investment in the Issuer and the New Shares – there may be other risks which are not mentioned in this Summary Note.

1. Key information on the key risks specific to the Issuer or its industry:

Risks relating to the Strategic Initiatives

The increase in share capital is one of the main measures of the Bank’s Strategic Initiatives. Accordingly, unless the Bank can strengthen its capital buffers through additional CET1, its ability to sustain further growth within the parameters of the new regulatory framework, may be significantly curtailed. Failure to improve the capital base would also have an adverse impact on the Bank’s ability to sustain its current dividend pay-out approach and would entail that the Bank’s ability to proceed with the payment of dividends to Shareholders would be curtailed, if not altogether prohibited, until the new capital requirements are met to the satisfaction of the Regulatory Authorities. This could have a significant impact on the Issuer’s overall business, operational results and financial and capital condition.

In such an event, the Bank could also be subject to measures by the Regulatory Authorities involving its management including the imposition restrictions on assets and/or the sale of assets should this result in serious risks to the financial condition of the Bank.

Credit Risk and Risk of Credit Quality Deterioration

The activity, financial and capital strength and profitability of the Issuer also depend on the creditworthiness of its customers, among other things. In carrying out its credit activities, the Issuer is exposed to the risk that an unexpected change in the creditworthiness of a counterparty may generate a corresponding change in the value of the associated credit exposure and give rise to the partial or total write-down thereof.

Risks associated with Capital Adequacy

The Issuer is required to adhere to capital adequacy regulations which require it to maintain appropriate capital resources both in terms of quantity and quality. As an other systemically important institution (“O-SII”), the Issuer must fulfil supplementary requirements concerning the amount of CET1 capital it must hold as a buffer. In addition, as a result of the SREP which banks within the EU, including the Issuer, are subjected to once a year, the applicable prudential limits setting out the specific measures which every bank needs to implement in the following year, including the minimum amount of capital, are communicated by the Regulatory Authorities.

The rules on capital adequacy for banks define the prudential minimum capital requirements, the quality of capital resources, and risk mitigation instruments. Non-compliance with these capital requirements may have a significant impact on the Bank’s operations and future sustainability.

Liquidity Risk

Liquidity risk refers to the possibility that the Issuer may find itself unable to meet its current and future, anticipated and unforeseen cash payment and delivery obligations without impairing its day-to-day operations or financial position. The activity of the Issuer is subject in particular to funding liquidity risk, market liquidity risk, mismatch risk and contingency risk.

Market Risk

Market risk involves the risk that the Bank’s earnings or capital will be adversely affected by the volatility of market rates or prices such as interest rates, credit spreads and foreign exchange rates. In the event that any of the foregoing market risks were to occur, the Issuer may experience significant losses in the value of its investment portfolio, that would consequently have a significant adverse impact on the operations and financial performance of the Bank as well as the value of its assets.

Concentration Risk

Concentration risk arises due to a high level of exposure by the Bank to individual issuers or counterparties (single name concentration) or a group of connected clients or a high level of exposure within industry sectors and geographical regions (sectoral concentration). Given the size and nature of the domestic financial sector and the local economy, the Bank is exposed to concentration risk in its credit business. The Bank’s investment portfolio may also be exposed to concentration risk derived from excessive reliance on the same country, counterparty, sector or currency. In addition, the deposit base of the Issuer primarily consists of customers located in Malta and other EU countries. As a result, the Issuer is highly exposed to any economic trends affecting Malta specifically and the EU generally, which if negative may have an adverse effect on the Issuer, its business and results of operations and financial condition.

Move from BBR to Euribor

The increase in competition for credit in the local sector is leading to pressure on the Bank to move from its BBR in pricing its loans to Euribor. This situation, if material, would have an effect on the net interest margin of the Bank and would therefore impact the financial position of the Group.

Operational Risk

Operational risk is the risk of loss due to errors, infringements, interruptions and damages caused by inadequate or failures in internal processes or personnel or systems or caused by external events. Any losses arising from such failures, could have a material adverse effect on the Issuer’s business, financial condition, results of operations and prospects and could materially adversely affect its reputation.

