NEWS | Wednesday, 02 March 2008

Loss of foreign exchange revenue could dent BOV’s mid-year profits

Moody’s confirms D+ rating for BOV

Charlot Zahra

International credit rating agency Moody’s credit rating agency maintained its D+ bank financial strength rating (BFSR) to Bank of Valletta (BoV), which translates into a Baseline Credit Assessment of Baa3. The outlook is stable.
However, the international credit rating agency said in its report that “a more permanent constraint on the bank’s profitability is the loss of foreign exchange trading gains following Malta’s adoption of the euro in January 2008.”
In a Credit Analysis issued on Monday afternoon, the international credit rating agency said the rating was supported by “the bank’s dominant domestic franchise in Malta, bolstered by a solid retail profile, as well as its adequate financial fundamentals buttressed by the good performance of the local economy in recent years”.
However, the rating also reflected key constraints including: “(i) the bank’s lack of core-business geographic diversification; (ii) its high single-party exposures; (iii) the material market risk arising from the bank’s large securities (mainly fixed-income) portfolio and sectoral concentration to financial institutions; and (iv) the credit portfolio’s high sensitivity to the performance of the local economy and the need for a further increase in loan loss provision cover,” Moody’s said in its report on BOV.
In its report, Moody’s said that BoV’s global local currency (GLC) deposit ratings of A3/Prime-1 “additionally take into account Moody’s assessment of a very high probability of systemic support for the bank in case of need; hence, the long-term rating enjoys a three-notch uplift from BoV’s Baa3 Baseline Credit Assessment”.
BoV’s foreign currency deposit ratings were unconstrained by Malta’s foreign currency deposit ceiling. The rating for the bank’s US dollar-denominated senior unsecured debt is A3.
The outlook for all of the bank’s ratings was stable.
In its report, Moody’s said: “BoV’s BFSR is currently well placed within the D+ range. Possible improvements in underlying financial fundamentals are not expected to be sufficient to alleviate the ratings constraints arising from lack of geographic diversification and sizeable concentrations.
“Nonetheless, the bank’s standing within the D+ range would be further secured in the event of the following developments all occurring: (i) a reduction in single-party credit exposures; (ii) a moderation of the sector concentrations in the fixed-income securities portfolio; and (iii) an improvement in BoV’s credit quality.
“In the event that the aforementioned improvements were coupled with a reduction of the corporate governance deficiencies and the successful implementation of geographic diversification strategies, BoV would likely experience positive ratings pressure.
“Given the already very high assessment of systemic support, the most likely scenario in which BoV’s GLC deposit ratings would be upgraded is an upgrade of its BFSR. This would in turn result in an upgrade of the foreign currency deposit rating,” Moody’s said in its report.
The international credit rating agency noted that “although mark-to-market write-downs of BoV’s portfolio of international financial institutions’ fixed-income securities are likely to put a significant dent in its 2008 results, this is not currently expected to impact the bank’s ratings.
“Downward pressure on the BFSR could be triggered by a significant deterioration in the bank’s capitalisation, failure of the bank to defend its franchise and/or a reversal of the improving trend in credit quality, exerting negative pressure on core revenues. Such a scenario is not currently expected,” Moody’s said in its report.
“Lower support assumptions and/or a downgrade of the bank’s BFSR would result in a downgrade of BoV’s GLC deposit rating, which would in turn result a downgrade of the foreign currency deposit rating. Again, such a scenario is not currently expected.
“Write-downs on securities portfolio given spread-widening should not have a long-term impact on profitability, though loss of foreign exchange trading gains may,” Moody’s explained in its report.
The international credit rating agency said that “although BoV’s core business remained solid during 2007 and continued to evolve in line with senior management’s targets, market conditions as they have unfolded since August 2007 have had a bearing on the bank’s bottom-line results.
“Given its core banking business’ geographic confinement to the Maltese market and the bank’s very large share of this market, BoV lacks good credit growth opportunities.
“As a result, Financial Markets and Investments account for nearly 50% of the balance sheet. Investments in international financial institutions’ fixed-income securities booked as Financial Assets at Fair Value Through Profit and Loss make up the bulk of such investments.
“Consequently, although BoV has no direct exposure to the US sub-prime market, the bank’s September 2007 financial year-end results reflect an MTL8.4 million (EUR19.6 million) mark-to-market write-down of financial institutions’ fixed-income securities (in light of broadening credit spreads).
“Bank data for the three months between September and December 2007 suggest that further write-downs resulted in a 40% decline in net income compared to the same period in 2006.
“Nonetheless, the quality of the bank’s securities portfolio is high and, as BoV usually holds many of these securities till maturity, it expects to claw back much of the losses.
“A more permanent constraint on the bank’s profitability is the loss of FX trading gains following Malta’s adoption of the euro in January 2008.
“Consequently, although we expect BoV’s six-month March 2008 results to reflect the aforementioned pressures, we currently maintain a stable outlook on the bank’s ratings,” Moody’s said in its report.
On its part, in its reaction to the Moody’s report, Bank of Valletta (BOV) welcomed the international credit rating agency’s re-affirmation of its credit ratings, first assigned to the Bank last year.
BOV Chief Executive Officer (CEO) Tonio Depasquale said yesterday: “We are pleased that Moody’s has once again acknowledged the strength of the BOV Brand in Malta, highlighting our dominant domestic franchise, which is bolstered by a solid retail profile as well as good underlying financial fundamentals”.
Depasquale said that the fact that Moody’s had confirmed all BOV’s ratings and kept the stable outlook for all of the bank’s ratings “is particularly welcome at this time of extreme volatility in the international financial markets, and the negative impact of the credit crunch on the earnings of financial institutions internationally.”

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