Profit warnings from banks

In recent weeks, the number of company announcements issued by companies listed on the Regulated Main Market of the Malta Stock Exchange increased substantially. Many announcements by both equity and bond issuers related to the ‘COVID-19’ pandemic and how this is impacting the various aspects of their business. Moreover, these announcements in the main also coincided with the annual financial reporting season for most companies due to their financial year ending in December. As such, apart from the ‘COVID-19’ updates, most equity and bond issuers also published their 2019 annual financial statements over recent weeks except for those companies such as International Hotel Investments plc and Medserv plc that required an extension in line with the Public Statement issued by the European Securities and Markets Authority on 27 March 2020 (regarding publication deadlines under the EU Transparency Directive) and the circular issued by the Listing Authority on the same subject matter.

Last week, the two major retail banks also issued their Interim Directors’ Statements to update the market on their financial performance and business trends during the first quarter of the year. As indicated in several articles in the past, the formal requirement for companies to publish semi-annual Interim Directors’ Statements was removed over four years ago following changes by the European Commission to the Transparency Directive.

This notwithstanding, a few of the equity issuers in Malta replicated the approach taken by most companies across international financial markets who continued issuing such statements (or ‘Trading Updates’ as they are commonly referred to in the UK) to keep the market updated with the most important developments taking place.

The two announcements published last week by Malta’s largest retail banks can be considered as ‘profit warnings’ which should not be surprising giving the current circumstances and the announcements being made by most banks internationally.

HSBC Bank Malta plc issued an Interim Directors’ Statement explaining that prior to the outbreak of the ‘COVID-19’, the bank had a strong start to 2020 with business volumes ahead of the prior comparable period coupled with reductions in costs as well as growth in the loan book. Although the bank did not experience a material increase in specific credit losses, HSBC decided to take an expected credit loss provision of €7 million reflecting the potential impact of ‘COVID-19’ in general. HSBC’s performance in Q1 2020 was also dented by the negative fair value movements on the investment portfolio held by its life insurance subsidiary as a result of which, the HSBC Malta Group recorded a loss before tax of €7 million during the first quarter of 2020. The bank reiterated that its capital buffers remain “exceptionally strong” and that its “long-established conservative approach to risk” places it in a “strong position” to withstand prevailing challenges.

On its part, Bank of Valletta plc did not provide actual figures in its announcement, particularly for expected credit losses as the bank explained that since “the duration of the current situation will be a key determinant of the extent to which any ultimate credit losses may arise … any forecasts at this stage would be speculative”. Instead, BOV noted that mainly due to the ‘COVID-19’ pandemic, its financial performance was “somewhat below expectations” as some adverse effects started to emerge towards the end of March. BOV reported in its Interim Directors’ Statement that although “the situation on impairment provisions remained favourable to date … the current difficult trading environment for our customers is likely to necessitate further provisions”.

Another very important part of the announcement issued by BOV related to the two major litigation cases involving the Deiulemar Trust and Falcon Funds SICAV. While it was previously anticipated that resolutions might take place in the near term, BOV explained that negotiations (in the case of the Falcon Funds SICAV) and proceedings (in the case of the Deiulemar Trust) are being impacted by the current ‘COVID-19’ situation and final conclusions may be deferred to 2021. It was interesting to note that despite the delays, the Board stated once again that the amount of provisions taken to date amounting to €100 million “will prove sufficient”. As such, at this stage, the Directors do not consider “that any further provision will be necessary”, thus confirming the statement made in the 2019 Annual Report which said that “the Bank considers the provisions recognised to date to be sufficient to cover any likely requirements of the Bank to settle its claims”. BOV also reported that while the decline in income levels and potentially growing credit losses will lead to reduced profitability in 2020, its capital buffers continued to strengthen in the period under review.

Malta International Airport plc is also expected to issue its own statement shortly as it generally publishes its Q1 financial highlights around mid-May and its Q3 financial highlights by the first half of November.

Given the current extraordinary circumstances, the publication of Interim Directors’ Statements becomes even more important since investors need more timely information in order to take any decisions that may be necessary when reviewing their investment portfolios. The various companies whose equity is listed on the Regulated Main Market of the MSE should make every effort to provide quarterly key performance indicators.

For example, following the lifting of certain restrictions by the Government as from last Monday 4 May, companies owning retail complexes and retail outlets such as Main Street Complex plc, Plaza Centres plc, PG plc and Tigné Mall plc should have seen some resumption of activity in most of their outlets. In view of the closure of the various outlets as from 23 March, it would be resassuring for investors to understand how the revenues of these various companies will be impacted throughout the course of 2020. As such, the publication of Q1 and Q3 financials apart from the complete disclosure of financials within the half-year financial statements and the annual financial statements will enable the investing public to have a clearer picture of what the impact from ‘COVID-19’ might look like.

Although all businesses are facing unprecedented challenges, it is equally important for the executive management and the directors to understand that the investing public is also facing difficult times and the provision of additional information is of paramount importance especially as a result of the cancellation or suspension of dividends by many companies which is placing additional pressures on those investors reliant on a steady and predictable flow of income from their financial investments.

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