On 20 February 2018, HSBC Bank Malta plc published its preliminary results for the financial year ended 31 December 2017.
During 2017, net interest income dropped by 4.6% to €120.7 million (FY2016: €126.4 million) as the 6.5% decline in gross interest income to €132.9 million was only partly mitigated by the sharp drop in interest expense to a record low of €12.2 million (-22%). The decline in the interest expense was largely driven by the maturity of the €58.2 million 4.6% subordinated bonds in February 2017. The Bank explained that the trend of low interest rates, excess liquidity, and limited investment opportunities persisted in 2017. Moreover, gross interest income was adversely impacted by the reduction in the bank’s corporate loan book and bond portfolio.
Non-interest income slumped by 27% to €40.2 million when compared to the €55.1 million figure of the previous comparable period. However, excluding the one-time gain of €10.8 million related to the sale of VISA shares which took place during FY2016, the reduction in the bank’s non-interest income was of 9.2%, mainly reflecting the bank’s cautious and selective approach towards doing business which, in turn, had an adverse impact on fees, commissions as well as trading income. Meanwhile, HSBC Malta’s life assurance subsidiary reported a profit before tax of €7.3 million which was broadly in line with that of the previous year.
Overall, the bank’s net operating income before loan impairment charges and other provisions declined by 11.4% to €160.9 million (FY2016: €181.5 million).
On the expenditure side, total non-interest expenses of €110.3 million were 3% higher when compared to the previous financial year. In his respect, however, it is important to highlight that during FY2016 the bank took an extraordinary charge of €8 million related the remediation of a legacy operational failure in brokerage business which was partially reversed by €1.8 million in 2017. Moreover, during 2017 HSBC Malta re-examined its approach towards the provision for the collective agreement clauses related to future employee benefits which resulted in an additional charge of €7.6m in 2017 compared with the charge of €2m in 2016. Accordingly, on an adjusted basis non-interest expenses increased by 7.6% to €104.5 million (FY2016: €97.1 million), largely reflecting higher risk and compliance costs which outweighed the 3% reduction in underlying staff costs following the early voluntary retirement programme implemented in 2016.
Another significant development in 2017 was the €1.17 million net reversal of loan impairment charges compared to a net charge of €9.03 million in FY2016. In this respect, HSBC Malta explained that its efforts aimed at improving the quality of its assets resulted in a 20% year-on-year reduction in non-performing exposures, notably in the corporate loan book. In fact, non-performing loans as a percentage of total gross loans dropped to 5.3% as at 31 December 2017 compared with 6.4% in 2016. This resulted in a number of reversals of corporate impairment provisions raised in the past. Furthermore, the bank reviewed its conservative provisioning approach to certain legacy defaulted mortgage exposures as the observed rates of recovery picked up as a result of improved collection practices. In addition, the collateral securing the relative exposures was prudently assessed as adequate, leading also to a net recovery on retail impairment provisions in 2017.
The 2017 pre-tax profit figure amounted to €49.8 million – representing a 19.9% decline from the previous year’s comparable figure. However, excluding the effects of the gains on the sale of VISA shares, the movements in the provision for brokerage remediation costs, as well as the provisions for collective agreement benefits, the adjusted pre-tax profit of HSBC Malta fell by 9.5% to €55.6 million (Fy2016: €61.4 million). The tax charge for the year under review amounted to nearly €19 million (FY2016: €22 million), leading to a net profit of €30.9 million compared to €40.2 million registered in the previous financial year.
The Statement of Financial Position shows a 7% drop in total assets to €6.8 billion (31 December 2016: €7.31 billion), reflecting reductions in both loan balances and financial investments. In this respect, HSBC Malta explained that net loans and advances to customers decreased by 5.8% to €3.13 billion, largely reflecting reductions in the corporate loan book as a result of lower business activity due to bank’s prioritisation of compliance issues. Moreover, several corporate customers chose to replace bank funding with externally issued debt. On the other hand, the bank’s retail loan book expanded by 4.9%.
Similarly, total liabilities decreased by 7.5% to €6.32 billion, largely driven by declines in customer deposits (-4.7% to €4.77 billion reflecting lower corporate deposits in line with the bank’s ongoing review of risk appetite which outweighed the 2.6% increase in retail deposits) as well as liabilities under investment contracts. The advances-to-deposits ratio remained broadly flat at 65.6% (31 December 2016: 66.4%).
Shareholders’ funds expanded by 1.2% to €479 million (31 December 2016: €473.5 million) which translates into a net asset value per share of €1.33 (31 December 2016: €1.314). The bank’s capital ratios continued to improve during 2017 as the Common Equity Tier 1 capital ratio increased to 13.9% from 13.2% as at 31 December 2016 and the total capital ratio added 20 basis points to 14.4% (31 December 2016: 14.2%).
The Board of Directors of HSBC Bank Malta plc is recommending a final ordinary gross dividend of €0.0386 per share (€0.0251 per share net of tax), representing a 5.8% drop from the final ordinary dividend declared for the financial year ended 31 December 2016. However, the Directors are also recommending the payment of a special gross dividend of €0.0854 per share (€0.0555 net of tax). The total net final dividend of €0.0806 per share will be paid on 19 April 2018 to all shareholders as at close of trading on Friday 9 March 2018. Following the interim dividend distributed in September 2017, the total gross dividend for FY2017 amounts to €0.171 per share (€0.1112 net of tax). In this respect, the bank explained that its strong capital position enables it to sustain a payout ratio at 65% and also to pay an extraordinary dividend out of retained earnings.
Commenting on the results, HSBC Malta’s CEO Mr Andrew Beane explained that in 2017, the bank largely completed the changes to its business model in order to meet the highest global standards for compliance and risk management. He added that while these actions reduced profitability during the year due to lower revenues and higher costs, they have materially strengthened the bank’s risk profile and position it well for the future.
Looking ahead, Mr Beane made reference to the strong underlying dynamics of the local economy. Against this background, however, Mr Beane also warned that it has now become essential for Malta “to ensure that growth remains broad based and sustainable and that risks are managed appropriately including an increasing level of long-term risk in the local bond market which has become a greater cause for concern.” Moreover, the CEO added that in 2018 the bank will increase investment in customer service and innovation to support growth over the medium term while sustaining the bank’s conservative credit discipline that supports strong performance through the full economic cycle.