Bank of Valletta plc - Long-term Credit Rating Downgraded to ‘BBB+’

On 2 March, the international credit rating agency Fitch Ratings downgraded BOV’s Long-term Issuer Default Rating (IDR) to ‘BBB+’ from ‘A-‘ but maintain a ‘Stable’ outlook. The agency also affirmed BOV’s Short-term IDR at ‘F2’, Individual Rating at ‘C’ and Support Rating at ‘2’. The Support Rating Floor (SRF) has been revised to ‘BBB’ from ‘BBB+’. Fitch explained that the downgrade of BOV’s Long-term IDR reflects its more cautious view on the Bank’s high single-name concentration which increases its vulnerability to any sharp deterioration in asset quality. Fitch stated that given the small size of the domestic economy, the Bank is faced with limited scope for diversification. Fitch’s revision of BOV’s rating follows its assessment of the Maltese government’s ability to support the Bank, which represents over 40% of the aggregate domestic banking assets and about 100% of the country’s GDP. Fitch believes the Maltese government’s propensity to support BOV is very strong however it warned that large banking sector problems could be too much for a small economy to support itself.

Fitch however noted that that BOV’s ratings continue to reflect its satisfactory profitability, sound liquidity and funding position, adequate capitalisation as well as its position as the largest bank in Malta. It also made reference to BOV’s historically weak asset quality by international standards and its reliance on Malta’s small economy. Moreover, Fitch confirmed that funding and liquidity ratios are “sound and supported by a large and stable customer deposit base” with loan/deposit ratios maintained at conservative levels (69% as at 30 September 2010). BOV’s Fitch core capital ratio was 11.7% at the end of 2010 which Fitch views as adequate given the Bank’s risk profile – with fairly high concentrations in assets and weakening asset quality. Fitch stated that BOV’s asset quality weakened during the year ended 30 September 2010 with the doubtful loans over gross loans ratio reaching almost 8% from 6% a year earlier. This deterioration was mainly due to the real estate and construction sector, although Fitch noted that this sector is now showing signs of improvements.

Nonetheless Fitch affirmed that BOV’s profitability is satisfactory as the Bank continued to generate strong revenue in the full-year to 30 September 2010. It also confirmed that BOV has a largely sufficient buffer to absorb significantly higher loan impairment charges. Fitch expects BOV’s profitability to continue to benefit from a more favourable domestic economic environment during the current financial year ending 30 September 2011. Loan impairment charges are however expected to remain higher than in the past, weighing down the Bank’s operating profit.

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