The Bank of Valletta Group is declaring a profit before tax of €13.5 million for the six months which ended on 30 June. This represents an annualised return on equity of 2.8%. The group registered a pretax profit of €67.8 million for the corresponding period last year.

Profit before litigation provisions amount to €88.5 million, which is 30% higher than the €67.8 million recorded for the same period last year, and is indeed the highest ever half-yearly profit reported by the Group.

The decrease in profit is wholly attributable to a litigation loss provision of €75 million that the Group is setting aside in the current financial reporting period.

The annualised return on equity before the litigation provision stands at 18.7%, compared to 18.4% for June 2017.

The Board of Directors, having taken note of extensive discussions with regulators, resolved not to declare an interim dividend. Moreover, the board does not intend to recommend a final cash dividend for Financial Year 2018.

Operating profit, stated before deducting this litigation provision, amounts to €84.2 million, an improvement of almost 43% over the corresponding operating profit last year.

The litigation provision consists of a prudential provision against potential losses arising out of ongoing litigation cases, made in terms of IAS 37. Amongst these litigation cases, the bank is currently involved in three material litigation cases. The Board of Directors keeps these cases under continuous review to thus assess the bank's position from time to time in the light of developments as they occur.

Should developments so warrant, the board will take the necessary measures in accordance with the changed circumstances, including making appropriate provisions. Such provisions, including the one forming part of the present financial statements, are made without prejudice, and do not, in any way, constitute any admission of fault or liability on the part of the bank.

The litigation provision of €75 million is being made in the context of changing circumstances affecting the three cases, and following extensive discussion with supervisory authorities.

The most material of the cases is that concerning the bankruptcy of the Deiulemar Group, where the bank is being sued for the amount of €363 million in Torre Annunziata, Italy. This lawsuit concerns trusts which were onboarded by the bank in 2009. The only assets settled in trust with the bank were shares in the ultimate holding company of the Deiulemar Group having a nominal value of €6,000.

The group went bankrupt in 2012, and the lawsuit was filed against the bank as Trustee in 2014 by the curators of the bankruptcy of the Deiulemar Group. The legal advice furnished to the board remains unchanged, namely that the bank has strong legal defences on the merits of the case.

Nevertheless, changing circumstances around the case have led the board to revisit its previous stance, and it has now resolved to recognise a provision to reflect a higher probability of an eventual outflow of funds in connection with the case.

The amount provided represents the best estimate of potential losses in the current situation, and may be re-assessed should further developments so require.

The main developments that have led the board to re-evaluate its position were the issue of a sequestro conservativo for €363 million against the bank in March, and the Appellate Court's decision to decline the bank's appeal against the sequestro on 19 July.

These unexpected events have significantly influenced the board's stance in respect of this case. The board has also considered other developments which continued to shore up its view that an accounting provision in this case is now appropriate.

The bank has, on its own initiative, placed assets under custody with an independent reputable Italian bank, consisting of sovereign bonds with a value of just over €363 million, to make good for the sequestro. This measure did not in any way impact the bank's operations, in view of its situation of high liquidity, and will remain in place until and depending on the eventual resolution of the case.

The bank will keep all litigation cases under continuous review, and will keep the supervisory authorities and the market informed of any material developments. Should developments so warrant, the board will take the necessary measures in accordance with the changed circumstances, including making appropriate provisions.  Such provisions are made without prejudice, and do not, in any way, constitute any admission of fault or liability on the part of the bank.

The other two cases where the bank is facing litigation are the La Valette Property Fund where the bank is appealing against a recent decision by the Arbiter of Financial Cases and the Falcon Fund, which case has not even begun.

The bank's officials who spoke at a press conference on Tuesday were quite scathing as regards the situation at Torre Annunziata where as many as 13,000 residents from a total population of 40,000 had invested in Deiulemar and lost money when it went bust.

Consequently the issue is a very emotional one and there have been protest marches in the streets. Every time the case is heard in court, a massive crowd turns up. The situation seems to have affected the judiciary as well and at one point it was hard to find enough judges to sit on appeal since many had also lost money on the bankruptcy.

The issue was also becoming a bad advertisement for Malta.

The court case is still ongoing and the bank, as said,  believes it has a strong case.

The bank is involved only with the three trusts and not with the running of the entire Deiulemar group which was involved in shipping, real estate and acting as a distributor for Coca Cola in the region.

Total income for the Group, comprising interest margin, fees and trading income, amounted to €127.9 million, compared to €115.5 million last year, an increase of 11%.  Costs were kept under control, rising by 2% to reach €63.9 million even though the bank is engaged in changing the IT system.  The Group also benefited from an improvement in the credit quality of its loan book, which led to a reversal of impairment provisions of €20.2 million.

Lending to customers remains the largest asset on the Group's balance sheet, and showed a satisfactory growth, mostly in the home loans segment.  The management of customer deposits was another key focus for the bank, which was deemed necessary in a period of prolonged low interest rates.  While retail deposits continued to increase in a sustained manner, corporate deposits decreased.  Total deposits with the bank today amount to €10 billion.

Deo Scerri, BOV Chairman, explained that the board is, as always, focused on ensuring the long-term stability and sustainability of the Group, through the build up of strong capital buffers and by keeping the business model under constant review.  "By re-investing profit rather than paying it out in cash, the capital position of the bank will continue to be strengthened, as befits a bank which is considered by international regulation as a systemically important institution for Malta," said the chairman.

The board is, concurrently, implementing a business restructuring programme at BOV with the aim of reducing the bank's risk profile.  This is a medium term programme which will see the bank re-dimensioning or closing down certain non-core businesses and relationships which lie at the periphery of the board's risk appetite, or where the risk being assumed is not adequately remunerated by income generated.

Mr Scerri stated that "these twin strategies of capital conservation and de-risking the business model are the tools which will ensure the long term future of BOV as a safe, sustainable and profitable institution."