HSBC Bank Malta plc - Interim Results

On 3 August 2020, HSBC Bank Malta plc published its interim results covering the six-month period ended 30 June 2020.

Performance Overview

During the first half of 2020, net interest income eased by 0.2% to €53.5 million as the 9.2% decline in gross interest income to €57.4 million (H1 2019: €63.2 million) was mostly offset by the sharp contraction in interest expense to just €3.97 million compared to €9.64 million in the first half of 2019. In this respect, the bank explained that the positive impact of its revised interest rates paid on customer deposits, coupled with the growth in the retail lending book, led to a stable net interest income performance which however continued to be adversely affected by the further decline in the average yield on the bank’s investment book.

Non-interest income fell considerably to €8.07 million compared to €19.9 million in the first half of 2019. The main reason for this considerable drop emanated from the much lower contribution from the bank’s insurance subsidiary which reported a loss of €8.9 million compared to a profit before tax of €2.4 million in H1 2019. The performance of HSBC Life Assurance was negatively impacted by revaluation losses as a result of adverse market conditions (equity and interest rates), actuarial adjustments and lower trading activities as a result of ‘COVID-19’. On the other hand, HSBC Malta noted that its other main drivers in the non-interest income segment had a satisfactory performance when considering the significant contraction in macro-economic activity in Malta in general due to ‘COVID-19’. In this respect, the bank recorded an aggregate drop of 4.8% (or -€0.67 million) to €13.2 million (H1 2019: €13.9 million) in net fee, commission and trading income as the additional fees generated within the ‘Commercial Banking’ segment following the introduction of new fees were offset by the lower activities within the cards, payments, insurance and credit divisions.

The performance of HSBC Malta was further dented by an expected credit loss amounting to €8.68 million (H1 2019: credit release of €1.04 million) which the bank recognised in view of the prevailing adverse circumstances due to ‘COVID-19’. The bank explained that in its assessment, it incorporated the probability weighted outcome of different forward economic scenarios at portfolio level while noticing some increases in specific credit losses in both the retail and commercial units which, however, are not material.

On the expenditure side, total operating costs were 4.7% lower than the corresponding period last year and amounted to €51.1 million (H1 2019: €53.6 million). The reduction was mainly due to lower HR costs (-7.1% to €22.5 million) as well as general and administrative expenses (-4.8% to €25.2 million), reflecting the first results from the implementation of the bank’s revised strategy announced in October 2019 which focuses on technological innovations and a more cost-effective operating model. In contrast, the bank incurred higher depreciation and amortisation charges (+17.8% to €3.44 million) reflecting the higher level of investments especially in IT and the modernisation of the retail network.

Overall, HSBC Malta reported a pre-tax profit of €1.81 million compared to the corresponding figure of €20.9 million recorded in H1 2019. After taking into account tax charges amounting to €0.64 million, the net profit generated by the bank in the first six months of 2020 amounted to €1.18 million (H1 2019: €13.6 million) which, in turn, translates into an annualised return on average equity of 0.5% (H1 2019: 5.9%).

The Statement of Financial Position shows that total assets increased by 1.6% to €6.6 billion compared to the €6.5 billion figure as at 31 December 2019. The growth was primarily due to the higher balances in liquid assets (namely balances held with the CBM and other banks, treasury bills and cash) which expanded by €103.7 million to €1.37 billion. Customer loans also increased, albeit by a much slower pace, to €3.29 billion (+€32.3 million) compared to €3.26 billion as at the end of 2019, largely reflecting strong growth across the ‘Commercial Banking’ lending book whilst retail lending remained stable. On the other hand, balances held in financial assets and investments contracted by 3.2% (or -€54.8 million) to €1.64 billion (31 December 2019: €1.7 billion) as the bank continued to take a conservative approach towards investing its surplus liquidity.

Similarly, total liabilities increased by 1.7% to €6.13 billion mostly due to the 3.4% increase (or +€168.1 million) in customer deposits to €5.14 billion (31 December 2019: €4.98 billion) which was partly offset by the drop in liabilities under investment and insurance contracts (-€36.3 million to €805.9 million). As a result of the higher increase in customer deposits than loans, the loan-to-deposit ratio deteriorated to just under 64% compared to around 65.5% in 2019. Meanwhile, the bank’s equity base dropped marginally to €468.9 million, translating into a net asset value per share of €1.301. Nonetheless, the bank’s capital ratios continued to strengthen further with the Common Equity Tier 1 capital ratio reaching 16.6% compared to 16.4% as at 31 December 2019. Likewise, the Total Capital ratio increased to 19.3% compared to 19% as at the end of 2019.

Dividend

In line with the recommendation by the European Central Bank that eurozone banks should not make dividend payments during the pandemic, regardless of capital strength, the Board of Directors of HSBC Malta elected not to declare an interim dividend. In a separate announcement, the bank also explained that in view of the latest directives issued by the ECB, it is also withdrawing its earlier recommendation for the payment of a final dividend for the 2019 financial year. HSBC Malta noted that it intends to provide an update on the dividend policy at the year-end results for 2020 when the economic impact of ‘COVID-19’ is better understood, taking into account the views of its shareholders, the interests of other stakeholders as well as other factors including the bank’s financial performance and capital position.

Outlook

Commenting on the results, HSBC Malta’s CEO Mr Simon Vaughan Johnson explained that the first six months of 2020 have been both challenging and transformative. As a result of ‘COVID-19’, the financial performance of the bank suffered in line with the rest of the Maltese economy. Nonetheless, the bank continued to provide support to its numerous customers and lay the foundations for the eventual recovery and growth in the future. HSBC Malta reiterated its commitment towards its ‘Safe Growth’ strategy as it remains committed to maintaining a strong risk management culture with zero appetite for financial crime risk.

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HSBC Bank Malta plc – Interim Report & Accounts for the six-month period ended 30 June 2020.