On 30 March 2021, Bank of Valletta plc published its Annual Report for the financial year ended 31 December 2020.
During 2020, BOV generated €146.8 million in net interest income. This is 4% lower than the previous comparable period as the 19.7% decline in interest expense to €43.5 million was outweighed by the 8.1% drop in gross interest income. In this respect, BOV explained that despite the higher demand for lending, net interest margins contracted further reflecting the reduction in income from treasury activities as well as the higher burden of negative interest rates.
Non-interest income also declined in 2020 with a drop of 12.5% to €84.8 million compared to €96.9 million in 2019. This was due to the sharp drops in net fee and commission income (-8.9%) and trading profits (-25.2%) mostly as a result of the significant disruption that COVID-19 had on economic activity.
In aggregate, the bank’s total operating income contracted by 7.3% to €231.6 million compared to just under €250 million in 2019.
On the expenditure side, total operating costs increased by 4.5% to €170.4 million (2019: €163 million) as the higher HR costs (+11.4%) and depreciation and amortisation charges (+47%) outweighed the reduction of 8.5% in general administrative expenses. Given the reduction in income and the higher cost base, BOV’s cost efficiency ratio deteriorated to 66.8% (on an adjusted basis) compared to 55.7% in 2019.
The bank’s financial performance was severely dented by a net impairment charge of €56.5 million which is much higher than the net charge of €13.4 million recorded in 2019. In this respect, BOV explained that it took on additional expected credit losses in relation to long outstanding legacy non-performing exposures which coupled with the impact of the COVID-19 situation on credit quality offset an €8.58 million litigation provision reversal related to the Swedish Pensions Agency. Meanwhile, the bank recorded lower income from its associate investments (namely Mapfre MSV Life plc and Mapfre Middlesea plc) which amounted to €10.5 million compared to €15.9 million in 2019.
Overall, BOV reported a profit before tax of €15.2 million (2019: €89.2 million) which, however, includes a number of significant one-off items including the impact of COVID-19, the surge in impairments as well as the costs specifically related to the continued implementation of the bank’s ‘Transformation Programme’. After accounting for a tax charge of €1.4 million, the bank’s net profit for the year amounted to €13.8 million (2019: €63.5 million) which, in turn, translates into a return on average equity of 1.3%.
The Statement of Financial Position as at 31 December 2020 shows that total assets grew by 1.5% to €12.9 billion mostly due to the increases in customer loans (+6.6%), investments (+6.8%) and liquid assets (+3.5%). Total liabilities increased by 5% to €11.8 billion as customer deposits grew by 6% to €11.3 million. Nonetheless, the loans-to-deposits ratio improved marginally to 42.1% compared to 41.8% as at the end of 2019. Meanwhile, BOV’s equity base expanded by 1.4% to €1.08 billion which, in turn, translates into a net asset value of €1.845 per share (31 December 2019: €1.819 per share). The bank’s CET 1 ratio strengthened to 20.9% compared to 19.5% as at the end of 2019 whilst the Total Capital Ratio climbed by 1.4 percentage points to 24.5%.
In line with the regulators’ recommendation, the Board of Directors decided not to declare a dividend for the 2020 financial year.
In their commentary, the Directors of BOV explained that the bank embarked on a strategy that is aimed at ensuring the long-term sustainability of the organisation. The retail banking business model is changing rapidly as the record low interest rates continue to exert pressure on the net interest margin. Technological innovation across most business lines and steep regulatory demands for systemic banks such as BOV are changing the traditional banking landscape. BOV is not only accepting these changes but is using them as catalyst for a major shift from the use of cash and cheques to the use of electronic banking channels.
The bank noted that although 2020 has been exceptionally turbulent, its ambitious strategic plan is directing the bank to deliver marked improvements in the ways it operates and in the quality of service it offers to its customers.