Stock Market review - HSBC Bank Malta's interim profits
Challenging conditions and euro adoption leave their mark
HSBC Bank Malta plc published its interim results to June 30, 2008, following a board of directors' meeting on July 25.
The directors declared a gross interim dividend of €0.119 per share (June 2007: €0.1537) on an unchanged payout ratio of 75 per cent of profits. The interim dividend is payable on August 22 to those shareholders as at close of trading on August 1, with the equity trading ex-dividend as from August 3.
During the first six months of 2008 HSBC registered a 6.5 per cent increase in gross interest income mainly on the back of a further growth in loans and advances to customers (+€146.6 million or 5.2 per cent).
This increased income was offset by a 19% growth in interest payable due to heightened competition following adoption of the euro. As a result, net interest income decreased by 3.9 per cent to €60.8 million with the margin dropping by 5.4 percentage points to 49.5 per cent.
Net fee and commission income dipped by 0.74 per cent to €15.5 million notwithstanding reduced levels of business activity attributable to the euro conversion and the general election held in March.
The introduction of the euro led to lower foreign exchange dealing income, which declined significantly from €8.5 million in 2007 to €3.7 million in 2008. HSBC's CEO, Alan Richards, remarked that in the first half of 2007 the bank experienced very strong pre-euro conversion activity, which makes the comparison from one year to the next slightly distorted.
Net gains arising from sale of financial assets amounted to €1 million compared to €3 million in the first six months of 2007. Net insurance claims incurred and movement in policyholder liabilities, coupled with other operating income, were marginally unchanged at €7.8 million. Overall, non-interest income dropped by 20.3 per cent to €28.2 million with HSBC Malta's net operating income decreasing by 9.8 per cent in the first half of the year to €89 million. The steeper decline in non-interest income compared to net interest income results in net interest income as a percentage of total income rising to 68.3 per cent of total income (June 2007: 64.1 per cent).
Operating expenses in the first half of the year increased by 6.1 per cent to €42 million. The charge for depreciation was marginally unchanged at €3.5 million while administrative expenses grew by 6.7 per cent to €38.5 million. HSBC attributed this increase to the one-off costs related to the euro conversion and increased investment in information technology. The increase in expenses, coupled with the drop in income, resulted in a deterioration in the cost-to-income ratio to 47.2 per cent (June 2007: 40.1 per cent) although still commendable by international standards.
Operating profit before impairment allowances decreased by 20 per cent to €47.1 million. After four years of impairment releases, HSBC registered a €0.6 million impairment allowance as a result of the strong increase in loans. In fact, the company reported that there was no deterioration in the credit quality of the loan book.
HSBC generated a pre-tax profit of €46.6 million in the first half of 2008, representing a 21.1 per cent decline from the record profitability achieved in June 2007. This decline was described by Mr Richards as "disappointing" although the 2007 figure included significantly stronger revenue flows from pre-euro conversion foreign exchange and investment dealing activities. The tax expense for the first six months of 2008 was €16.5 million, which represents a marginal tax rate of 35.4 per cent. As a result, profit after tax decreased by 23 per cent to €30.1 million, resulting in earnings per share of €0.103.
Total assets as at June 30, 2008 amounted to €5.1 billion, representing a 7.8 per cent increase when compared to the value of assets as at December 31, 2007. Customer deposits increased by 12.84 per cent to just below €4 billion while, on the liabilities side, loans and advances to customers rose by 9.3 per cent to €3 billion. As a result, the advances-to-deposit ratio declined to 0.74 times from the 2007 figure of 0.77 times.
The directors reported that the investments portfolio classified as "available for sale" was marked down by €7.7 million. However, unlike the policy adopted by Bank of Valletta, this mark-down was not recognised in the income statement but was charged to the revaluation reserve in the Group's balance sheet. Consequently, shareholders' funds of the HSBC Malta Group as at June 30, 2008 stood at €272.9 million, 3.4 per cent lower than the level as at the end of 2007. Return on equity decreased by 5.8 percentage points from last year's record level but remains high at 21.6 per cent with return on assets decreasing marginally by 0.8 percentage points to 1.9 per cent.
Replying to questions during the news conference held in conjunction with the results announcement, Mr Richards explained that the €10 million drop in income in the first half of the year is made up of a €4.5 million decline in foreign exchange income, a €3.5 million decrease in the interest margin mainly arising from intensified competition and a decline of €2 million in profit on sale of financial assets compared to last year.
Mr Richards also stated that HSBC Malta's current dividend policy of distributing 75 per cent of profits to shareholders may need to be reviewed by the board of directors in the light of the market conditions. He remarked that this payout is high by international standards and future payout levels must be analysed in the light of the bank's capital requirements and ongoing profitability.
