HSBC Bank Malta plc - Interim Results

On 5 August 2019, HSBC Bank Malta plc published its interim results covering the six-month period ended 30 June 2019.

Performance Overview

During the first half of 2019, net interest income dropped by 0.9% to €53.6 million as the 2.6% decline in gross interest income to €63.2 million (H1 2018: €64.9 million) was only partially offset by the 10.8% contraction in interest expense to €9.64 million. In this respect, the bank explained that gross interest income was negatively impacted by the contraction in the commercial loan book interest margin as well as the further decline in the average yield on the investment book. On the other hand, HSBC Malta generated higher income from its mortgage business and also exercised more efficient management of its treasury function.

The financial performance of HSBC Malta was also dented by the 2.2% drop in non-interest income to €19.9 million compared to €20.3 million in the corresponding period last year. Net fee income decline by 6.9% to €11.1 million (H1 2018: €11.9 million) largely reflecting the disposal of a specific insurance portfolio which was concluded in December 2018, as well as lower management fees within the Asset Management subsidiary. Furthermore, the bank registered a substantial decline in ‘net other operating income’ which during the period under review only amounted to €0.88 million compared to €1.85 million in the first half of 2018. On the other hand, these reductions were partly offset by the 7.7% uplift in trading profits to €2.76 million (H1 2018: €2.56 million) reflecting improved income from foreign exchange transactions.

With respect to the performance of its life assurance subsidiary, HSBC Malta explained that this subsidiary reported a 39% increase in pre-tax profits to €2.4 million, largely reflecting favourable market movements. Furthermore, HSBC Life assurance (Malta) Ltd registered a 2% increase in premium income as a result of the growth following the launch of a new employee pension plan.

On the expenditure side, total operating costs were 2.5% lower than the corresponding period last year and amounted to €53.6 million (H1 2018: €54.9 million). The reduction was mainly due to lower HR costs (-1.8% to €24.2 million) as well as initiatives aimed at continuous cost control, outsourcing and processes optimisation. Furthermore, the bank’s financial performance was also positively impacted by an expected credit release of €1.04 million compared to a charge of €3.36 million in H1 2018. In this respect, however, HSBC Malta explained that it continues to maintain a conservative approach to provisioning and the total amount of non-performing loans dropped by 8% to €125 million compared to €136 million as at the end of December 2018.

Overall, HSBC Malta reported a pre-tax profit of €20.9 million which is almost 30% higher than the corresponding figure of €16.2 million in H1 2018. However, in view of the much higher tax charge of €7.32 million when compared to just €1.83 million in H1 2018 (which was positively impacted by an exceptional treatment applied on a specific transaction), the net profit figure of HSBC Malta for the first six months of 2019 amounted to €13.6 million compared to €14.3 million in H1 2018. This translates into an earnings per share of €0.0378 and an annualised return on equity of 5.86%.

The Statement of Financial Position shows a 0.68% increase in total assets to €6.35 billion compared to the €6.31 billion figure as at 31 December 2018. Similarly, total liabilities only increased by 0.5% to €5.88 billion. On the other hand, total shareholders’ funds grew by nearly 3% to €472.1 million which, in turn, translates into a net asset value per share of €1.3102 (31 December 2018: €1.2733 per share). The loans and deposit ratio improved to 65.6% from 63.6% as at the end of 2018 as the bank increased its loan book by 2.3% (or €73.1 million) to €3.18 billion whilst customer deposits dropped by 0.77% (or €37.6 million) to €4.85 billion reflecting lower balances of commercial banking deposits.

HSBC Malta closed the period under review with stronger capital ratios. In fact, the Common Equity Tier (“CET”) 1 capital ratio stood at 16.2% as at 30 June 2019 compared to 14.6% as at 31 December 2018. Likewise, the total capital ratio (“CAR”) increased to 18.8% from 17% as at 31 December 17%. The bank also noted that these ratios are well above regulatory requirements.

Dividend

The Directors of HSBC Malta declared a net interim dividend of €0.0111 per share compared to the €0.026 per share declared for the first six months of 2018. In this respect, the bank explained that the amount of dividend being declared is based on its current payout ratio of 30%, and takes into consideration regulatory developments which are currently underway. These include early-stage discussions with the European Central Bank Single Resolution Board to understand the requirements that will apply for new Required Eligible Liabilities (“MREL”). The latter are likely to further increase capital requirements for the sector and HSBC Malta intends to provide more detail with the publication of the 2019 annual results as these requirements become clearer.

Outlook

Commenting on the results, HSBC Malta’s CEO Mr Andrew Beane explained that the financial performance of the bank in the first half of 2019 is satisfactory as the bank emerges from a period of implementing a risk management strategy with increased momentum. Strategically, HSBC Malta is now focused on delivering a world-class customer service to support growth. In fact, progress registered so far in retail banking is ahead of expectations with significant market share gains achieved in new customer acquisition and home loans without increasing risk appetite. Furthermore, retail banking will also be benefiting from a number of digital innovations that the bank will soon be launching in the second half of this year.

Following completion of significant risk management actions, commercial banking has now stabilised and the performance of the bank’s life assurance subsidiary improved as well. Nonetheless, both divisions require further work to increase profitability and are a strategic focus for the bank going forward.

Mr Beane also noted the progress that the bank registered when it comes to cost control. Additionally, HSBC’s signature credit discipline has delivered further reductions to the risk profile of the bank’s portfolio. As such, while Malta’s economic performance and outlook remain positive, HSBC Malta is positioned for the long-term economic cycle whilst also remaining cautious in growing its exposures to higher risk sectors such as corporate real estate.

The bank also commented positively on the actions currently being taken by the local authorities to reform corporate insolvency practices. In this respect, HSBC Malta explained that its capacity to better use its capital to support lending into the economy and, if appropriate, distribute higher dividends will significantly increase once such reforms are concluded.

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HSBC Bank Malta plc – Interim Report & Accounts for the six-month period ended 30 June 2019.