Risks relating to Information Technology

The Issuer depends on its information technology systems to process a large number of transactions on an accurate and timely basis, and to store and process substantially all of the Issuer’s business and operating data. The Issuer’s business activities would be materially disrupted if there were a partial or complete failure of any of these information technology systems or communication networks. In addition, any failure or delay in recording or processing the Issuer’s transaction data could subject the Issuer to claims for losses and regulatory fines and penalties.

Information Security Risk

Loss or leakage of confidential information could have a material adverse effect on the operations and performance of the Issuer.

Reputational Risk

Reputational risk is the current or future risk of a loss or decline in profits or share value as a result of a negative perception of the Issuer’s image by customers, counterparties, shareholders, investors or regulators. The Issuer believes that if any of these risks were to occur it could result in a material adverse effect on the operations and performance of the Issuer.

Business Risk

Business risk is defined as a measurement of the variance between unanticipated unfavourable changes in future profit margins of the Issuer and those forecasted. It can lead to serious losses and therefore impact the Issuer’s capital.

Strategic Risk

Strategic risk is the risk of suffering potential losses due to decisions or radical changes in the business environment, improper implementation of decisions, lack of responsiveness to changes in the business environment, with negative impact on the risk profile and consequently on capital, earnings as well as the overall direction and scope of the Bank in the long run.

Risks connected with Legal Proceedings in Progress and Supervisory Authority Measures

As at the date of the Prospectus, the Bank and the Group companies are defendants in several legal proceedings. Moreover, from time to time, past and present directors, officers and employees may be involved in civil and/or criminal proceedings, the details of which the Group may not lawfully know about or communicate. The Group is also required to deal appropriately with various legal and regulatory requirements in relation to certain aspects of its activity, such as conflicts of interest, ethical issues, anti-money laundering laws, client assets, competition law, privacy and information security rules and others. Actual or alleged failure to do so may lead to additional litigation and investigations and subjects the Group to damages claims, regulatory fines, other penalties and/or reputational damages.

Risks related to the Distribution of Dividends

The capacity of the Issuer to distribute dividends depends on the compliance of the minimum applicable capital requirements based on the regulations in force, specifically the overall capital requirements, where failure to comply involves the need to calculate the Maximum Distributable Amount. Therefore, albeit the Issuer may have distributable profits pursuant to its statutory financial statements, the Issuer would not be able to pay dividends in the case of failure to comply with these prudential regulatory provisions.

The distribution of dividends could, also, in future, be excluded or limited by the need to comply with capital requirements laid down by legal and/or regulatory rules applicable to the Group and/or imposed by the rules concerning Maximum Distributable Amount.

Risks associated with Borrowings and Evaluation Methods of the Issuer’s Assets and Liabilities

In conformity with the framework dictated by International Accounting Standards, the Issuer should formulate evaluations, estimates and theories that affect the application of accounting standards and the amounts of assets, liabilities, costs and revenues reported in the financial statements, as well as information relating to contingent assets and liabilities. The estimates and related hypotheses are based on past experience and other factors considered reasonable in the specific circumstances and have been adopted to assess the assets and liabilities whose book value cannot easily be deduced from other sources.

The application of IAS by the Issuer reflects the interpretation and decisions made with regard to said principles. In particular, the measurement of fair value is regulated by IFRS 13 “Fair Value Measurement”.

In addition to the risks implicit in the market valuations for listed instruments, the risk of uncertainty in the estimate is essentially inherent in calculating the value of: (i) the fair value of financial instruments not listed on active markets; (ii) receivables, equity investments and, in general, all other financial assets/liabilities; (iii) severance pay and other employee benefits; (iv) provision for risks and charges and contingent assets; (v) goodwill and other intangible assets; (vi) deferred tax assets; and (vii) real estate. The quantification of these items subject to estimation can vary quite significantly in time depending on certain trends.

