Mood of “heightened caution” on outlook for eurozone
On Friday, the Bank of Valletta Group reported pre-tax profits for the first six months of the Financial Year 2012 (FY 2012) amounting to €49.1 million. This compares with profits of €45.2 million for the equivalent period ended 31March 2011. The Board declared a gross interim dividend of €0.06 per share, which represents an increase of 8 per cent over last year’s interim dividend of €0.0555 per share.
BOV Chairman Roderick Chalmers presented the results to the media, by first putting the bank’s results into a macro-economic context. He noted that the first three months of the current financial year saw a deepening of the eurozone crisis, which was alleviated somewhat by the measures taken by the European Central Bank (ECB), which made available unlimited three year liquidity to European financial institutions through its Long Term Refinancing Operations. In March 2012, the Greek government debt was rescheduled under the so called Private Sector Initiative, which involved all private sector institutions taking losses (or “haircuts”) of 75 per cent on their Greek holdings. Concurrently, the EU member states signed up to a Fiscal Pact, which involved the enactment by the Parliaments of individual member states of legislation obliging governments to conform to “golden rule” limitations on deficit and debt.
Mr Chalmers warned that he believed that it would be a mistake to regard the eurozone crisis as being “over”, as further corrective measures were needed to tackle “the root cause” of the crisis, and it was uncertain whether the austerity measures would receive the necessary degree of public support in a number of countries.
Review of performance
Giving more detail about the Group’s results, Mr Chalmers explained that the Net Operating Profit before fair value movements for the period had remained unchanged compared with the same period of FY 2011 (€47.0 million). Fair value movements for the period showed a small gain of €0.5 million compared with a negative €5.6 million in the first half of the previous year.
As a result, operating profit improved from €41.4 million to €47.5 million.
The improvement in the interest margin contribution to €77.3 million (FY 2011: €67.8 million) was influenced by the sum of €5.2 million recovered from accounts on which interest had previously been suspended. The balance of the increase in net interest margin contribution was the result of higher volumes of advances seen year-on-year.
Net Commission and Trading Income was, as in the previous year, “virtually flat year-on-year”, which Mr Chalmers attributed to “muted” demand for credit and “subdued” investment-related activities due to negative market sentiment in the wake of the deepening eurozone sovereign debt crisis.
Activity in local capital markets remained limited pending a forthcoming revision of bond issuance regulations by the Listing Authority. The local equity market continued to trend downwards on very low volumes – in marked contrast with the broad recovery seen across global equity markets in the first three months of calendar 2012. Foreign exchange business has seen a narrowing of margins in a competitive market environment. However, the bank’s cards business continued to deliver satisfactory results.
Operating expenses increased by 10 per cent over the same period last year, most of which was attributed to personnel, IT, consultancy, legal, professional and regulatory-related expenses. Mr Chalmers reiterated that while the bank’s continuing investment in IT would ensure its sustainability and competitiveness, control of other discretionary expenditure would remain a priority for management. The chairman remarked that investment in customer centric innovation continued to feature as a key element of the bank’s operations. BOV became the first bank in Malta to respond to changing customer preferences, with the recent launch of its mobile customer proposition. BOV Mobile uses the latest technology, harnesses the widespread use of mobile internet, and is set to change the way people prefer to bank and to pay – and has been well received by the market with over 6,600 subscribers signing up in the few weeks since launch.
The bank’s overall credit quality remains satisfactory, with the proportion of non-performing accounts to total loans and advances showing an improvement over the position at September 2011. Nevertheless, the bank continued to build up the collective provision allowance through increasing precautionary allowances in respect of exposures in vulnerable sectors.
The chairman said that the European Central Bank’s decision to grant unlimited three-year liquidity to the European banking sector had a positive impact on credit markets, as a result of which the mark-to-market markdowns seen in the first quarter of FY 2012 were reversed in the second quarter. This resulted in a fair value gain of €0.5 million for the six-month period, as compared with a charge of €5.6 million for the same period in the previous financial year.
