Bank of Valletta plc - Interim Results

On 31 July 2019, Bank of Valletta plc (“BOV”) published its interim financial statements covering the six-month period ended 30 June 2019.

Performance Overview

During the first half of 2019, net interest income contracted by 1.7% to €77.6 million (H1 2018: €79 million) as the 2.7% decline in gross interest income was only partly offset by the 5.3% reduction in interest expense to €27.2 million. In this respect, the bank explained that gross interest income continued to be negatively impacted by the prevailing unfavourable interest rate scenario as well as the bank’s high level of liquidity which is detrimental in terms of profitability. On the other hand, interest expense was mostly lower due to a contraction in the cost of wholesale funding.

On the other hand, non-interest income grew by 1.9% to €49.9 million (H1 2018: €49 million) as the substantial increase in trading profits to €12.9 million (H1 2018: €7.54 million) offset the 9.6% drop in net fee and commission income to €36.5 million (H1 2018: €40.4 million). The upsurge in trading profits was mainly due to higher positive fair-value movements whilst the lower amount of net fees and commissions reflects de-risking actions that the bank is implementing in line with its long-term ‘Transformation Programme’ strategy.

Total operating income remained virtually unchanged at €127.5 million. Conversely, the bank’s operating costs climbed by 27.4% (or €17.5 million) to €81.5 million largely reflecting higher HR costs (+8.7% to €35.6 million) as well as a significant increase in ‘General administrative expenses’ to €39.8 million compared to €26.3 million in the first six months of 2018. The latter also includes costs related to the implementation of the bank’s ‘Transformation Programme’ (including the engagement of two global consultancy firms) as well as work related to the upcoming replacement of the bank’s core IT system.

The financial performance of BOV was also dented by the non-recurrence of the considerable amount of favourable loan impairment reversals which took place in the first half of 2018. In fact, during the period under review, BOV took a net impairment charge of €0.94 million compared to a net impairment reversal of €20.2 million recorded in H1 2018. In this respect, BOV explained that it maintained a prudent stance towards impairment provisioning and that its strategic decision to adopt a more proactive approach when dealing with legacy non-performing exposures is yielding satisfactory results.

Meanwhile, the contribution from the bank’s investments in the insurance and the life assurance businesses amounted to €9.24 million compared to €4.31 million in H1 2018, with most of the increase emanating from the life company – namely Mapfre MSV Life plc.

Overall, BOV reported a pre-tax profit of €54.3 million compared to the adjusted corresponding figure of €88.5 million in H1 2018 which excludes a litigation provision of €75 million in relation to the Deiulemar case. After taking into account tax charges amounting to €16.1 million, the net profit generated by BOV in the first six months of 2019 amounted to €38.1 million which, in turn, translates into an annualised return on average equity of 7.5%.

The Statement of Financial Position as at 30 June 2019 shows that total assets grew by 1.7% to €12.4 billion when compared to the position as at the end of 2018. The increase was mostly due to higher amounts of liquid assets (namely balances held with the CBM, treasury bills and cash which expanded by €235.8 million to €3.64 billion) as well as customer loans which expanded by 2.9% (or €126.1 million) to €4.49 billion.

Total liabilities increased by 1.5% to €11.3 billion on the back of the 2.1% growth (or +€223.3 million) in customer deposits. The loans-to-deposits ratio improved to 42.2% compared to 41.9% as at the end of 2018. Meanwhile, the bank’s capital base increased to €1.03 billion compared to €994.1 million as at 31 December 2018, translating into a net asset value per share of €1.7722. BOV’s capital ratios strengthened with the total Capital Adequacy Ratio climbing to 22.7% from 21.1% as at the end of 2018, and the Common Equity Tier 1 capital ratio reaching 19.1% compared to 18.3% as at 31 December 2018.

Dividend     

Taking cognisance of supervisory guidance, the Board of Directors of BOV resolved not to declare an interim dividend. However, the recommendation for a final cash dividend will be revisited at the end of the financial year in line with developments taking place in the second half of the year.

Outlook

The bank explained that during the six months under review, it embarked on a holistic ‘Transformation Programme’ that aims at lowering BOV’s risk profile whilst also ensuring long-term sustainability, stability and profitability. Furthermore, the bank invested additional resources towards the strengthening of its overall IT infrastructure, especially following the cyber-attack incident which took place in February 2019.

Looking ahead, BOV explained that one of its main priorities is the conservation and strengthening of its capital position. Furthermore, the bank is focused on widening its pool of overseas correspondent banks (especially with respect to US Dollar clearing) and also on implementing its ‘Transformation Programme’ which, in turn, is a disciplined, structured and pro-active plan where the ultimate aim is to make BOV the financial services provider of choice. The ‘Transformation Programme’ encompasses various targets, including the exit and/or re-dimensioning of business lines where the risk-reward ratio is not in synch with the bank’s strategic, risk management, anti-financial crime and compliance frameworks. The implementation of the ‘Transformation Programme’ is underpinned by the ‘Core Banking Transformation’ programme. The latter is currently at an advanced stage before implementation, and involves the replacement of the bank’s legacy core IT system with a state-of-the-art platform.

Download

Bank of Valletta plc – Interim Report covering the six-month period ended 30 June 2019.