Bank of Valletta plc - Full-Year Results
On 18 March 2020, Bank of Valletta plc published its preliminary statement of annual results for the 2019 financial year.
Performance Overview
During 2019, BOV generated €152.9 million in net interest income. This is 2.4% lower than the previous comparable period as the 5.6% decline (or -€3.24 million) in interest expense to €54.1 million was outweighed by the 3.2% drop (or -€6.93 million) in gross interest income. In this respect, BOV explained that despite the higher demand for lending, net interest margins contracted partly reflecting the reduction in income from treasury activities, and partly due to the higher burden of negative interest rates. On the other hand, the bank’s cost of funding in the long term was lower when compared to 2018, reflecting the replacement of matured debt with new bonds at a lower coupon rate.
Non-interest income also declined in 2019 with a drop of 4.3% (or -€4.31 million) to €96.9 million compared to €101.2 million in the 2018 financial year. This was largely due to the sharp drop of 9% (or -€7.31 million) in net fee and commission income which outweighed the surge in trading profits (+€4.22 million) which, however, was boosted by a €5 million fair value gain on financial instruments (FY2018: €1.06 million). In this respect, BOV noted that derisking measures implemented during the course of the year as well as new regulations related to investment products led to a reduction in volume of fees earned on the bank’s various services and products.
In aggregate, the bank’s total operating income fell by 3.1% (or -€8 million) to just under €250 million.
On the expenditure side, total operating costs surged by almost 25% (or +€32.4 million) to €163 million compared to €130.6 million in the 2018 financial year. The bulk of the increase, amounting to €23.9 million, was due to the costs related to the bank’s Transformation Programme which is expected to run over two years. Furthermore, during 2019, BOV continued to invest in its IT infrastructure and human resources, particularly in control functions which, on a normalised basis, led to a total increase in operating costs of 6.5% to €139.1 million.
Given the reduction in income and the higher cost base, BOV’s cost efficiency ratio deteriorated to 55.7% (when excluding the extraordinary costs related to the Transformation Programme, as well as the reversal in expected credit losses and the share of results from insurance operations) compared to 50.7% in 2018. Moreover, BOV’s core operating profit before expected credit losses (and excluding the significant expense in the Transformation Programme) dropped by 13% to €110.6 million compared to €127.2 million in 2018.
BOV’s financial performance in 2019 was boosted by a €11.6 million net reversal in expected credit losses (FY2018: €10.8 million), as well as the considerable increase in income from the bank’s associates (namely Mapfre MSV Life plc and Mapfre Middlesea plc) which almost doubled to €15.9 million compared to €8.21 million on the back of positive market movements. With respect to the reversal in expected credit losses, BOV explained that its proactive approach to delinquent exposures continued to yield positive results. Furthermore, the ratio of non-performing exposures to total loans improved to 4.6% compared to 5.3% as at the end of 2018.
Similar to 2018, BOV took another litigation provision in 2019. This amounted to €25 million compared to €75 million in 2018. The amount of total provisions already provided for by the bank in relation to the Deiulemar Trust and the Falcon Funds Sicav have thus increased to €100 million which, in turn, reflects the likely economic outflows in terms of accounting rule IAS 37.
Excluding the litigation provisions and the extraordinary charges related to the implementation of the Transformation Programme, BOV’s pre-tax profits contracted by 5.5% to €138.1 million compared to €146.2 million in 2018. Conversely, when including all reported items, BOV’s pre-tax profit of €89.2 million for the 2019 financial year is 25.3% higher than the corresponding figure of €71.2 million in the previous year. After accounting for a tax charge of €25.7 million, the bank’s net profit for the year amounted to €63.5 million (FY2018: €51.4) which, in turn, translates into a return on equity of 6.2%.
The Statement of Financial Position as at 31 December 2019 shows that total assets grew by 1.5% (or +€183.6 million) to €12.3 billion. Although customer loans increased by 1.9% (or +€82.8 million) to €4.45 billion, financial assets and investments contracted by 7% (or -€244.9 million) to €3.28 billion whilst assets subject to negative interest rates surged by 7.2% (or +€280 million) to €4.17 billion.
Total liabilities increased by 1% to €11.3 billion, driven by higher balances in customer deposits which, during 2019, grew by 2.1% (or €214.8 million) to €10.6 billion. Nonetheless, the customer loans-to-deposits ratio remained virtually unchanged at 41.8% compared to 41.9% as at the end of 2018. Meanwhile, BOV’s equity base expanded by 6.9% to €1.06 billion which, in turn, translates into a net asset value of €1.819 (31 December 2018: €1.703 per share). The preliminary statement of annual results also noted that the bank’s CET 1 ratio strengthened to 19.5% compared to 18.3% as at the end of 2018.
Dividend & AGM
For the first time since the publication of the 2018 interim financial results, the Directors of BOV are recommending the payment of a dividend which amounts to €0.017 per share (net) which is still subject to regulatory approval. Furthermore, given the extraordinary developments related to the global spread of the coronavirus ‘COVID-19’, the bank decided not to hold its Annual General Meeting on 15 May 2020, and instead postpone the AGM to a future date which will be announced through a separate company announcement. In the announcement, the bank will also determine the cut-off date for shareholders to be entitled to attend and vote at the AGM, the date when the dividend will be paid, and also the cut-off date for shareholders who shall be entitled to receive the dividend.
Outlook
In their commentary, the Directors of BOV explained that during 2019, the bank embarked on a fully-fledged Transformation Programme in order to build a stronger and more effective governance, risk and control framework, and implement more robust anti-money laundering measures. As expected, such measures impacted commission income especially around foreign payment commissions. Moreover, following the cyber-attack experienced in February 2019, immediate steps were implemented to strengthen and enhance the bank’s IT security infrastructure. BOV also successfully installed a new core banking IT system which went live on 1 January 2020.
With respect to the most recent developments related to the ‘COVID-19’, the bank noted that these will most likely have a substantial negative impact on both global and local economies. BOV regularly performs stress tests, including assessment of economic downturn scenarios, as part of its capital planning process to build capital buffers. The existing buffers, supported by measures made available by regulatory authorities, provide significant mitigation against the additional challenges posed by this unprecedented event. A pro-active response programme has been put in place to continually assess and respond effectively to this evolving situation, adjust operations to maintain business continuity and support the safety and health of all of the bank’s stakeholders.
In the coming months, BOV will continue implementing changes to its business model. While the strengthening of capital remains the overarching objective, the bank’s strategy is also focusing on ways how to grow the business, enhance customer experience, improve internal processes and manage costs.