Risks arising from the Issuer’s Custody Business

The Issuer acts as custodian to a number of professional investor funds (“PIFs”), UCITS funds and alternative investment funds (“AIFs”) (collectively “CISs”). When acting as custodian of UCITS, AIFs and PIFs marketed to experienced investors, the Issuer is (broadly) in terms of applicable regulation: (a) liable for loss of financial instruments held in custody; and (b) is also liable for all other losses suffered by such investment funds and unit holders therein as a result of the Issuer’s negligent or intentional failure to properly fulfil its obligations pursuant to applicable law. The liability of the Issuer is not affected by any delegation of services. When acting as custodian of PIFs marketed to qualifying and extraordinary investors, the Issuer is, in terms of applicable regulation (broadly) liable for any loss or prejudice suffered by the PIF or the unit-holders due to the Issuer’s fraud, wilful default or negligence including the unjustifiable failure to perform in whole or in part the custodian’s obligations arising pursuant to applicable law and the relevant custody agreement in place. With respect to PIFs marketed to qualifying and extraordinary investors, the Issuer’s liability is similarly not affected by delegation of safekeeping functions, however it may (in certain instances) be varied or reduced with the written consent of the PIF or the manager acting on behalf thereof.

In the event that such liability arises, this could impact the financial performance of the Issuer.

Risks arising from the Issuer’s Trusts Business

The Bank’s trust unit was established in 2005, when the Bank was granted authorisation by the MFSA to offer trustee services in terms of the Trusts and Trustees Act (Cap. 331 of the laws of Malta). The Issuer has decided to wind down its trust business. However until such time as the trust business is wound down and, possibly even thereafter, liability of the Issuer could materialise in respect of the Bank’s trust business due to (amongst others), negligence of the Issuer in the performance of its functions, loss of assets settled on trust and any breaches of the Issuer’s contractual obligations. In the event that such liability arises, this could impact the financial performance of the Issuer. Such liabilities in relation to the trust business are taken into account in the capital allocation of the Issuer.

Risks arising from the Bank’s International Corporate Centre

The Issuer’s international corporate centre (“ICC”) houses a large number of deposit accounts held by the Issuer’s international corporate clients. The level of information required in order for the Issuer to comply with know-your-customer and other due diligence requirements may be very cumbersome when international corporate clients are comprised of complex corporate structures. In such instances, the identification of the ultimate beneficial owners and/or the sources of funds and wealth may be difficult to determine. Such situations present serious legal, regulatory and reputational risks for the Issuer and potential financial risks due to the fact that the Issuer may not be able to detect money laundering and terrorist financing in respect of its international clients.

Risks connected with the Collection, Storage and Processing of Personal Data

The activity conducted by the Group is subject to the rules governing the processing of personal data in terms of the Data Protection Act (Cap. 440 of the laws of Malta) and subsidiary legislation issued thereunder (the “DPA”). The Group has adapted its internal procedures to comply with the DPA. However, the Group remains exposed to the risk that data collected could be damaged or lost, disclosed or processed for purposes other than as permitted in the DPA. The possible damage or loss of customer data, in the same way as its unauthorised processing or disclosure, would have a negative impact on the activity of the Issuer, in reputational terms too, and could lead to the imposition of fines.

Risks connected with the Performance of the Property Market

The Issuer is exposed to the risks of the property market. Any downturn in the property market could result in the Group having to make impairments to the real estate it owns or holds as collateral at a value that is higher than the recoverable value, with consequent negative effects, including significant ones, on the operating results and capital and financial position of the Issuer and/or the Group.

