The financial results for Bank of Valletta for the year ended 30 September were “very satisfying”, bank CEO Charles Borg said in an interview.
The bank delivered core profits of €100.3 million, in line with the previous year, showing that it has continued to build on its strong points despite the economic and financial crisis both in Malta and abroad.
Core profits reached €100.3 million due to the following factors:
- An eight per cent increase in the net interest income to €147.6 million, mainly due to the bank’s bigger base of over €7 billion. This was achieved despite the low interest rate scenario around.
- A two per cent increase in commission income to €62.4 million, with some increases such as on credit cards and on trade relations especially to Libya and also some decreases, on funds and insurance.
- Operating expenses increased overall by six per cent, mainly because of the collective agreement that was signed – a year late into a three-year period – forcing the bank to pay out the bonuses due for 2011 in this year and giving employees an average increase of three per cent.
Mention must also be made of the bank’s continued investment in IT – an area in which it fully intends to continue innovating and investing. This year it came out with mobile banking and it will continue to invest in this area and in new technologies. The bank will also continue to invest heavily in the card system. In 2010 it announced a €17 million project in this area.
The bank is active on a 24/7 basis and with mobile banking it will be even closer to its customers.
The upgrading of the card management system is ongoing. The bank is also investing heavily in a state-of-the-art new system that will be launched by March next year.
Exceptional items
The bank’s results have been impacted by three exceptional items.
The first is a negative one, an increased provisioning collective impairment of €13.5 million. This is an impairment decision that does not regard specific loans on the loan book but rather reflects how the bank views the market and the industry. The bank feels there are some sectors that are more at risk than others. This is one of the most difficult decisions taken in the financial year. It is by nature a very subjective decision and one that needs to be justified to the bank’s external auditors who will want to know the reasoning behind it. The bank feels it has its feet on the ground and that it has to be prepared for any eventuality. The €13.5 million collective impairment charge is in respect of the property and construction sectors. The bank has been very successful in its backing of the construction sector and helped many constructors with a modified repayment programme when times became difficult. But five or six years ago, very early in the crisis, the bank decided to come out of the sector. It worked with its customers and they pulled back. The bank feels the need to be more than cautious in this regard.
Another sector in which the bank is now being very prudent is in the retail sector. This is another sector that the bank is closely monitoring because of the pressure of intense competition in this sector by very big companies. If the existing businesses in this sector do not adapt to the new situation, they could become a problem. The bank is currently engaged in an ongoing evaluation of the investment portfolio sustained by the loan book, representing a total of €2.5 billion. Most of the investments are ahead of the curve: they repay on a regular basis. This valuation is in turn validated by Bloomberg and other international agencies. At the beginning of the financial year, the Fair Value Movement was very negative because of the euro crisis. In September 2011, it impacted on the Profit and Loss figures by €25 million. Q1 of the financial year saw a worsening by €10 million, but this was almost erased in Q2 and Q3. By Q4, last year’s negative figures had given way to a positive €8.7 million, especially after Mario Draghi’s initiative at the ECB and the realisation that the euro will not disappear. So last year’s €25 million hit has been turned around into a profit of €9 million this year. This represents a turnaround of 135 per cent – a very significant turnaround indeed.
The third exceptional item is in respect of the vexed issues of the La Valette Property Fund and perpetual securities. The LVMMPF and perpetual securities issues have been an unhappy experience both for BOV and for its customers. Last year, the bank bought the Property Fund and made what it felt was a good offer to investors. The bank will continue to work to bring early closure to all material issues relating to the fund and other securities issues – including the early winding up of the fund. The bank is keen to avoid potentially lengthy, complex and expensive court proceedings, which would not be in anyone’s interest. It is going through each file with Malta Financial Services Authority and checking whether the investor could be described as being an experienced investor. Maybe, by the end of the year, this unhappy experience will be over. As regards the perpetual securities issue, the bank has received 138 complaints. Of these, 39 have been settled, in 12 cases the bank has made an offer that the customers are considering, investigations are still ongoing in 48 cases and in respect of the remaining 39, the complaints were not upheld by the bank.
Financial position
Customer deposits at BOV have increased by five per cent, or €285 million, since September 2011.
A look at the growth of customer deposits in recent years shows that this is increasing regularly, notwithstanding the intense competition in this sector both from the government – which has issued bonds at very attractive rates – and also from new banks in the sector that make offers the bank does not feel it can match.
The increase in deposits comes not only from institutional investors but also from individual customers.
Other banks can offer interest at double the BOV rates but the bank feels these rates are too risky. The Deposit Guarantee Scheme – which is funded by the commercial banks, including BOV – no doubt helps assuage any worries in this regard.
There has also been a steady growth in lending by the bank. Some areas, such as business loans, show a lower rate of growth but there is a steady increase in advances. The home loans sector, in particular, has continued to grow and today forms one-third of the bank’s total lending.