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 €1.6 million compared with €3.8 million for the first half of 2011.
Review of financial position
Mr Chalmers also provided an overview of the financial position of the bank. Total assets as at the end of March 2012 stood at €6.7 billion (compared to €6.6 billion in September 2011), while equity attributable to shareholders amounted to €488.8 million (September 2011: €473.2 million). Loans and advances, net of impairment allowances, stood at €3.69 billion, an increase of just €87 million, reflecting the subdued demand for credit over the period. The Non-Performing Loans ratio improved to 4.1 per cent from 5.1 per cent.
The chairman stated that the bank had continued to roll out the JEREMIE initiative in support of small and medium sized enterprises (SMEs), explaining that JEREMIE is a joint initiative with the European Commission and European Investment Fund, and is directed at extending finance to SMEs through the provision of credit risk protection. BOV has committed €51 million to this programme, and as at March 2012, over 250 facilities totalling €22.8 million have been extended to SMEs – with 77 per cent of these facilities being extended to micro enterprises employing less than 10 people. Mr Chalmers cited the programme as another example of the support extended by Bank of Valletta to local enterprises.
Customer deposits, standing at €5.62 billion, increased by €94 million, with modest growth seen in both the retail and institutional sectors, despite the high level of government bond issues and what Mr Chalmers described as “keen ongoing competition for deposits in the domestic market”.
A recent 4.25 per cent Medium-Term Note (MTN) for €40 million was fully subscribed, bringing the total take-up in MTNs to €95.4 million. The MTN programme is aimed at both a wider choice for customers as well as for lengthening the duration of liabilities in anticipation of more demanding liquidity regulations.
Mr Chalmers referred to the affirmation by credit rating agency Fitch of BOV’s credit rating at BBB+ with “a stable outlook” as a welcome development at a time when many financial institutions and sovereigns have been facing downgrades.
During the period under review, the bank continued to manage its balance sheet in a “deliberate and prudent manner”. The bank’s liquidity remains strong with a ratio of 49 per cent while the loans-to-deposit ratio remained largely unchanged at 68.7 per cent. Core Tier 1 Capital stood at 10.8 per cent, up from 10.5 per cent at the end of FY 2011.
Corporate Social Responsibility
Mr Chalmers confirmed the bank’s commitment to fulfil its role as a major presence in the community through its comprehensive programme of Corporate Social Responsibility. The bank dedicates over one per cent of its annual profits to seven different areas – ranging from its high-profile culture and heritage projects to sponsorship of the leading Maltese sports leagues – making it one of the most significant corporate supporters of local society.
Interim Dividend
An interim dividend of €0.06 per share will be paid on 24 May to shareholders on the bank’s Register of Members at the close of business on 10 May 2012. 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,” stated Mr Chalmers.
Outlook
Looking forward, the chairman described the mood for the second half of the financial year as one of “heightened caution”, saying that the ECB provision of liquidity would only be a “temporary palliative” as longer-term solutions would require fiscal and structural reform in the eurozone. He stressed that there was an urgent need to “stimulate economic growth in order to arrest a potentially socially destabilising rise in unemployment”.
Turning to the Maltese economy, Mr Chalmers said it was essential for Malta to continue to develop new sectors of activity, in order to combat any potential slow-down in previously successful sectors. Mr Chalmers noted that there had been a mild contraction in the economy in the last quarter of calendar 2011, and that, in general, business sentiment at the start of 2012 was subdued – both as a result of domestic political uncertainty and, more importantly, as a result of concerns as to the likely economic impact of the austerity measures being implemented by governments across the eurozone. These factors are being offset by stable tourist arrivals, steady employment levels and a solid services sector (including financial services). He noted that there had been “signs of some stress” in certain sectors of the economy – most notably in the construction/property and retail sectors – but that the former was being alleviated somewhat by EU-funded capital projects.