Bank of Valletta plc - Interim Results & Dividend Announcement

On 29 April 2008 Bank of Valletta plc published their financial results for the six months ended 31 March 2008.

The key highlights are:
• Net interest income up 1.2 per cent to €64.4 million;
• Net fee and commission income down 3.9 per cent to €16.5 million;
• Foreign exchange income down to €7.7 million from €11.7 million;
• Negative fair value movements on overseas investments at €25.8 million;
• Pre-tax profit of €25 million (2007: €56.6 million);
• Shareholders’ funds of €400 million.

During the six months to 31 March 2008, net interest income generated by the BOV Group marginally increased to €64.4 million on continued growth in the loan book counteracted by the rise in interest payable on customers’ deposits. Net fee and commission income edged 3.9% lower to €16.5 million. This slight drop was attributable to a slowdown in volumes within the asset management and stockbroking divisions following the weak performance of both equity and bond markets. Income generated from foreign exchange activity dropped to €7.7 million during the first half of the financial year from €11.7 million in the comparative period. This decline in foreign exchange earnings is attributable to Malta’s adoption of the euro on 1 January 2008.

The main item which negatively impacted the half-yearly results was the ‘fair value movements’ on the Bank’s overseas investment portfolio. During the period under review the BOV Group recognised a markdown in value of €25.8 million. This severe downturn resulted from the international financial market crisis in recent months but is considered by the Board of Directors as being a ‘temporary correction’. During a stockbrokers meeting also held on 29 April, BOV Chairman Mr Roderick Chalmers spoke at length about the causes of this writedown. Mr Chalmers stressed that the Bank does not have any holdings related to US sub-prime mortgages, Asset Backed Securities or Collateralised Debt Obligations and to date the Bank has not suffered any default on any of its overseas investments. The Chairman on the other hand explained that the Bank’s investment portfolio is of a very high quality (92.5% rated ‘A’ and higher) and a short duration (80% are of less than 5 years to maturity). Given BOV’s strong liquidity position, Mr Chalmers stated these bond investments are being held until redemption at which point the Bank is expected to receive the full face value of the investment. As such, the Chairman noted that the significant markdown experienced in the six months to 31 March 2008 is expected to be recovered gradually over the coming years as the bonds come up for redemption.

Total operating income amounted to €62.9 million in the first six months of the year, 31% 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 €3.1 million in the first half of the year from €4.7 million. This decline was mainly as a result of a higher tax incidence but also due to the volatile financial markets which affected the respective companies investment returns.

The Group’s expenses increased by 4.6% during the first six months to €39.5 million mainly due to the one-off euro adoption costs which totalled €0.8 million. In fact the Chairman revealed that after adjusting for the euro changeover costs, the increase in expenditure was contained at 2.6%. The cost to income ratio climbed to 60% following the sharp drop in operating income. However, if one excludes the significant investment markdowns, BOV’s cost to income ratio remained at a healthy level of 43.2% (Mar 2007: 39.3%).

BOV recognised a net impairment charge related to loans and advances of €1.5 million (Mar 2007: €1.8 million) with the Chairman reporting 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 4.3% as at 31 March 2008. Group pre-tax profit amounted to €25 million and after accounting for taxation and minority interests, the profit attributable to shareholders amounts to €16.9 million (Mar 2007: €37.9 million).

Group total assets as at 31 March 2008 amounted to €5.6 billion. Net loans to customers increased by €186 million (+7%) during the first half of the year to €2.8 billion. The Bank reported that the growth in lending resulted from a wide range of business sectors as well as sustained demand for home loans. Deposits from customers also grew strongly in the first half of the year with a rise of €214 million (5%) to €4.5 billion. BOV’s advances to deposits ratio remained at a prudent level of 62%. Shareholders’ funds as at 31 March 2008 of €400 million translate into a net asset value per share of €3.00.

The Directors declared the payment of a gross dividend of €0.135 per share (€0.0878 net of tax) to all shareholders on the register of members as at close of trading on Tuesday 6 May. The interim dividend represents an increase of 3.3% over last year’s dividend despite the drop in profitability which was solely attributable to the exceptional markdowns on the Bank’s overseas investment portfolio. The dividend is expected to be paid on 28 May 2008.

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