Despite these "disappointing" results, the CEO confirmed that he is optimistic on HSBC's business prospects for the second half of the year.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication.
It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.
The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
The directors declared a gross interim dividend of €0.119 per share (June 2007: €0.1537) on an unchanged payout ratio of 75 per cent of profits. The interim dividend is payable on August 22 to those shareholders as at close of trading on August 1, with the equity trading ex-dividend as from August 3.
During the first six months of 2008 HSBC registered a 6.5 per cent increase in gross interest income mainly on the back of a further growth in loans and advances to customers (+€146.6 million or 5.2 per cent).
This increased income was offset by a 19% growth in interest payable due to heightened competition following adoption of the euro. As a result, net interest income decreased by 3.9 per cent to €60.8 million with the margin dropping by 5.4 percentage points to 49.5 per cent.
Net fee and commission income dipped by 0.74 per cent to €15.5 million notwithstanding reduced levels of business activity attributable to the euro conversion and the general election held in March.
The introduction of the euro led to lower foreign exchange dealing income, which declined significantly from €8.5 million in 2007 to €3.7 million in 2008. HSBC's CEO, Alan Richards, remarked that in the first half of 2007 the bank experienced very strong pre-euro conversion activity, which makes the comparison from one year to the next slightly distorted.
Net gains arising from sale of financial assets amounted to €1 million compared to €3 million in the first six months of 2007. Net insurance claims incurred and movement in policyholder liabilities, coupled with other operating income, were marginally unchanged at €7.8 million. Overall, non-interest income dropped by 20.3 per cent to €28.2 million with HSBC Malta's net operating income decreasing by 9.8 per cent in the first half of the year to €89 million. The steeper decline in non-interest income compared to net interest income results in net interest income as a percentage of total income rising to 68.3 per cent of total income (June 2007: 64.1 per cent).
Operating expenses in the first half of the year increased by 6.1 per cent to €42 million. The charge for depreciation was marginally unchanged at €3.5 million while administrative expenses grew by 6.7 per cent to €38.5 million. HSBC attributed this increase to the one-off costs related to the euro conversion and increased investment in information technology. The increase in expenses, coupled with the drop in income, resulted in a deterioration in the cost-to-income ratio to 47.2 per cent (June 2007: 40.1 per cent) although still commendable by international standards.
Operating profit before impairment allowances decreased by 20 per cent to €47.1 million. After four years of impairment releases, HSBC registered a €0.6 million impairment allowance as a result of the strong increase in loans. In fact, the company reported that there was no deterioration in the credit quality of the loan book.
HSBC generated a pre-tax profit of €46.6 million in the first half of 2008, representing a 21.1 per cent decline from the record profitability achieved in June 2007. This decline was described by Mr Richards as "disappointing" although the 2007 figure included significantly stronger revenue flows from pre-euro conversion foreign exchange and investment dealing activities. The tax expense for the first six months of 2008 was €16.5 million, which represents a marginal tax rate of 35.4 per cent. As a result, profit after tax decreased by 23 per cent to €30.1 million, resulting in earnings per share of €0.103.
Total assets as at June 30, 2008 amounted to €5.1 billion, representing a 7.8 per cent increase when compared to the value of assets as at December 31, 2007. Customer deposits increased by 12.84 per cent to just below €4 billion while, on the liabilities side, loans and advances to customers rose by 9.3 per cent to €3 billion. As a result, the advances-to-deposit ratio declined to 0.74 times from the 2007 figure of 0.77 times.
The directors reported that the investments portfolio classified as "available for sale" was marked down by €7.7 million. However, unlike the policy adopted by Bank of Valletta, this mark-down was not recognised in the income statement but was charged to the revaluation reserve in the Group's balance sheet. Consequently, shareholders' funds of the HSBC Malta Group as at June 30, 2008 stood at €272.9 million, 3.4 per cent lower than the level as at the end of 2007. Return on equity decreased by 5.8 percentage points from last year's record level but remains high at 21.6 per cent with return on assets decreasing marginally by 0.8 percentage points to 1.9 per cent.
Replying to questions during the news conference held in conjunction with the results announcement, Mr Richards explained that the €10 million drop in income in the first half of the year is made up of a €4.5 million decline in foreign exchange income, a €3.5 million decrease in the interest margin mainly arising from intensified competition and a decline of €2 million in profit on sale of financial assets compared to last year.
Mr Richards also stated that HSBC Malta's current dividend policy of distributing 75 per cent of profits to shareholders may need to be reviewed by the board of directors in the light of the market conditions. He remarked that this payout is high by international standards and future payout levels must be analysed in the light of the bank's capital requirements and ongoing profitability.
Despite these "disappointing" results, the CEO confirmed that he is optimistic on HSBC's business prospects for the second half of the year.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication.
It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.
The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.