In the private sector, there has been a dearth of big investments, such as the building of hotels or other large ventures. Everybody seems to be taking a back seat and the government, for its part, seems to be investing in roads and big projects.
The ratio of gross advances to customer deposits stands at 66.7 per cent. This figure is indicative of the difficulties banks are experiencing in satisfying liquidity levels, especially in times such as these with low returns.
BOV, along with other banks, has to satisfy the Basel III and Capital Requirements Directive (CRD) IV levels of liquidity by 2019. By then, banks must be strongly capitalised and hold a certain level of liquidity.
BOV is ahead of the curve in this, said Mr Borg, but there is still a narrow gap between its present position and the Basel III and CRD IV levels. The bank intends to get there by following the hallowed principle it has adopted in previous years of dividing its profits into one-third to shareholders as a dividend, one-third to the government in taxes and one-third added to the reserves.
This policy has helped the bank in the past and will get the bank to Basel III and CRD IV levels by 2019 without the need to seek extra capital.
The bank is what is called a domestically systemically important bank and this imposes on it obligations that other banks do not have.
As to the European proposal of a single regulator, the bank still does not know how this will affect it. Some seem to be saying that all domestically systemically important banks will be regulated by the ECB while others say that only banks with a global footprint – such as Deutsche Bank or Bank of Santander – will be ECB-regulated and that the others will be regulated by, in Malta’s case, the MFSA and the Central Bank of Malta.
BOV would prefer the latter solution as the ECB solution could lose focus on such a small bank.
As to the CRD IV liquidity levels, the bank is already there, but this has been at the expense of its reserves. Today, for instance, it has lent €400 million to the ECB and earns nothing from it.
When the ECB came out with its LTROs (Long Term Refinancing Operations), this instrument was intended for those banks with a liquidity problem. But BOV knew from the deposits of other banks that the institutional set-up whereby banks used to borrow from each other was almost at a stand-still. That was when the ECB came up with the LTRO offer, which saved the day. Had that not happened, there would have been a world-wide liquidity problem. In those circumstances, the bank took €115 million from the LTRO offer.
When BOV realised the situation had returned to normal, it deposited the money from LTROs back with ECB at a zero rate, hence losing money.
The bank’s board is now about to discuss whether it could repay this by the end of the year.
As for CRD IV levels, a bank must have enough liquidity to last three months. But this militates against the bank earning income: part of its portfolio would not be earning any money.
These new rules definitely affect the bank, said Mr Borg. But the board feels the bank has done well because it has consistently taken the right decisions. The bank’s clients know and appreciate this, which is why they have continued to deposit with the bank.
BOV and SMEs
Over the years, the bank has continued to invest in the Maltese economy. Had it so wished, it could have continued to invest in property as so many were urging it to do, but that would have led Malta to come to grief just like Spain and Ireland.
In recent months, the MFSA has been going through the BOV’s books and the Authority’s conclusions are very close to the bank’s own.
On paper, the proportion of the bank’s advances linked to property may appear large, but that is because the bank, in Maltese tradition, holds property as collateral. The bank carefully monitors the real value of every property used as collateral and where the value has slipped, the debtor has to increase the amount of collateral.
In the last few years, the bank has not seen any new – or any big – new business. It is true that there are many green shoots coming up, such as foreign companies relocating to Malta, online gaming and financial services, but these are not capital-intensive.
Malta, like the rest of Europe, is very strong in SMEs: 90 per cent of the European economy is based on SMEs.
In this regard, BOV has been extra helpful to Maltese SMEs through its JEREMIE (Joint European Resources for Micro to Medium Enterprises) programme. At first, the bank was rather reluctant to become involved, since the programme involved a lot of work and paperwork with rather meagre returns.
But the overall impact has been huge: JEREMIE funds have been obtained to start up a fun train, help manufacturing and retail outlets and install PV panels and the like. Over 430 businesses have been helped and this has turned Malta into a model for other countries, to the extent that other countries are coming to study it.
The scheme is strictly regulated and regularly audited by the EU, and no problem has been found. It is based on a lower level of collateral and has lower interest rates, but it has taken off and has had a tremendous impact on the Maltese economy. It has created new jobs but it will run out next year and the bank is trying to see whether a JEREMIE 2 can be created. BOV’s office in Brussels is actively studying this.
The bank and the future
BOV is trying to look into the future to see where the Maltese economy will be in five years’ time. It is clear there will be new economic sectors, such as the generation of energy, and the bank is getting some interesting proposals in this regard.
But the bank is also aware that new developments can also mean new risks. It wants to help the Maltese economy grow, but in a responsible manner: lines and boundaries must be set in such new areas as alternative energy generation and aviation.