Bank of Valletta plc - Interim Results

On 29 July 2021, Bank of Valletta plc published its interim financial statements covering the six-month period ended 30 June 2021.

Performance Overview

During the first half of 2021, net interest income increased by 1.5% to €73.4 million as the further 3.3% decline in gross interest income to €92.9 million was outweighed by the 18% reduction in interest expense to €19.5 million. In this respect, the Bank explained that gross interest income continued to be negatively impacted by the prevailing negative interest rate scenario and the increase in customer deposits. On the other hand, BOV continued to register steady growth in home loans and in corporate loans issued in support of businesses under the ‘BOV MDB COVID-19 Assist Scheme’. Moreover, the Bank’s cost of funding was favourably impacted by the redemption of the €70 million 4.8% subordinated bonds in March 2020.

In contrast, non-interest income surged by 11.3% to €40.4 million as net fee and commission income increased by 8.6% to €34.3 million whilst trading profits also grew substantially to almost €6 million compared to €3.85 million in H1 2020. Despite the rebound, the Bank noted that its performance continued to be dented by the pandemic, especially in relation to foreign exchange business due to reduced foreign trade and travel. Meanwhile, the results for the first half of 2021 include: (i) a €1.5 million refund of customer fees and charges which are currently being discussed with regulatory authorities; and (ii) a gain on Visa shares of €1.2 million.

Overall, the total operating income of the Bank grew by 4.8% to €113.8 million compared to €108.6 million in the first six months of 2020.

On the expenditure side, total operating costs climbed by a further 10.2% to €98.6 million reflecting the higher level of investments amounting to €17.1 million (H1 2020: €5.8 million) in the ‘Anti-Financial Crime Transformation’ as well as in the implementation of the ‘BOV 2023 Strategy’. On an adjusted basis, operating expenses eased by 2.6% to €81.5 million reflecting lower consultancy fees as some aspects of the Bank’s de-risking programme reached completion. Conversely, the Bank incurred an operating loss of around €1 million in relation to refunds made to customers who were recently targeted in fraudulent scams.

BOV’s financial performance was boosted by: (i) a net impairment reversal of €3 million compared to a charge of €7.46 million incurred in H1 2020; as well as (ii) the much higher contribution of €7.63 million (H1 2020: €2.09 million) from the Bank’s insurance associates (namely Mapfre Middlesea plc and Mapfre MSV Life plc) which, in turn, was largely driven by an increase in market value of investments and higher written premiums.

Overall, BOV reported a pre-tax profit of €25.9 million compared to the corresponding figure of €13.8 million in H1 2020. After taking into account tax charges amounting to €6.44 million, the net profit generated by the bank in the first six months of 2021 amounted to €19.4 million which, in turn, translates into an annualised return on average equity of 3.59% (H1 2020: 1.92%).

The Statement of Financial Position as at 30 June 2021 shows that total assets grew by 6.4% (or +€822.5 million) to €13.7 billion when compared to the position as at the end of 2020. The increase was mostly due to higher amounts of: (i) liquid assets (+€428.9 million to €4.23 billion); (ii) investments (+€260.8 million to €3.71 billion); and (iii) customer loans (+€186.3 million to €4.93 billion). Similarly, total liabilities increased by 6.8% to €12.6 billion on the back of the substantial growth in customer deposits (+€286.1 million) and amounts owed to banks (+€481.4 million). In view of the sharper percentage increase in customer loans to customer deposits, the loans-to-deposits ratio improved to 42.6% compared to 42.1% as at the end of 2020. Meanwhile, the bank’s equity base increased marginally to €1.1 billion, translating into a net asset value per share of €1.876. BOV’s capital ratios remained stable with the Common Equity Tier 1 and Total Capital Ratio remaining at 20.9% and 24.5% respectively.

Dividend

The Board of Directors of BOV resolved not to declare an interim dividend. In this respect, the Bank explained that a return to a stable and predictable dividend is not advisable at this stage given the risks in the overall economic environment, the litigation risks BOV is facing, and the need for capital to support the ongoing transformation strategy over the coming months.

Litigation Update

BOV noted that the Deiulemar litigation situation has not changed during H1 2021. The Bank maintains its position, based upon robust legal opinions, that the claim is wholly without merit. An offer to settle out of court made during 2020 was based solely upon a desire by BOV to end this long-standing matter quickly to remove uncertainty and avoid costs associated with addressing the matter. This would also enable the Bank to make a more effective use of its capital surplus. Significant efforts continue on a number of fronts to resolve this situation and no additional provision for litigation was considered necessary.

Outlook

Commenting on the results, BOV Chairman Dr Gordon Cordina explained that: “Bank of Valletta remains profitable, well-capitalised and liquid, as it emerges from the stresses imposed by the pandemic on its lending portfolio and other assets. Also, greylisting has not implied any immediate significant concerns, thanks to the de-risking programme implemented by the Bank which accelerated in recent months and which is expected to be completed in the current year. A significant prolongation of greylisting status could however have important longer term implications for the Bank’s performance.”

“Prospects for the second half of 2021 point to a continued economic recovery and the rollout of the first tangible results of the transformation strategy. The Bank will nevertheless retain its prudent stance towards credit provisioning, sustain its efforts to combat financial crime in all of its forms, while ensuring that its systems and operating methods become more customer-centric.”

“The Board will be actively reviewing its dividend policy later in the year as results are crystallised, the strength of our capital to meet future risks is better ascertained, and in line with the recommendations of our regulators.”

‘Greylisting’ of Malta

In relation to the recent decision by the Financial Action Task Force to place Malta on its greylist, BOV noted that this development is not expected to have an immediate impact on the Bank’s operations and rating. However, greylisting could raise transaction costs and impact cross-border transaction flows for the whole banking sector. Increased monitoring by foreign banks and counterparts is also expected. Initial indications are that BOV’s international trading partners had factored in such an eventuality, but the Bank will watch closely as there remains a risk that a prolonged period before removal from the greylist may lead to some potentially changing their view.

The Bank explained that it has robust policies and disciplined practices to support its commitment to protect its customers and society from financial crime. Over the past years, BOV invested heavily in a comprehensive Anti-Financial Crime transformation programme and as a result strengthened the Anti-Financial Crime controls and enhanced its automated systems for the monitoring of payments and transactions and customer screening, amongst others.

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Bank of Valletta plc – Interim Report covering the six-month period ended 30 June 2021.

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