2. Risks relating to the Shares:

  • There can be no assurance that an active secondary market for the New Shares will develop or, if it develops, that it will continue. Furthermore, there can be no assurance that an investor will be able to sell or otherwise trade in the Shares at all.
  • Following the completion of the Rights Issue and the allocation of the New Shares, the price at which the Shares will be traded, as well as the volume of trades, may fluctuate. There can be no guarantee of the price which may be realised by investors in the New Shares. In addition, limited trading in the Shares could increase the price volatility of the Shares and may limit the ability of investors to trade the New Shares in the amount, at the price and at the time desired.
  • The Rights being offered to Existing Shareholders pursuant to the Rights Issue form part of the Issuer’s capital plan. In accordance with the capital plan, the Issuer intends to raise its share capital by approximately €150,000,000. In the event that the Bank is not successful in raising this capital, its capital base and its ability to sustain further growth within the parameters of the new regulatory framework will be significantly curtailed. This could have a significant impact on its overall business, as well as its operational and financial results.
  • Even after the New Shares are admitted to trading on the Official List, the Bank must remain in compliance with certain requirements. The Listing Authority has the authority to suspend trading of the Shares if, inter alia, it comes to believe that such a suspension is required for the protection of investors or of the integrity or reputation of the markets. Furthermore, the Listing Authority may discontinue the listing of the Shares if, inter alia, it is satisfied that, owing to special circumstances, normal regular dealings in the Shares are no longer possible, or upon the request of the Issuer or the MSE. Any such trading suspensions or listing revocations/discontinuations described above, could have a material adverse effect on the liquidity and value of the Shares.
  • The value of an investment in the Shares can rise or fall, and past performance of the Shares is not necessarily indicative of future performance.
  • The subscription of part or all of the Proportionate Entitlement will increase the exposure of Existing Shareholders to the Bank and its future performance. Any additional exposure to the Shares may not be suitable for every Existing Shareholder. In addition, an investment in the New Shares may not be suitable for all investors, including Assignees as well as Employees and other investors subscribing to New Shares pursuant to the Intermediaries Offer.
  • The extent of any dividend distribution by the Bank will depend upon, amongst other factors, the ability of the Bank to improve its current capital base, the profit for the year, the Directors’ view on the prevailing market outlook, any debt servicing requirements, the cash flows of the Bank, working capital requirements, the Board’s view on future investments, and the requirements of the Act.
  • A Shareholder will bear the risk of any fluctuations in exchange rates between the currency of denomination of the New Shares (i.e. the Euro) and the Shareholder’s currency of reference, if different.
  • If an Existing Shareholder does not exercise the subscription rights granted under the Rights Issue, his/her percentage shareholding in the Issuer will decline and his/her voting rights will be diluted. This dilution will be proportional to the percentage by which the share capital of the Issuer is increased and to the extent by which the Existing Shareholder does not participate in the Rights Issue.
  • Investment in the New Shares involves the risk of the loss of the capital invested in the event that the Issuer becomes subject to insolvency proceedings or finds itself failing or at risk of failure which involves the application of resolution tools, including the bail-in tool. In this regard, the BRRD Regulations, provide for the application of resolution tools by the Resolution Committee to credit institutions, at risk of failure, as an alternative to liquidation proceedings. The exercise by the Resolution Committee of any of its powers may have a material effect on the business and prospects of the Issuer. In addition, any bail-in of capital instruments will mean that Shareholders might have some or all of their shareholdings diluted or cancelled without any compensation therefor.

Disclaimer:

Prospective investors are urged to base any investment decision on all the information contained in the Prospectus. The value of investments may increase as well as decrease and past performance is not an indication of future performance. Prospective investors should consult an independent financial adviser for personal advice prior to participating in the Rights Issue.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd is the Joint Sponsor to the Bank of Valletta plc Rights Issue.

This webpage has been prepared based on the Prospectus dated 30 October 2017 issued by Bank of Valletta plc and no representations or guarantees are made by Rizzo, Farrugia & Co. (Stockbrokers) Ltd with respect to the accuracy of the data. This webpage is for information purposes only. It is not intended to be and should not be construed as an offer or solicitation to acquire or dispose of any of the securities or issues mentioned herein. Rizzo, Farrugia & Co. (Stockbrokers) Ltd accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this webpage.

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