On 18 February 2020, HSBC Bank Malta plc published its preliminary results for the financial year ended 31 December 2019.
During 2019, net interest income increased by 1.4% to €110.1 million (FY2018: €108.6 million) as the 1.1% decline in gross interest income to €120.6 million (FY2018: €121.9 million) was outweighed by the further substantial reduction of 21% in interest costs to €10.5 million (FY2018: €13.2 million). The contraction in gross interest income reflected lower revenues from debt and other fixed income instruments (-18.3% to €7.9 million) which offset the slight increase of 0.4% from interest on loans and other assets. In this respect, HSBC Malta also explained that the strong growth in mortgage business offset the reduction in commercial banking as a result of lower commercial loan balances. Furthermore, the reduction in income from debt and other fixed income instruments was contained. Despite the negative interest rate scenario in the euro area, the bank increased revenues on excess liquidity due to proactive management within the same conservative risk appetite. Overall, the bank’s net interest margin (reflecting the amount of net interest income to gross interest income) remained elevated at the 91.3% level.
Non-interest income also increased by 1.4% to €31.9 million (FY2018: €31.5 million) reflecting the growth of over 30% in net trading income which offset the reduction in other operating income (largely reflecting gains on repossessions and fair-value movements in investment property). The surge in net trading income includes a €1.8 million fair-value gain on VISA shares. On the other hand, net fee and commission income remained virtually unchanged at €22.8 million as the strong fee performance within commercial banking as a result of the new fee structure offset the reduction in fee income within insurance following the sale of a specific insurance portfolio in December 2018. Meanwhile, the bank’s life assurance subsidiary – HSBC Life Assurance (Malta) Limited – reported a decline of €0.6 million in profits before tax to €3.1 million, reflecting adverse market movements in 2019.
Overall, the bank’s net operating income before changes in expected credit losses and provisions increased by 1.4% to €150.4 million (when including the €1.8 million fair-value gain on VISA shares) compared to €148.4 million in the 2018 financial year.
On the expenditure side, total adjusted operating costs dropped by 3.4% to €104.7 million reflecting a number of cost initiatives which more than offset the inflationary costs, new pension expenses and continued investments in digital propositions. Likewise, the bank’s performance was also boosted by a considerable reduction in expected credit losses as these amounted to just €0.39 million compared to the charge of €3.49 million incurred in the 2018 financial year. In this respect, HSBC Malta explained that the much lower charge was driven by a number of recoveries and repayments across both the retail and commercial divisions.
Overall, HSBC Malta reported an adjusted pre-tax profit of €45.3 million which is 24.1% higher than the comparable figure of €36.5 million for the 2018 financial year. However, as previously announced on 18 November 2019, HSBC Malta took a €16 million restructuring provision which was partly offset by a final provision release amounting to €1.4 million related to the €8 million brokerage remediation costs which were originally accounted for during the 2016 financial year. As a result, the net loss incurred by HSBC Malta over the past four years related to the legacy operational failure in the bank’s brokerage business amounted to €2.8 million.
The income tax charge for the 2019 financial year amounted to €10.5 million. This is higher than the charge of €9.86 million incurred in the previous comparable period since during 2018, HSBC Malta benefitted from a different tax treatment applied on a specific transaction. As a result, the net profit figure for the year amounted to €20.2 million compared to €28.7 million in 2018. However, on an adjusted basis, the bank’s return on equity improved to 6.4% compared to 6.1% in 2018.
The Statement of Financial Position as at 31 December 2019 shows that total assets increased by 3% to €6.5 billion, reflecting the 4.7% growth (or +€147 million) in customer loans to a three-year high of €3.26 billion as well as the 6.2% increase in financial assets and investments. On the quality of its lending portfolio, HSBC Malta added that non-performing exposures contracted by 13% over the previous year.
On the liabilities side, the major movement was in customer deposits as these increased by 1.8% (or +€89.1 million) to €4.98 billion. Nonetheless, the loans to deposits ratio still improved to 65.5% compared to 63.6% as at the end of 2018.
Shareholders’ funds grew by 2.4% to just under €470 million. This translates into a net asset value per share of €1.304 compared to €1.273 as at 31 December 2018. The bank’s capital ratios continued to improve during 2019 with the Common Equity Tier 1 capital ratio increasing to 16.4% from 14.6% as at 31 December 2018. Similarly, the total capital ratio rose to 19% from 17% as at the end of 2018. HSBC Malta also added that it is fully compliant with the regulatory capital requirements.
The Board of Directors is recommending a final net dividend of €0.014 per share, representing an increase of 16.7% over the final net dividend per share of €0.012 for the 2018 financial year. Coupled with the interim net dividend of €0.011 per share paid in September 2019, the total net dividend for the year amounts to €0.025 per share (FY2018: €0.038 per share), representing an overall payout ratio of 30% on the adjusted net profit figure. The final dividend will be paid on 15 April 2020 to all shareholders as at close of trading on 5 March 2020.
Commenting on the results, HSBC Malta’s CEO Mr Andrew Beane explained that “HSBC’s financial performance in 2019 exceeded expectations driven by revenue growth in retail banking, excellent progress on cost management and a low level of expected credit losses. Performance in our Commercial and Insurance divisions was less strong and we have taken a number of actions to address this with both businesses demonstrating progress in the final quarter of the year. HSBC’s signature risk management standards and the positive trading performance have again enabled us to generate a dividend for shareholders.”
“Looking to the future, it is clear that the ways customers are using banks is profoundly changing with the rapidly growing adoption of digital services, notably on mobile devices. At the same time, the interest rate outlook has deteriorated which is creating pressure on the profitability of banking across the Eurozone. The Board considered these factors carefully in 2019 and concluded that to succeed over the longer term it was necessary to change elements of our business model in order to both meet these chaining customer expectations, and to enable a transition to a more sustainable cost platform which can accommodate the interest rate outlook. The restructuring actions we announced in October position HSBC well for the future and provide clarity to our customers and employees. The associated one-off costs are reflected in our reported numbers but they have not impacted our divided which has been sustained at the same payout ratio on an adjusted basis.”
“In 2020 we will see the full year benefit of the investment we made in digital last year while making new investments to upgrade our self-service channel and in our re-modelled branch network. I am particularly looking forward to the opening of our national flagship branch in Qormi later this year which will be our largest branch in the country. In our Commercial division we remain Malta’s leading international bank, uniquely able to connect Maltese companies into the global economy and high quality inbound investors to Malta.”
“Turning to the operating environment it is clear that development in the local market have regrettably caused further damage to Malta’s reputation as a financial services centre. Sustainable economic growth requires full compliance with the rules of the international financial system and the reviews of objective international bodies, such as Moneyval, have set out clearly that significant improvements are required. While we welcome the action plans that have been announced, 2020 will represent an essential test of the capacity of Malta’s institutions to demonstrate significant progress.”
At HSBC we are proud of our values and the standards we uphold. Our commitment to invest and remodel our business to further embed these standards in recent years has necessarily resulted in a business which is smaller but stronger. However, this phase of our strategy is complete and, as we evidenced in 2019, the future focused HSBC model is strongly profitable, is producing dividends for shareholders and is protecting our stakeholders from the range of risks we face.”