News | Wednesday, 05 May 2010

BOV’s ‘encouraging’ results

Bank of Valletta Group reported pre tax profits for the first six months of the Financial Year 2010 (FY 2010) amounting to €47.5 million. This compares with profits of €6.3 million for the equivalent period ended 31st March 2009. The Board declared a gross interim dividend of €0.075 per share (March 2009: €0.028 per share, gross).
Describing the results as “solid, satisfactory and encouraging”, BOV Chairman Roderick Chalmers provided extensive context during a press conference to announce the results.
“Whereas stability and confidence have been restored to the global financial and banking system, the crisis of 2008-2009 caused significant and potentially lasting damage to the global economy,” remarked the Chairman. He added that Governments around the world continued to face the challenges of combating high unemployment and a demand for on-going stimulus support against a backdrop of contracting tax revenues.
Chalmers noted that whereas signs of the impact of the global recession were evident in Malta, these were at a much more modest level than had been seen elsewhere across Europe.
The Chairman commented that the past six months have seen a number of economies emerging slowly and painfully from the recession. Government finances everywhere remained under pressure, and the markets are becoming more critical and demanding of those countries (for example Greece) where it is perceived that they have not brought the required degree of austerity and rigour to the management of their public finances.
Roderick Chalmers said that Malta too has “very gradually” emerged from the recession. He noted that there are signs of growth returning to the economically vital tourist sector, and early signs that the manufacturing sector, which was one of the sectors hardest hit by the recession, is edging towards recovery. He commented that the property market remains “subdued” – but it was his view that it is likely that this is more the consequence of “inadequate business and planning processes” that have resulted in the substantial over-supply that is apparent in certain sectors, rather than being due to the impact of the economic recession per se.
Providing a detailed commentary on the results, the Chairman stated that the retail and corporate businesses of the Bank had continued to perform well, and that there had been a further modest reversal on the unrealised fair value markdowns on the Bank’s Financial Markets portfolio. Net commission and trading revenues had performed “very strongly” with investment related activities (Capital Markets, Funds and Wealth Management, Bancassurance and Stockbroking) producing particularly good results. The Chairman noted that Foreign trade and exchange business was also “robust”, and that the Cards business continued to “deliver improved results.” Roderick Chalmers said that whereas the specific impairment charge was little changed year on year, the Bank had adopted a “prudent” approach to the (non specific) collective allowance allocation, setting aside an additional €4.6 million to reflect its cautious outlook on the economic environment pertaining to certain sectors of the economy. Overall credit quality remained satisfactory, with the proportion of non performing accounts to total loans and advances showing only a “marginal increase”. “Costs” the Chairman remarked “remained under tight control, notwithstanding an ongoing investment in IT”.
Roderick Chalmers explained that the European Central Bank (ECB) had not implemented any changes to the historically low reference rate of 1% since May 2009. Despite this, Net Interest Margin for the period of €61.9 million increased by €3.5 million from €58.4 million to March 2009, arising principally from the time lag effect on the re-pricing of deposits, and an increase in the size of the loan book. Rates available for the Financial Markets book remained “very low”, and the Bank was very well placed for the eventual upturn in rates. “However”, the Chairman said “I do not expect any change in rates until late 2010 or the first quarter of 2011 at the earliest, due to the fragility of the economic recovery.”
Chalmers noted that the six month period to March 2010 has seen a further reversal of approximately €6 million of the unrealised fair value movements booked in previous periods. This compared with a markdown of €32 million for the six month period to March 2009 – a date which “represented something close to the low point of the financial crisis.” A further sum of €6.2 million before tax has been credited directly to reserves, representing gains on the available for sale portfolio.
On a final note explaining the summary results, Roderick Chalmers turned to the Jointly Controlled and Associated Companies that represent BOV’s insurance sector interests through its holdings in Middlesea Valletta Life Assurance Company Limited (MSV), in which BOV has a direct equity interest of 50%, and in Middlesea Insurance plc (MSI), where BOV’s holding increased to 31.08% following the rights issue that was launched in November 2009. The share of loss of €3.6 million represents the MSV share of profits (€3.6 million) less the MSI share of losses (€7.2 million). Mr Chalmers explained that this charge “represents BOV’s share of profits and losses on its MSV and MSI shareholdings based on the audited accounts of these companies through to 31 December 2009, and therefore includes the impact on MSI’s results of the write off of its entire investment in Progress Assicurazioni SpA, following the decision that was taken to wind up the operations of that company.”

