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Commentary on BOV Financial Results
23 Mar 2018

Review of Performance

Bank of Valletta Group reported a profit before tax of €174.7 million for the 15 month period ended on 31 December 2017, compared to €145.9 million for the 12 months to September 2016 (or €118.4 million when adjusted for the one off gain on the VISA transaction). Key performance indicators were satisfactory with a pre-tax Return on Equity of 16.5% and a Cost/Income ratio of 47.3%. (FY 2016, adjusted for one off gain on VISA: 16.9% and 44.3% respectively). These results were achieved during a period where the local economy continued to grow at a rate above the EU average which

provided opportunities in both the corporate and the retail sectors. High levels of liquidity and the continuing low interest rate environment continued to be experienced during the period under review. 

Overall performance was impacted by both core and non-core items. The Group’s strategy to focus on alternative revenue streams helped to alleviate the pressures on net interest income and lower exchange earnings. Continuing investment in both IT and HR, the two primary resources, led to a higher cost base while the cautious view towards provisioning was retained during the period under review. Gains attributed to external non-core factors, namely fair value gains and share of profits from the insurance business, amounted to €5.6 million and €19.3 million respectively. Due to the

change in the reporting date, the share of profits from equity accounted investees represented the consolidation of an 18 month period as the financial year end of the Group is now coterminous with that of its associates. The core profit of €149.9 million was reported for the 15 month period to December 2017, compared to the €101.2 million for the 12 months to September 2016. 

Net interest margin of €182.9 million was, on average, 2% below last year. The persisting low interest rates impacted all segments of the balance sheet. The changing mix of the loan book and competitive pressures pushed down the effective interest rate receivable on advances while the continuing preference for short term low yield deposit products resulted in a reduction in interest expense. The net interest margin on the Group’s Treasury operations experienced narrowing margins, limited investment opportunities for maturing instruments and higher liquidity balances which attracted negative rates. 

Net commissions of €86.3 million, or an annualised growth of 4% over the comparative period. Satisfactory growth was experienced in the card business and investment related products, including bancassurance. The Group’s strategy to de-risk its business model resulted in lower income, on average, being earned on foreign exchange transactions. 

Operating costs for the 15 month period of €151.3 million were, on average, 7% higher than last year. During the period under review the Bank signed the contract with Oracle, the supplier of its new core banking solution. As expected, this multi-year Core Banking Transformation (CBT) programme impacted the IT spend. The Group also continued with enhancing its investment in human resources, primarily in the control functions.

The strategic drive by the Bank in adopting a more proactive approach towards debt recovery and the management of non performing loans has resulted in a reversal of impairment allowances of €6.2 million. The prudent view towards the valuation of collateral held was retained and exercises to write off long outstanding debt continued. 

Review of Financial Position 

Total assets at the end of the reporting period stood at €11.8 billion (September 2016: €10.7 billion). Equity attributable to the shareholders of the Bank, which also reflects the increase from the rights issue, amounted to €962 million as at 31 December 2017 (September 2016: €729 million). The Group’s CET 1 ratio stood at 16.1% at the reporting date, up from 12.8% as at 30 September 2016. 

Customer deposits at 31 December 2017 amounted to €10.1 billion, an increase of €916 million over September 2016. This growth occurred in demand deposits, mostly from the retail segment. Tighter onboarding procedures were applied in line with the lower risk business model. Incoming funds not applied to lending were invested into high quality short dated instruments and liquid assets. Cash and short term funds at December 2017 amounted to €3.6 billion, compared to €2.3 billion as at September 2016. 

Gross loans and advances to customers, at €4.5 billion, were €162 million higher than September 2016. Demand for credit arose from both the personal and the business sectors. The write off exercises continued during the period under review whereby long outstanding exposures, which were mostly provided for, were written off. 

Dividend

The conservation and the generation of capital remain high on the Bank’s agenda. Following the issue of subordinated debt last year, capital was further strengthened by the Rights Issue made during the period under review as part of the Bank’s multi-year capital planning programme. The Bank’s strategy is to continue building reserves through profit retention and determine the dividend payout ratio with reference to the CET 1 ratio. 

Further to the gross interim dividend of €0.045 per share paid in May 2017, the Board of Directors will, at the forthcoming Annual General Meeting, be recommending a final gross dividend of €0.08 per share. Shareholders will be given the right to elect to receive the dividend either in cash or by the issue of new shares. The total dividend for the year represents a gross yield of 6.9% by reference to the closing share price of €1.80 per share at end December 2017 and a net dividend cover of 3 times. 

Looking Ahead 

While the results for FY 2017 are considered to be satisfactory, the coming years are expected to remain challenging particularly in view of the ‘low-for-long’ interest rate situation and high liquidity levels as well as the changing demographics of the local economy and stricter on boarding procedures. The Group’s strategic vision focuses on a low risk sustainable business model to ensure long term stability and viability while returning an equitable return to its investors. The strengthening of the capital base, which started in 2016 through the issuance of subordinated debt on the local market, and was followed with the successful rights issue during FY 2017 will continue in the coming years as the Bank seeks to continue to strengthen its capital buffers.

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).