HSBC Bank Malta p.l.c. reported a profit before tax of €62.2m for the year ended 31 December 2016. This represents an increase of €15.4m or 33% on the previous year.

The reported profit before tax incorporates two 'non-recurring' items which are excluded from the adjusted results as it is considered internally as a better reflection of management's performance.

The first item relates to the gain on disposal of the bank's membership interest in Visa Europe. During the first half of 2016 Visa Inc. completed the acquisition of Visa Europe. As a result of this transaction, the bank received upfront cash consideration and preference shares. The total amount of income recognised in the reported results in relation to this transaction is €10.8m.

The second item represents a provision of €8m set aside in relation to a legacy operational and regulatory failure in the bank's now-closed brokerage business. This sum reflects the estimated cost of ensuring that customers affected by this specific issue are not disadvantaged in line with HSBC's commitment to the highest standards of conduct and fairness.

The Bank has self-identified and self-reported the issue to the regulator, Malta Financial Services Authority. This issue relates to 'execution only' trades dealt in by customers purchasing complex instruments without the Bank undertaking an appropriateness test required by MiFID. The bank will contact affected customers directly once final details of the resolution approach are agreed with the Malta Financial Services Authority at which point the final costs will be confirmed.

	2016	2015
	€000	€000
Reported profit before tax	62,221	46,772
Adjusting items:
Exclude the gain on VISA transaction	(10,787)	-
Add the provision for brokerage remediation costs	8,000	-
Add the provision for early voluntary retirement	-	14,668
Adjusted profit before tax	59,434	61,440

Profit attributable to shareholders amounted to €40.2m resulting in earnings per share of 11.2 cent compared with 8.5 cent in 2015. The Board recommends a final gross dividend of 4.1 cent per share (2.7 cent per share net of tax). Together with the interim dividend paid in September 2016, the total gross dividend for the year will be 11.2 cent per share (7.3 cent per share net of tax), which represents a 45% increase compared to the 2015 dividend. The final dividend will be paid on 20 April 2017 to shareholders who are on the bank's register of shareholders at 14 March 2017 

Andrew Beane, Chief Executive Officer at HSBC Bank Malta p.l.c., said: "The bank made significant progress in 2016 through implementation of our strategic plan, achieving a level of profitability on an adjusted basis that was in line with our expectations.  In particular, strong progress was demonstrated on cost management which we signalled as a priority to shareholders in our 2015 results announcement and has enabled us to offset some of the challenges posed by the unprecedented level of interest rates and increased regulatory costs.  The legacy charge relating to our now closed brokerage business is disappointing and dates back to an operational failure that took place some ten years ago.  However, I believe that HSBC's approach to self-identify, self-report and remediate this issue demonstrates to our customers that HSBC is committed to the highest standards of conduct by doing what is right for our customers at all times.

"The local economy continues to perform well and the outlook remains favourable, although it is important that there is continued focus on diversification to avoid an undue level of concentration in certain sectors. However, banking is experiencing a more challenging environment driven by negative interest rates, increased regulatory expectations for higher levels of capital adequacy and for compliance with the highest global standards of financial crime risk management and the need to concurrently fund investment into new digital technology. In the context of these challenges I believe HSBC is uniquely well positioned; we continue to exceed our end-point capital adequacy requirements; we have made transformational investments in financial crime risk management and we are well on the path to bring new digital innovation to Malta; indeed we were particularly pleased to be recognised by The Banker Magazine as Malta's best bank for 2016. 

"In the coming year, while we have a number of priorities including the re-launch of our small business services, embedding our market-leading financial crime compliance standards is our overarching focus.  While we expect this to continue to impact profitability in the short term, it represents an investment in the future of the bank by enabling us to operate a business that is strong, safe and secure for customers, for employees and for shareholders for the long-term. I would like to thank my colleagues for their outstanding commitment to HSBC in 2016 and our customers and shareholders for their continued trust," he said.

All three main business lines, Retail Banking and Wealth Management, Commercial Banking and Global Banking and Markets, continued to be profitable during 2016.

