HSBC Bank Malta plc - Full-Year Results

On 19 February 2019, HSBC Bank Malta plc published its preliminary results for the financial year ended 31 December 2018.

Performance Overview

During 2018, net interest income dropped by 10% to €108.6 million (FY2017: €120.7 million) as the 10.5% decline (or -€13.9 million) in gross interest income to €118.9 million was only partly mitigated by the 15.3% drop (or -€1.87 million) in interest expense to a record low of €10.3 million. The decline in the interest expense partly reflects the maturity of the €30 million 5.9% subordinated bonds in October 2018. On the other hand, gross interest income continued to be adversely impacted by the unfavourable low interest scenario and limited investment opportunities, as well as the contraction in the bank’s loan book (-0.6%, or -€18.4 million) and investments portfolio (-3.3%, or -€54.4 million). Despite the drop in net interest income, the bank’s net interest margin improved to 91.3% from 90.8% in 2017.

Net fee income was slightly higher than 2017 as commissions generated from Retail Banking & Wealth Management operations offset reductions in Commercial Banking. The bank also registered growth in net trading income (+2.1%) and also posted an operating income of €3.31 million from other activities compared to an operating expense of €0.72 million in the previous comparable period. In contrast, HSBC Life Assurance (Malta) Limited reported a profit before tax of €3.7 million which is substantially lower than the €7.3 million figure posted in the previous year. This decline was mainly due to positive market movements in 2017 (+€2 million) that were not repeated in 2018 (-€0.2 million).

Overall, the bank’s net operating income before loan impairment charges and other provisions declined by 7.8% to €148.4 million (FY2017: €160.9 million).

On the expenditure side, operating expenses increased by 2% (or €1.9 million) in 2018 when excluding the one-time collective agreement provision of €7.6 million accounted for in 2017. In this respect, HSBC Malta explained that the higher cost base reflects its continued commitment to investments in regulatory programmes, financial crime compliance and business growth. Furthermore, the bank’s results were also negatively impacted by a provision against expected credit losses of €3.49 million compared to a reversal of loan impairments of €1.17 million in 2017, as HSBC Malta reviewed its provisioning approach relating to aged defaulted mortgages which led to a recovery in 2017. On the other hand, and similar to 2017, the bank registered a €2.03 million reversal in the provision related to extraordinary brokerage remediation costs which were originally accounted for during 2016.

HSBC Malta reported a 22.6% decline in profits before tax to €38.6 million (FY2017: €49.8 million). Net profitability was however favourably impacted by a lower effective tax rate of 26% as the bank applied a different tax treatment on a specific transaction. As a result, the drop in net profits stood at 7% to €28.7 million compared to the figure of €30.9 million reported in 2017. The return on average equity for 2018 was 6.12% compared to 6.48% in the previous year.

The Statement of Financial Position shows a contraction of just over 7% in the size of the bank’s balance sheet. This was mostly due to the completion of the transfer of insurance portfolio as announced by the bank in 9 November 2017. Meanwhile, the loans-to-deposits ratio eased to 63.6% from 65.6% as at the end of 2017, reflecting lower volumes of customer loans and higher amount of deposits. In this respect, HSBC Malta explained that the growth of 2% in the retail loan book was not enough to make up for the drop in the corporate loan book which, in turn, was mainly due to both risk management actions as well as a reduction in non-performing loans.

Shareholders’ funds contracted by 4.2% to €458.8 million (31 December 2017: €479 million). This translates into a net asset value per share of €1.273 compared to €1.33 as at 31 December 2017. The bank’s capital ratios continued to improve during 2018 with the Common Equity Tier 1 capital ratio increasing to 14.6% from 13.9% as at 31 December 2017. Similarly, the total capital ratio rose to 17% from 14.4% as at the end of 2017, largely reflecting a subordinated loan issued in December 2018.

Dividend

The Board of Directors is recommending a final net dividend of €0.012 per share, representing a decline of just over 50% from the final net dividend per share of €0.025 for 2017. Coupled with the interim net dividend of €0.026 per share paid on 18 September 2018, the total net dividend for the year amounts to €0.038 per share representing an overall payout ratio of 47.3%. The final dividend will be paid on 25 April 2019 to all shareholders as at close of trading on 14 March 2019.

With respect to the bank’s decision to considerably reduce its payout ratio, HSBC Malta explained that new requirements recently introduced by the European Central Bank (ECB) necessitate the bank to hold additional capital for any unsecured non-performing loans aged over 2 years, as well as secured non-performing loans aged over 7 years that are not entirely provided for and regardless of the security held. Against this background, and in order to ensure that HSBC Malta has sufficient capital to support its future growth initiatives, the Board of Directors is recommending a reduced overall payout ratio.

Outlook

Commenting on the results, HSBC Malta’s CEO Mr Andrew Beane explained that in 2018 the bank continued to cement its highest global standards of compliance which, while reducing profitability, has enabled the bank to continue building a stronger and safer organisation. Mr Beane acknowledged that “2018 was difficult for the local financial services sector which suffered further reputational damage. It is essential that all market participants ensure anti money-laundering standards are fully implemented without delay in order to avoid more significant long-term risks. We welcome new initiatives announced by the local authorities which the industry must fully embrace and support.”

Looking ahead, Mr Beane noted how the local economy continues to perform well, providing HSBC Malta with an opportunity to re-focus its business in order to deliver measured growth. In this respect, Mr Beane explained that the bank’s “retail and wealth management business is trading well and this year we are also in a position to return our commercial division to measured growth following completion of an extensive restructuring process. New digital innovations will create enduring competitive advantage for HSBC as we bring a range of new world class solutions to benefit our customers.”

Regarding the new procedures introduced by the ECB relating to non-performing loans (“NPLs”), Mr Beane said that these “mean that Malta’s current framework for the recovery of security in the event of default requires reform. Banks will be required to hold additional capital against fully secured NPLs as a direct result of the long time to recover through current legal processes. For HSBC the expected impact relates to loans where the bank does not expect to incur additional losses even though the recovery process currently takes years. Looking to the future, the Board is focused on enabling the bank to generate growth for shareholders in this next phase while also ensuring full compliance with the new ECB requirements. Accordingly, whilst we will sustain the bank’s position as a strong dividend generating company, the Board has recommended a final dividend pay-out ratio of 30% in order to allocate additional capital to grow the business and meet the new ECB NPL requirements in the event that reforms to the current system are not forthcoming.”

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HSBC Bank Malta plc – Preliminary Results for the financial year ended 31 December 2018.