HSBC Bank Malta plc - Full-Year Results Review

HSBC Bank Malta plc published its full-year results as at 31 December 2008 following a Board of Directors meeting held on 20 February.

The Directors recommended a final gross dividend of €0.096 per share (net: €0.062) to be approved by shareholders at the Bank’s Annual General Meeting scheduled to be held on 1 April. The final dividend will be paid on 20 April to those shareholders as at close of trading on 27 February.

During 2008 HSBC registered a 3.3% increase in gross interest income following continued growth in loans and advances to customers. However this increase was offset by a 10% rise in interest payable on deposits due to heightened margin compression. This interest compression resulted from a combination of increased competition and the lowering of the base rate by the European central Bank in the last quarter of 2008. The net effect was a 2.5% decline in net interest income to €123 million compared to the €126.2 million recorded in 2007.

Despite lower business activity in the first quarter of 2008 due to the euro conversion and the general elections the Bank recorded a 2.5% rise to €31.8 million in net fees and commission income partly due to a €1 million rise in fees relating to card usage. On the other hand, the euro adoption in January 2008 resulted in a substantial drop in foreign exchange dealing income to €7.8 million compared to the €16.8 million recorded in 2007.

Net gains arising from sale of financial assets amounted to €2.8 million, 21.2% less than that registered in the previous year. Income from insurance activities substantially declined from €5 million in 2007 to a loss of €8.9 million in 2008. This drop is attributable to the significantly lower premiums earned and the €29.4 million loss incurred in fair value movements on the investment portfolio held by the Bank’s insurance division. These losses outweighed the substantial decline in insurance claims. Other operating income for 2008 was recorded at €31.8 million compared to the €15.8 million generated in the previous year mainly due to the 25% increase in the life assurance business profitability and the €3.5 million gains from property disposals and revaluation on property investment. Overall, non-interest income dropped by 9.9% to €65.3 million with HSBC’s net operating income declining by 5.2% during 2008 to €188.3 million. Net interest income now accounts for 65.3% of total income compared to 63.5% in 2007 due to the steeper decline in non-interest income.

Operating Expenses rose by 7.9% to €89.2 million as the Bank incurred one-time costs in administrative expenses. The latter increased by 8.7% as wages and salaries climbed 11.3% to €55.5 million, due to an exceptional charge to support a voluntary early retirement scheme whilst general expenses grew 3.8% to €27.7 million mainly due to non-recurring costs related to the euro conversion and information technology investment as well as higher utility and communications expenditure. The depreciation charge was marginally unchanged at the €6 million level during 2008. It is important to note that if one excludes the one-time charges relating to the euro conversion and early retirement scheme, operating expenses remained flat in 2008 compared to the level incurred in 2007. The increase in costs was reflected in a rise in the cost-to-income ratio which now stands at 48%, up from 42.1% in the previous year.

HSBC recorded an operating profit before impairment allowances of €98 million, 14.6% less than the 2007 figure. The Bank incurred a net impairment charge of €1.9 million during the period under review, substantially higher than the marginal charge accounted for in 2007. This rise is attributable to the continued growth in the loan book and to lower recoveries compared to the high recovery levels of 2007. Despite this increase, the impairment charge is just six basis points of the Bank’s loan portfolio as the credit quality remains good with non-performing loans as a percentage of net loans improving to 2.3% (Dec 07: 2.9%).

The Bank’s pre-tax profit for the year 2008 stands at €96.1 million representing a decline of 16.2% over the previous year. Despite this heavy decline, CEO Alan Richards stated that “Considering the introduction of the euro and the volatility of world financial markets, HSBC Bank Malta achieved a set of solid results in 2008.” After accounting for a tax charge of €33 million (marginal tax rate of 34.3%), HSBC’s 2008 profit stands at €63.1 million, 17.3% less than 2007 profitability. This was mirrored in a drop in earnings per share to €0.216 compared to €0.262 recorded in the previous year.

Total assets as at 31 December 2008 amounted to €5.3 billion, 8.5% higher than the 2007 assets value. Customer deposits remained marginally unchanged at the €4 billion level whilst loans and advances to customers rose 10.3% to €3.1 billion. The increase in loans and advances to customers compared to the minimal decline in deposits results in the advances to deposit ratio to rise to 0.78 times from the December 2007 level of 0.7 times. Despite recording a €9.7 million marked down in the Bank’s available-for-sale investments portfolio, charged net of tax to revaluation reserve, the Directors assured that the credit quality of these investments remain strong and these write-downs will be reversed over the long-term. Notwithstanding this write-down, shareholders’ funds as at 31 December rose by 2.1% to €282.5 million. Return on equity slid 416 basis points to 22.6% with return on assets decreasing to 1.9% compared to the 2.5% recorded in the previous year.

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