HSBC Bank Malta plc - Interim Results Review

HSBC Bank Malta plc published its interim results to 30 June 2008 following a Board of Directors’ meeting held on 25 July.

The Directors declared a gross interim dividend of €0.119 per share (June 2007: €0.1537) on an unchanged payout ratio of 75% of profits. The interim dividend is payable on 22 August to those shareholders as at close of trading on 1 August with the equity trading ex-dividend as from Monday 3 August.

During the first six months of 2008, HSBC registered a 6.5% increase in gross interest income mainly on the back of a further growth in loans and advances to customers (+€146.6 million or 5.2%). However, this increased income was offset by a 19% growth in interest payable due to heightened competition following adoption of the euro. As a result, net interest income decreased by 3.9% to €60.8 million with the margin dropping by 5.4 percentage points to 49.5%.

Net fee and commission income dipped by 0.74% to €15.5 million notwithstanding reduced levels of business activity attributable to the euro conversion and the general elections held in March. The introduction of the euro led to lower foreign exchange dealing income which declined significantly from €8.5 million in 2007 to €3.7 million in 2008. HSBC’s CEO Mr Alan Richards however remarked that during the first half of 2007 the bank experienced very strong pre-euro conversion activity which makes the comparison from one year to the next slightly distorted.

Net gains arising from sale of financial assets amounted to €1 million compared to €3 million in the first six months of 2007. Net insurance claims incurred and movement in policyholder liabilities coupled with other operating income was marginally unchanged at €7.8 million. Overall, non-interest income dropped by 20.3% to €28.2 million with HSBC Malta’s net operating income decreasing by 9.8% in the first half of the year to €89 million. The steeper decline in non-interest income compared to net interest income results in net interest income as a percentage of total income rising to 68.3% of total income (June 2007: 64.1%).

Operating Expenses during the first half of the year increased by 6.1% to €42 million. The charge for depreciation was marginally unchanged at €3.5 million while administrative expenses grew by 6.7% to €38.5 million. HSBC attributed this increase to the one-off costs related to the euro conversion and increased investment in information technology. The increase in expenses coupled with the drop in income resulted in a deterioration in the cost to income ratio to 47.2% (June 2007: 40.1%) – although still commendable by international standards.

Operating profit before impairment allowances decreased by 20% to €47.1 million. After four years of impairment releases, HSBC registered a €0.6 million net impairment allowance as a result of the strong increase in loans. In fact, the Company reported that there was no deterioration in the credit quality of the loan book.

HSBC generated a pre-tax profit of €46.6 million during the first half of 2008, representing a 21.1% decline from the record profitability achieved in June 2007. This decline was described by Chief Executive Officer Alan Richards as “disappointing although the 2007 figure included significantly stronger revenue flows from pre euro conversion foreign exchange and investment dealing activities”. The tax expense for the first six months of 2008 was €16.5 million which represents a marginal tax rate of 35.4%. As a result, profit after tax decreased by 23% to €30.1 million resulting in earnings per share of €0.103.

Total assets as at 30 June 2008 amounted to €5.1 billion representing a 7.8% increase when compared to the value of assets as at 31 December 2007. Customer deposits increased by 12.84% to just below €4 billion while on the liabilities side, loans and advances to customers rose by 9.3% to €3 billion. As a result the advances to deposit ratio declined to 0.74 times from the 2007 figure of 0.77 times. The Directors reported that the investments portfolio classified as ‘available-for-sale’ was marked-down by €7.7 million. However, unlike the policy adopted by Bank of Valletta, this mark-down was not recognised in the income statement but was charged to the revaluation reserve in the Group’s balance sheet. Consequently shareholders’ funds of the HSBC Malta Group as at 30 June 2008 stood at €272.9 million, 3.4% lower than the level as at the end of 2007. Return on equity decreased by 5.8 percentage points from last year’s record level but remains high at 21.6% with return on assets decreasing marginally by 0.8 percentage points to 1.9%.

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