Net interest income was down by 0.5% to €126.4m compared with 2015. The trend of low interest rates persisted in 2016 and continued to have an adverse impact on lending margins in retail and commercial loan portfolios. Yields on the investment book continued to decline as reinvestment rates were considerably lower and attractive reinvestment options remained limited. Furthermore, in March 2016, the ECB lowered its deposit rate to record negative 40 basis points and the bank effectively had to pay interest for placing its excess liquidity on nostro accounts and in money market deals which traditionally earned interest. The reduction in interest expense on deposits partially mitigated the drop in the interest income due to further decline in deposit rates and the continued shift of liability balances towards shorter dates.

Non-interest income decreased by 11% compared with 2015. This was largely a result of risk management actions taken during the year including the demise of stockbroking business and exit of clients outside the bank's risk appetite. In addition, the bank saw a decrease in card fees as the new regulation which introduced the reductions in interchange fees came into effect from the end of 2015. At the same time, the bank recorded higher proceeds from the sale of repossessed properties.

HSBC Life Assurance (Malta) Limited reported a profit before tax of €7.3m, a decline of 17% compared to 2015. While the new protection business generation was up year on year, the net revenue decreased due to lower premiums on the existing insurance policies, adverse impact of yield curve movement and lower management fees on the run-off portfolio of investment policies. 

Operating expenses were €110.3m, €9m or 7.7% lower compared with previous year. The provision for the early voluntary retirement programme of €14.7m launched at the end of 2015 was the main driver for higher 2015 costs. At the same time, operating expenses of 2016 included the non-recurring costs of the provision for brokerage remediation of €8m.

On an adjusted basis, excluding the above-mentioned non-recurring items, operating expenses were down 2% compared with 2015. The implementation of the early voluntary retirement programme during the year had a positive impact on staff costs which were 3% lower than the 2015 level despite further investment in risk and compliance and the annual pay increase agreed under the newly signed collective agreement. Administrative expenses were well controlled and decreased by 1.5% as a result of cost management actions and the favourable effect of currency fluctuations on the cost of outsourced services.

The adjusted cost efficiency ratio, that compares normalised operating expenses to normalised net operating income, was 60%, compared with 59% in 2015.

Loan impairment charges were down 17% compared with 2015. The decrease was largely attributable to better collection on defaulted retail exposures. The bank continued to exercise a cautious approach to provisioning for non-performing loans.

Net loans and advances to customers rose by 1% and stood at €3,320m. The growth was primarily observed in mortgages - this product continued to experience an increased level of demand as the government extended the incentives for first time buyers. The bank continued to monitor the developments in the real estate market closely and to maintain prudent lending practices. In the persisting low interest rate environment, early prepayments in both retail and corporate loan books remained at a high level creating a pressure on the margin and offsetting the effect of the record gross new lending.

Asset quality further improved in 2016 with non-performing exposures at 6.4% of gross loans and advances to customers compared to 7% in 2015. This was achieved through proactive engagement with defaulted borrowers which led to higher recoveri 

Customer accounts increased by 1% to €5,001m in 2016. Deposits from retail customers, the most stable funding, increased by 2% as the bank focused on expanding its primary-banked customer base. The bank sustained a robust liquidity position with the advances-to-deposits ratio remaining at 66% when compared with 2015.

The available-for-sale financial investments portfolio decreased by 13% year on year. The bank maintains its investment portfolio as a high-quality liquidity buffer and invests only in highly rated securities of sovereign and supranational issuers. Record low and often negative yields of many European sovereign bonds coupled with the limited availability of local government bonds made it extremely difficult for the bank to replenish its investment portfolio.

The bank's capital position remained solid. Common equity tier 1 capital increased to 13.0% from 12.4% at the end of 2015. At December 2016, the bank was compliant with its end-point regulatory capital requirements. This enabled the bank to maintain its dividend payout ratio at 65% of the profit after tax, one of the highest in the industry. During the year, the bank adhered to the revised Banking Rule 09 which imposes higher allocations for past due exposures. Taking into consideration the reduction in non-performing exposures referred to earlier, the bank was not required to set aside an additional General Banking risk provision