Bank of Valletta plc - Full-Year Results
On 15 March 2019, Bank of Valletta plc published its preliminary statement of annual results for 2018. These are the first set of financial results that cover the twelve-month period from January to December after in June 2017 BOV had changed its financial year end to 31 December from 30 September. As a result, it is important to highlight that the financial performance of BOV from January 2018 to December 2018 is not comparable with that of the previous financial year which covered a fifteen-month period from October 2016 to December 2017.
Performance Overview
During 2018, BOV generated €156.5 million in net interest income. This is, on average, 7% higher than the amount generated between January and December 2017 as the bank managed to offset the negative impact on profitability emanating from the prevailing unfavourable interest rate scenario by increasing lending volumes. Furthermore, BOV initiated an optimisation exercise of its treasury book whilst also experienced lower funding costs on the back of increased customer preference for on-demand deposits as well as the reduction in the cost on other financial liabilities and hedging instruments. The latter also includes the redemption of the €55.4 million 4.8% subordinated bonds on 27 August 2018. As a result, the net interest margin improved to a record high of 73.2% compared to 70.6% for the 2016/17 financial year.
BOV registered further growth in non-interest income which, in aggregate, amounted to €101.2 million. Net fees and commissions increased by an annualised rate of 17.5% to €81.1 million but trading and dividend income dropped by an annualised rate of 12%. In this respect, the bank explained that the good performance in the card business as well as in other areas such as credit, investments and foreign exchange were dented by the bank’s de-risking strategy.
On the expenditure side, total operating costs amounted to €130.6 million, representing an average increase of 8% when compared to the previous corresponding period. The bank’s cost base expanded further as BOV undertook further investments in IT (primarily related to the multi-year Core Banking Transformation programme) and HR. The latter was particularly targeted towards areas that cover anti-money laundering, risk and compliance functions. Meanwhile, BOV posted a positive release of expected credit losses of €10.8 million which, in turn, reflects the bank’s pro-active approach towards debt recovery and the management of legacy non-performing credit exposures.
The preliminary statement of annual results shows that following the €75 million litigation provision that BOV set aside in the first six months of the year, during the second half of 2018 the bank did not take additional similar litigation provisions. The €75 million litigation provision unveiled in H1 2018 is a prudential measure against potential losses arising out of ongoing litigation cases, namely the cases related to the Deiulemar Trust, the La Valette Multi Manager Property Fund and the Falcon Fund SICAV.
Excluding the abovementioned €75 million litigation provision, operating profits amounted to just under €138 million compared to €155.4 million for the fifteen-month period ended 31 December 2017. Accordingly, adjusted operating profits in 2018 were 11.3% higher than the annualised figure of €124.4 million for the 2016/17 financial year.
The contribution from the bank’s associates (namely Mapfre MSV Life plc and Mapfre Middlesea plc) amounted to €8.21 million in 2018. This is much lower than the €19.3 million figure reported in the 2016/17 financial year which, in turn, exceptionally represented an eighteen-month period.
Overall, BOV reported a profit before tax of €71.2 million which, when adjusted to the €75 million litigation provision, translates into a pre-tax return on equity of 14.9%. After accounting for a tax charge of €19.8 million, the bank’s net profit for the year amounted to €51.4 million.
The Statement of Financial Position as at 31 December 2018 shows that total assets grew by 2.8% (or €326.4 million) to €12.1 billion, largely driven by increased amounts of loans to banks (+€213.6 million), loans to customers (+€201 million) and cash and/or quasi-cash balances (+€86.6 million). On the other hand, financial assets and investments contracted by almost 5% (or €179.7 million) to €3.52 billion (31 December 2017: €3.7 billion).
Similarly, total liabilities increased by 2.7% to €11.2 billion as customer deposits expanded by 3.1% (or €314.3 million) to €10.4 billion (31 December 2017: €10.1 billion). Despite the substantial increase in customer deposits, the loans-to-deposits ratio improved to just under 42% from 41.2% as at the end of 2017.
BOV’s equity base expanded by 3.3% to €994.1 million. This translates into a net asset value of €1.873 (31 December 2017: €1.833 per share). The preliminary statement of annual results also noted that the bank’s CET 1 ratio strengthened to 18.3% compared to 16.1% as at the end of 2017.
Capital Plan
As already stated in the announcement relating to the publication of the 2018 interim financial results, the Board of Directors resolved not to recommend the payment of a dividend for the 2018 financial year. On the other hand, the Board of Directors are recommending a bonus share issue of one bonus share for every ten shares held which will be allotted to shareholders as at close of trading on Thursday 6 June 2019. The bonus share issue will be funded by a capitalisation of reserves amounting to €53.1 million.
Furthermore, BOV noted that it intends to issue an instrument, eligible for additional Tier 1 capital, to institutional investors. Moreover, the bank intends issuing a new subordinated bond in Q3 2019 to replace the existing 5.35% subordinated bonds which are due for repayment on 15 June 2019.
Commentary & Outlook
In their commentary, the Directors of BOV explained that the financial results reflect the good dynamics of the Maltese economy. On the other hand, the bank’s performance was dampened by excess levels of liquidity compounded by the low to negative interest rate environment, as well as programmes undertaken by the bank to strengthen its internal resources and implement de-risking initiatives.
Looking ahead, while the results for the 2018 financial year are satisfactory, the Directors noted that the bank’s future remains challenging reflecting its lower risk business model that is being implemented, the changing demographics of the local economy as well as the overall difficult operating environment for all European banks. Moreover, BOV is on course of implementing additional and enhanced IT security measures following the recent cyber-attack which occurred post reporting date.
Meanwhile, the conservation and the generation of capital remain high on the bank’s agenda. In fact, over the coming months BOV intends to raise new capital from institutional investors (which investment will be eligible as additional Tier 1 for regulatory purposes including prudential provisions under the new non-performing loans regulations) as well as new debt to meet regulatory requirements emanating from the ‘Minimum Requirement for Own Funds and Eligible Liabilities’ (“MREL”). As such, BOV’s strategy is to continue building reserves through profit retention and the future dividend payout ratio will be determined with reference to its CET 1 ratio.