BoV ahead on all revenue sources

Bank of Valletta plc recently published its preliminary statements for the financial year ended September 30, 2003. Preliminary statements are issued as part of a listed company's continuing obligations to keep the market informed in a timely manner. They are issued as soon as the board of directors approve the financial results, prior to the publication of the full annual report which will then be approved during the annual general meeting.

For the 2003 financial year, BoV had excellent results even though this does not show down at the bottom line since the jump in operating profit over last year had to be used to compensate for past under-provisioning.

We therefore see that, although operating income before impairment charges shot up by 33 per cent to Lm25.9 million (financial year 2002: Lm19.5 million), there was a heavy charge for impaired loans, in accordance with new banking regulations, of Lm12.2 million (2002: 5.7 million). As a result, profit before tax was little changed, at Lm14.8 million compared to the previous year's Lm14.5 million. This is much like a vigorous high-earner paying off debt at the pharmacy. The good news is that, according to the bank, it has now provided for most of the impairments and that only around 25 per cent further provisioning is needed.

During his meeting with stockbrokers, Joseph F.X. Zahra, chairman of BoV Group, gave a characteristically thorough and candid assessment of the Group's achievements and position. He said: "On becoming chairman of the BoV Group in 1998, I made it clear that I intended to push up the provisions against loans to reach international standards as soon as possible to make sure that the bank was on its strongest footing. My intention was later reinforced by new banking regulations. Through hard work and foresight we have been able to absorb these huge provisions and still register profit growth. The bank is now at its strongest. We hope that in the near future our efforts will result in bottom lines showing strong, steady improvements."

Under the banking directives, loans and advances are immediately and automatically written down if repayments are not received strictly as scheduled. There might be nothing wrong with a late paying customer but the fact that it paid late means that the loan would have to be written down. This automatic adjustment has the merit of being objective but takes away the banker's judgment about a customer's creditworthiness. This process can also take a heavy toll and, to avoid undue volatility, BoV has made the necessary charges over three years. The last instalment would take place this year.

BoV this year reported increases across all revenue heads with the major items (interest margin, commissions and trading profits) increasing between 12 and 13 per cent over last year. This is an achievement in an economy which is currently so sluggish.

Importantly, due to the new cost efficiency unit, which started out the year with a zero-cost-growth target, costs have actually been reduced from Lm27.3 million during the 2002 financial year to Lm27.1 million in 2003. The key cost/income ratio improved 51 per cent from last financial year's 58 per cent.

This pincer grip on profit - revenue up, costs down - expanded operating income as described.

Gross dividend is being maintained at 11 cents gross and, with earnings per share at 18c7, at the current average price of Lm2.616 BoV is trading at a price-earnings ratio of 14, with an attractive gross dividend yield of 4.2 per cent.

The dividend will be paid to shareholders who were on the share register following close of trading on November 7.

Customer deposits grew by 3.3 per cent to reach Lm1.43 billion while advances to customers, after impairment allowances, reached Lm781.1 million, up by 2.3 per cent. Here, too, BoV probably grew at a higher rate than Malta's economic growth during October 2002 to September 2003 (economic statistics still to be published).

During the financial year, BoV continued what Mr Zahra calls the velvet revolution of job evaluation and utilisation in order to optimise added value and, indirectly, compensation to efficient producers.

There has also been the usual emphasis on strategic planning and multiple channel delivery. Mr Zahra stated that BoV had a definite edge in banking cards and will soon start providing mobile banking services. Work on the new processing centre is showing steady progress.

BoV now also has a representative office in Egypt. This presence in the major countries of North Africa, led to BoV being engaged as a consultant on various banking tasks by other banks.

Mr Zahra sees future growth as coming from more loans in the future, perhaps at higher rates, as the economy improves. A second important source would be new investment products, including pension products.

Azzopardi Investment Management Limited is the corporate stockbroker of Bank of Valletta plc.

Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such.

The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.