Bank of Valletta plc - Interim Results

On 31 July 2020, Bank of Valletta plc published its interim financial statements covering the six-month period ended 30 June 2020.

Performance Overview

During the first half of 2020, net interest income contracted by 6.8% to €72.3 million (H1 2019: €77.6 million) as the 8.3% decline in gross interest income to a 15-year low of €96.1 million (H1 2019: €104.8 million) was only partly offset by the 12.7% reduction in interest expense to €23.8 million (H1 2019: €27.2 million). In this respect, the bank explained that gross interest income continued to be negatively impacted by the prevailing unfavourable interest rate scenario, a more prudent approach in the bank’s treasury function which, coupled with the very high levels of liquidity, had a detrimental effect in terms of profitability. On the other hand, interest expense was lower due to the continued preference of depositors for call accounts as well as the redemption of the €70 million 4.8% subordinated bonds which matured on 15 March 2020.

Non-interest income also contracted substantially as it dropped by 27.3% to €36.3 million (H1 2019: €49.9 million). The most material declines were registered in trading activities whereby the bank recorded an income of €3.85 million compared to €12.9 million in the first half of 2019. Furthermore, net fee and commission income was 13.6% lower and amounted to €31.6 million compared to €36.5 million in H1 2019. In both cases, the bank’s revenues were impacted by the considerable reduction in economic activity due to the ‘COVID-19’ pandemic. Moreover, a reduction in foreign exchange and commission income was also registered reflecting de-risking initiatives which the bank carried out in recent months.

Overall, the total operating income of the bank dropped by 14.8% to €108.6 million compared to €127.5 million in the first six months of 2019.

On the expenditure side, total operating costs surged by nearly 10% to €89.5 million (H1 2019: €81.5 million) reflecting higher depreciation and amortisation charges, increased insurance and regulatory contributions, as well as further investments in IT and the risk and control functions of the bank. Furthermore, the performance of the bank was further dented by a net expected credit loss of €7.46 million compared to a net reversal of impairment charges amounting to €0.94 million recorded in the first half of 2019. In this respect, BOV explained that in assessing the impairment charge, due consideration was given to the expected impact related to ‘COVID-19’. Judgment was also applied in assessing the probability of default of performing exposures operating in high risk sectors. BOV noted that the asset quality of such exposures remains sound and there is no significant increase in credit risk.

Meanwhile, BOV also generated lower returns from its investments in the insurance and life assurance businesses as these contracted sharply to just €2.09 million compared to €9.24 million in the first half of 2019, with the drop being attributable primarily to losses from actuarial valuations.

Overall, BOV reported a pre-tax profit of €13.8 million compared to the corresponding figure of €54.3 million in H1 2019. After taking into account tax charges amounting to €3.68 million, the net profit generated by the bank in the first six months of 2020 amounted to just over €10 million which, in turn, translates into an annualised return on average equity of 1.92% (H1 2019: 7.5%).

The Statement of Financial Position as at 30 June 2020 shows that total assets grew by 3.6% to €12.8 billion when compared to the position as at the end of 2019. The increase was mostly due to higher amounts of liquid assets (namely balances held with the CBM, treasury bills and cash which expanded by €235.3 million to €3.9 billion) as well as investments which expanded by 7.8% (or +€238.5 million) to €3.31 billion. Customer loans also increased, albeit by a much slower pace, to €4.54 billion compared to €4.45 billion as at the end of 2019. In this respect, BOV explained that demand for new mortgages slowed down significantly as growth in this sector was almost half that experienced in other periods. On the other hand, the bank provided more than €800 million through the granting of moratoria and the sanctioning of new loans to ease temporary liquidity constraints especially from its business customers.

Similarly, total liabilities increased by 3.6% to €11.7 billion on the back of the 4.7% growth (or +€502.6 million) in customer deposits. In view of the much larger increase in deposits than the growth in loans, the loans-to-deposits ratio deteriorated to 40.7% compared to 42.2% as at the end of June 2019 and 41.8% as at 31 December 2019. Meanwhile, the bank’s equity base increased marginally to €1.07 billion, translating into a net asset value per share of €1.83. BOV’s capital ratios continued to strengthen further with the Common Equity Tier 1 capital ratio reaching 19.8% compared to 19.5% as at 31 December 2019. In this respect, BOV also added that its capital plan shows that the capital ratios are expected to remain strong in the coming years both under the ‘business as usual’ scenario including the impact from ‘COVID-19’, as well as under a severe stressed scenario.

Outlook

The bank explained that for the past months it has been working on a new and comprehensive plan of action with a view of achieving more sustainable returns by minimising risk, grow its core business activities, as well as rationalise on costs. Nonetheless, BOV warned that the road ahead will be bumpy as uncertainty looms over how long the economic recovery will take. Although some early signs of recovery have been evident during the last two months, it is not as yet clear whether this will be sustained going forward.

In conclusion, BOV expressed its commitment to continue supporting the local economy through the provision of funds and other measures that may be required to assist the temporary liquidity needs of its numerous clients.

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Bank of Valletta plc – Interim Report covering the six-month period ended 30 June 2020.