The Bank of Valletta Group announced pre-tax profit for the financial year ended on 30 September 2013 (FY 2013) of €115.8 million. This represents a five per cent increase over the €110.7 million reported for the equivalent financial period ended 30 September 2012.

On the face of it, this was a very satisfactory result, CEO Charles Borg told me in an interview. Actually, it was the highest profit ever registered by the bank.

But a closer look at the components of the results shows that some segments reported very good results: there were also some one-offs, but there were also some negative results.

Core business suffered a €14 million (11 per cent) decrease especially in the interest margin.

One reason for this was the low interest rate scenario in which the bank is operating. The bank’s investments amount to €2.2 billion and the bank has consciously gone for low-risk investments. This in itself guarantees low returns but the bank is now finding that when it comes to reinvesting in the sector, the returns being offered are even lower than the ones that were there before.

This is not happening only in Malta or with regard to the bank’s investments, it is happening everywhere. Ironically, the bank has a very big portfolio of investments: had it lent more it might have obtained a better result.

The bank has registered an increase in deposits – an increase of more than €400 million, or seven per cent, the biggest increase registered so far.

But this too increases the liabilities of the bank. Again, if one compares this with a hypothetical increase in advances, this is in effect idle money.

On the other hand, the bank registered some exceptional items that will not be replicated that easily.

Thus fees and commissions have registered an increase. The major part of this increase comes from cards, not through increased fees, Mr Borg hurries to tell me, but through increase usage of cards.

The bank also benefited from a higher income from sale of investment products, especially from Valletta Fund Management which handles funds, apart from the bank’s ventures in bancassurance and wealth management, credit related fees, foreign exchange and trade finance.

One other contributor to the bank’s results came from market movements, mainly the valuation of the bank’s assets lost in the bad years of 2008 and 2009 and now almost completely recouped.

The bank’s fair value gains, amounted to €17 million – even this is an exceptional item.

The bank’s results have also been affected by the results of MSV Life and MSI which registered a combined profit of €12 million (last year €6 million).

The bank has also contributed to the results it has registered through ensuring that cost increases were kept to a minimum – just 1.7 per cent. The bulk of this was due to the cost of the workforce and increased spending on IT. The collective agreement runs out at the end of this year but negotiations for a renewal have run into recognition problems.

Then, too, most of the 1.7 per cent increase was regulatory-related. The bank is having to pay more into the Deposit Guarantee Scheme: its contribution has increased both because of its increased deposit base but also because the contributions are on a three-year moving scale upwards, this year being the last tranche.

The bank prides itself on being extremely cost-conscious.

There were then other reasons why the bank felt it had to be exceptionally prudent notwithstanding the record profit.

The bank, along with all the other banks in the eurozone, faces new regulatory rules, both as regards the Basle 3 rules and the CRD 4.

The bank is one of three banks in Malta that is to be examined in the near future by the ECB.

The biggest criticism local banks face from the IMF as well as the ECB is that most of their collateral relies on the value of property. IMF and ECB have both been insisting that Maltese banks should increase coverage and provisioning.

The valuation of property is a rather subjective valuation. The provisioning increase is not due to there being deterioration in quality but because the bank took a prudent view of collateral securing non-performing loans. 

The impairment losses registered last year were subdivided into €6.5 million in specific (charge) loans and €13.5 million as collective loans.

This time, the bank decided to take a conservative approach regarding the valuation of collateral. Its results meant it could do it, and the bank did not want to find itself in a position that the ECB would, in the future, force it to do this exercise when the bank might not be in a position to do so.

So this time, the bank decided to consider €21.5 million as being specific and just €1.5 million as being collective.

Specific allocations have thus increased by 23 per cent and total allocations amount to €64 million or 51.4 per cent of the loan book.

This is a first big step for the bank to take and what the bank could do this year. Next year, regulations could force the bank to do this.

The bank is moving into being regulated by the ECB. In fact, this week the bank is one of 130 banks attending a preliminary meeting in Frankfurt with the ECB so as to prepare for the asset quality review.

All this has absorbed €25.6 million out of the bank’s profits.

With regard to balance sheet items, deposits have increased, as said, by €411 million or seven per cent. This is a record, as the bank has never registered an increase of €400 million.

This was achieved notwithstanding intense competition especially from the small banks that have sprouted. The bank can still offer its clients an extremely good service. This is the reason why the bank has €6.2 billion in deposits.

Where are these deposits coming from? One half of the increase came from Maltese depositors – the bank enjoys huge trust by the Maltese even though competing banks offer extraordinary rates that the bank cannot offer.

Another segment, amounting to some €200 million are from corporate clients, mostly on a very short-term basis. Many of these clients are foreigners operating out of Malta.

The bank today is in a healthy situation. Its loans and investments are financed by deposits only. The bank has come out of the LTRO and MRO regimes and has paid back the €170 million to ECB because of the extra liquidity the bank has.

The shift is to short-term deposits especially with regard to current, savings and one-month term deposits.

As regards lending, this is very much a mixed sphere. The loan book is down by a little, some €50 million. However, at the end of it all, the bank has still lent €233 million.

One reason for this dip is that the bank had a few facilities which ended their loans, especially some big projects. Such loans may not be repeated in the foreseeable future. The bank continued to register growth in its Home loans business.

The bank still enjoys some 43 per cent of the market share of home loans, which constitute one-third of its loan book.

Finally, the bank’s intention is to diversify.

The bank has a huge responsibility to Malta, as it has 19,000 small shareholders. Any additional burden imposed on the bank will be an additional, unacceptable burden on these shareholders, even more than it will be on the government or Unicredit, the two big shareholders.

The ECB has long been warning banks to recapitalise and Mario Draghi said recently he expects some banks to fail. This is not a prospect that looms on BOV’s horizon. The coming examination by ECB on banks’ balances will be a tough one but BOV is well prepared for it.

It’s Tier 1 rating is 11.7, well above the minimum of eight required by the EU. This will increase to 14 by 2019. The bank is confident it will reach the Basle 3 Tier 1 rating of 14 before it becomes compulsory, through reinvesting part of the profits.

This is why the bank needed to exercise prudence in discussing its dividend. The ECB stress three concerns, namely

? financing,

? capital, and

? liquidity

The bank is already on target in relation to liquidity and it is ready to lose out on the profits it can make to ensure its stability and sustainability in the long run.

Over the coming months, the bank will be one of a select group of 130 banks that will be closely examined by the ECB. It will carry all the obligations required, which will be the same required of giant financial services providers like Santander, Deutsche Bank and Unicredit. It will also face new reporting requirements.

In the future, Bank of Valletta will also be facing increased regulatory processes, both on the local and international sphere, still an uncharted territory. It agrees with the regulator about banking union but its benchmark will always be higher.

The bank has always prioritised long-term sustainability, and retained its vision for growth. It is continuously exploring new areas of business. For instance, it intends to open up more to aero companies. This is an uncharted area for the bank, but it believes there are huge opportunities ahead.

The bank also intends to increase its presence in the energy generating business. Other new areas of business will be announced later on as they materialise.