Review of Financial Position
Roderick Chalmers also provided an overview of the financial position of the Bank. Total Assets as at the end of March 2010 stood at € 6.39 billion (compared to €6.10 billion in March 2009), while total equity amounted to €445.6 million (March 2009 - €393.1 million). Loans and Advances, net of impairment allowances, stood at €3.5 billion, an increase of €240 million or 7.4% since 30 September 2009.
Mr Chalmers described credit quality as solid, with Non-Performing Loans as a percentage of Gross Advances increasing only marginally to 4.1% (September 2009: 3.9%).
Deposits have exceeded a total of €5 billion for the first time in the Bank’s history, increasing by €246 million or 5.2% since September 2009. “This was achieved despite a high level of government and corporate bond issuance during the period, as well as keen ongoing competition for deposits in the market,” said Mr Chalmers. He went on to describe the “deliberate and prudent” balance sheet management measures that BOV has retained during the period under review. Referring to the recent Bond Issue, Mr Chalmers stated that, “we have added to our Tier II Capital base with the €70 million 4.8% 2020 Subordinated Bond issuance, which closed in March 2010, attracting more than 6,800 applications aggregating €96 million. As at the end of March 2010, the Bank’s core Tier I Capital stood at 10%, whilst total overall Capital ratio position was a strong 14.4%.”

Interim Dividend
The Board has resolved to declare an Interim Dividend of €0.075 per share (gross). This compares with last year’s interim dividend (as restated for the bonus issue effected in January 2010) of €0.028 per share. This dividend will be paid on 28th May to shareholders on the Bank’s Register of Members at the close of business on 12th May. 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,” concluded Mr Chalmers.

Outlook
Looking forward, Roderick Chalmers said that he expected that the general economic environment will continue to improve – but that this recovery will be slow and somewhat erratic, with the possibility of set-backs along the way. He noted that tourist arrivals for the first three months of 2010 have been encouraging, and there are “grounds for cautious optimism that the critically important tourist sector could be among the first to emerge from the recessionary gloom.” Commenting that the manufacturing sector is showing signs of a gradual recovery, he also said that the restoration of an appetite for investment expenditure will “determine the pace and sustainability of any rebound.” On the domestic property front, his expectation is that the chronic over-supply on the market will keep property prices in certain sectors subdued for some time to come. On the other hand however, he noted that a number of substantial infrastructural projects announced in the 2010 fiscal budget or otherwise in the pipeline will give the larger scale construction operators some grounds for optimism that their order books will see an upturn. The Chairman said that “in this area, speed of implementation on the key projects will be critical.”
Turning to the wider international scene, Roderick Chalmers commented that although the financial and banking crisis has “abated”, there is no doubt that governments and regulators around the world are determined to introduce radical changes to strengthen the system, so as to “prevent any recurrence of the terrifying events of late 2008 and early 2009, when the global financial system came perilously close to melt-down.” His view was that whereas risk based measures to strengthen capital and liquidity requirements are necessary and should be welcomed “whole-heartedly,” he felt that it would be a pity if policy-makers were to “succumb to populist pressures for industry-wide levies or taxes.” The Chairman said that, in his opinion, such levies would be “indiscriminate in nature and effect,” and would punish the imprudent and the prudent in equal measure. They would therefore bring with them their own “moral hazard” without necessarily strengthening or safeguarding the system as a whole. Elsewhere on the international front, Mr Chalmers observed that the pressures being faced by Greece in re-financing its debt, and the consequent threat of contagion, demonstrated very acutely the importance of continuing fiscal discipline at government level right across Europe.

Conclusion
Roderick Chalmers closed by saying that the Board of Directors wished to express sincere thanks to Tonio Depasquale, the Chief Executive, his senior management team and all the Bank’s staff for their “dedication, commitment and hard work,” noting that “their collective efforts have produced the very satisfactory results being reported today.” On behalf of the Board, Mr Chalmers also thanked the many customers for “the business they bring to the Bank, and for the great confidence and trust that they consistently demonstrate.” “As has been observed before, BOV’s firm commitment to support and encourage our many customers and the economy as a whole through the difficult down-cycle has been clearly recognised, acknowledged and appreciated,” Roderick Chalmers observed. The Chairman concluded by referring to the regulatory authorities at the MFSA and the Central Bank, expressing gratitude to them for their support, wise counsel and advice.

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