On Friday, the Bank of Valletta Group reported pre-tax profits for the first six months of the financial tear 2011 amounting to €45.2 million. This compares with profits of €47.5 million for the equivalent period ended 31 March 2010. The Board declared a gross interim dividend of €0.0625 per share, which is in line with last year’s interim dividend (as restated for the bonus issue of January 2011).
Describing the context within which the results were achieved, BOV Chairman Roderick Chalmers said the sovereign debt crisis that has plagued the eurozone since April 2010 has continued unabated. As expected, Portugal followed Greece and Ireland in requesting financial assistance of the EU and the IMF. While Spain and Italy seem to have weathered the storm, it remains to be seen whether Greece’s debt burden is sustainable. “Fortunately, the bank’s exposure to the three more seriously challenged eurozone economies is very limited, but the wider concern is the fear of contagion into the broader euro market should the EU leadership not move in a determined and conclusive manner to secure a long term solution to the current uncertainty,” stated the chairman. He added that the longer this takes, the more likely it is that domestic political pressures in the different European states might make a lasting solution more difficult to achieve.
Mr Chalmers then spoke about the two recent external event shocks – the political upheaval in North Africa, citing Libya in particular, and the tragic aftermath of the earthquake in Japan. Both events have a direct bearing on the local economy – Libya because of the strong business ties with Malta, and Japan because of its global influence as the world’s third largest economy, and the effect on the oil price triggered by the uncertain future surrounding nuclear power generation. The chairman added: “The bank has limited direct exposure in Libya, but some secondary exposure does exist, due to the growing number of Maltese businesses that have been trading with that country in recent years, and the number of Maltese nationals employed there. Overall, the position is very manageable, and we are working closely with our clients to support them through this period of challenging circumstances.” Referring directly to the credit perspective, Mr Chalmers affirmed that, “we have taken a cautious view on this secondary exposure, and have added to our collective allowance in this regard to cater for the higher downside risks. The bigger concerns at this stage are more geo-political than business in nature, particularly as an early solution to the upheaval in Libya is becoming more elusive with the passage of time.”
Review of performance
Giving more detail about the results, Mr Chalmers stated that while there had been a modest increase of four per cent in net operating profit for the period over last year (€47 million in 2011 against €45.2 million in 2010), partly due to a satisfactory turnaround in the contribution to profits from insurance sector interests, fair value movements for the period showed a negative €5.6 million compared with a gain of €5.9 million recorded in the first half of the previous year.
The improvement in the interest margin contribution arose principally from the time lag effect on the re-pricing of deposits and the gradual escalation of rates in anticipation of the expected interventions of central banks to contain inflationary pressures. The ECB announced the first increase in rates in almost three years − a 25 basis points (0.25 per cent) increase in its intervention rate − in early April. Turning to Net Commission and Trading Income, Mr Chalmers described the situation as “virtually flat year-on-year” stating that, “demand for credit has been muted, and investment related activities have been subdued, as negative sentiment returned to the markets in late 2010 and early 2011 in the wake of the continuing eurozone sovereign debt crisis.” The slowing down of local capital markets activity in bond issuance was attributed by Mr Chalmers in part to the publication of new regulations by the Listing Authority. “Foreign exchange business has been satisfactory, and our cards business continues to deliver improved results,” said Mr Chalmers, “while operating expenses for the period increased by just 1.6 per cent over the same period last year.”
While the economic conditions have had a knock-on effect on credit quality, Mr Chalmers described the specific impact on the BOV loan book as “modest and manageable”, and stated that the higher impairment charge reflects the bank’s “prudent and cautious outlook,” as well as a precautionary allowance in respect to indirect exposure to the current events in North Africa. “Overall,” Mr Chalmers said, “credit quality remains satisfactory.”
The chairman described the eurozone sovereign debt crisis as one that “continues to trouble the credit markets,” saying that this uncertainty and the gathering inflationary pressures have caused spreads to widen, reflected in a fair value charge for the six months of €5.6 million (as opposed to a credit of €5.9 million during the same period to 31 March 2010).
On a final note explaining the summary results, Mr Chalmers turned to BOV’s insurance sector interests, through its holdings in MSV Life plc and Middlesea Insurance plc. The share of profits from this sector amounted to €3.8 million, compared with a loss of €3.6 million for the first half of 2010.
Interim Dividend
The Board has resolved to declare an Interim Dividend of €0.0625 per share, which is in line with last year’s interim dividend (as restated for the bonus issue of January 2011). This dividend will be paid on 26 May to shareholders on the bank’s Register of Members at the close of business on 12 May 2011. The final dividend “will be determined by the Board later in the year, and will take account of the results for the year as a whole, as well as the conditions prevailing at the time,” Mr Chalmers said.
Outlook
Looking ahead, the chairman described the mood for the second half of the financial year as one of heightened caution due largely to the potential wider impact effects of the events in North Africa on the local economy, as well as continuing eurozone tensions. Apart from a subdued demand for credit, it is expected that trade finance business will be adversely affected by the disruption in Libya. On a more positive note, Mr Chalmers cited tourism, employment data, and export sectors as ‘holding up’. In addition, significant capital works programmes co-funded by the EU should provide a welcome boost to the construction sector. “As always, we will continue to manage our capital and balance sheet in a cautious and prudent manner, while providing support to Maltese business in a dependable and responsible way,” concluded Roderick Chalmers.