Bank of Valletta plc - Full-Year Results Review

Bank of Valletta plc published its full-year results to 30 September 2008 following a Board of Directors’ meeting held on 31 October.

The Directors declared the payment of a final gross dividend of €0.0675 per share (Sep 2007: €0.1122) to all shareholders on the register of members as at close of trading on Wednesday 5 November.  This dividend will be put forward for shareholders’ approval during the Annual General Meeting on 17 December.  Together with the gross interim dividend of €0.135 per share paid in May, the total gross dividend in respect of the financial year amounts to €0.2025 per share (Sep 2007: €0.3921) resulting in a dividend payout ratio of 67.2%. The final dividend is expected to be paid on 18 December 2008.

During the year under review, the Group’s net interest income decreased by 2.6% to €126.1 million (Sep 2007: €129.5 million).  Despite a 4.3% rise in gross interest income to €291 million, interest expenses climbed by 10.3% to €165 million.  The increased competitive pressure for loans and deposits led to a reduced interest margin (43.3% from 46.4% in 2007), while the drop in interest rates and euro adoption created a negative impact resulting from the time lag between the maturity of deposits and the immediate drop in interest on the loan book.

The Group’s total non interest income declined to a negative €6.4 million mainly as a result of the negative fair value movements on the bank’s investment portfolio. The BOV Group also registered lower fee and commission income and a drop in profits from foreign exchange activities.  Net fee and commission income declined by 4.4% to €33 million mainly due to a slowdown in volumes within the asset management and stockbroking divisions resulting from the disruption in the financial markets which consequently impacted investor behaviour. The adoption of the euro saw foreign exchange earnings decline by €10 million to €13 million.

BOV adopted IAS 39 which implies that the Bank’s investment portfolio is ‘marked to market’ and any changes in the value of its bond holdings must be directly reflected in the income statement.  BOV held an exposure to Lehman Brothers Paper and as a result of the bankruptcy of this American investment bank, BOV recognised a loss of €12.7 million from this investment alone.  Apart from the direct hit from the collapse of Lehman, the Bank also accounted for “unrealised” losses of a further €41 million on its portfolio as various bond prices declined in value especially in the aftermath of the Lehman demise.  In fact these writedowns increased by €14 million in the final two weeks of BOV’s financial year which coincided with the peak of the financial market crisis.  BOV’s Chairman stated during the Stockbrokers’ meeting held on 31 October 2008 that the Bank does not hold any investments in US sub-prime mortgages, Asset Backed Securities or Collateralised Debt Obligations i.e. toxic assets.  The Bank’s portfolio is of a very high quality with 89% of total exposures in securities rated A- or higher and having an average of 3.5 years to maturity. During the meeting, Mr. Chalmers explained that given BOV’s strong liquidity position, at above 50% against a regulatory minimum of 30%, the bank did not fire sale any of its debt securities in the highly strained and distressed market conditions that have prevailed over the past year. The Bank confirmed that it will retain its investments through to redemption at which point BOV is expected to receive the full face value of the investment.

Total operating income amounted to €119.8 million during the year, 29% below the income in the comparative period. The share of profits from associates and jointly-controlled companies involved in insurance activities (Middlesea Valletta Life Assurance Co. Ltd. and Middlesea Insurance plc) dropped to €1.7 million from €5.8 million reported last year. This profitability decline was also severely affected by the volatile financial markets.

BOV Group’s expenses increased by 5.2% during the year to €77.8 million mainly due to a new staff collective agreement signed by the Group which became effective on 1 January 2008 together with the one-off euro adoption costs of around €1 million. The cost to income ratio climbed to 64% (2007: 42.2%) reflecting the sharp drop in operating income. BOV recognised a net impairment charge on its loans and advances of €3.1 million compared to a €0.4 million recovery last year.  The Chairman reported that the credit quality of the loan book continued to improve as shown by a further drop in the ratio of non-performing loans as a percentage of total net loans. This ratio has decreased to a multi-year low of 4% as at 30 September 2008. Group pre-tax profit amounted to €40.6 million and after accounting for taxation and minority interests, the profit attributable to shareholders amounts to €26.1 million (Sep 2007: €67.9 million).

Group total assets as at 30 September 2008 totalled €6.2 billion. Net loans to customers increased by €418 million (+15.9%) during the year to €3 billion. The Bank reported that the growth in lending resulted from carefully selected increases to various business sectors as well as a sustained demand for home loans.  The Chairman highlighted that the bank has a very low delinquency rate in its mortgage portfolio. Deposits from customers also grew strongly during the year to €4.6 billion from €4.3 billion with such growth experienced in both euro and foreign currency deposits. BOV maintained a conservative loan to deposit ratio of 66%.  Shareholders’ funds as at 30 September 2008 of €393 million translate into a net asset value per share of €2.95.  The Group’s pre-tax return on equity (profit after tax divided by average shareholders’ funds) decreased to 10.2% (2007: 26.4%). Return on assets (profit before tax divided by average assets) also declined to 0.68% (2007: 1.83%).

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