As the media strode up the steps to the main entrance of BoV's Zachary Street head office last Friday to attend the annual news conference on the publication of the Bank's audited accounts, one question ran through their minds: how had Malta's largest Bank been affected by the international credit crisis?
BoV chairman Roderick Chalmers, flanked by CEO Tonio Depasquale and other directors and executives, immediately put the financial results for the year ended on September 30 in their context: "The conditions encountered throughout the last year - and particularly in the second half of September - have been unprecedented and truly extraordinary, representing the most profound financial crisis of a generation," he said.
In the prevailing circumstances of market meltdown, massive government interventions and the collapse of banking giants, the BoV Group's pre-tax profit of €40 million could be described as "respectable", Mr Chalmers emphasised.
The Bank's reported profit was €61 million lower than that achieved for the preceding year. Mr Chalmers explained that the Bank had sustained two hits from the ongoing credit turmoil: firstly, an impairment charge of €12.7 million on its holdings of Lehman senior debt, which was marked down in the Bank's books to an estimated recovery value of 15 per cent; secondly, credit spreads, which had widened considerably as a result of the crisis, had remained inordinately high and badly impacted quoted bond prices in an almost frozen market. This had led to unrealised mark-downs of €41 million, of which €14 million arose in the last half of September.
The total direct impact of the financial crisis was thus just under €53 million, of which half arose during the latter part of September. While Lehman's is being seen as an outright loss, Mr Chalmers expressed confidence that BoV would claw back much of the mark-downs on those other securities which it opted to hold through to redemption. In other words, should BoV hold on to its securities until maturity, and assuming that there is no further impairment on these investments, the accounting mark-downs charged to date would reverse as profits in future years.
It would have been unrealistic to expect BoV's investment portfolio to come through the financial "tsunami" unscathed. But the collateral damage is contained, and reflects a prudent portfolio management stance. While an impact of €53 million is quite material when compared to the Group's profit, when considered in the context of the average size of its banking book of almost €2.6 billion, the impact is equivalent to 2 per cent of the book.
What enabled the BoV boat to sail through the storm, a little bruised and battered, but none the worse for wear? A critical factor was the composition and quality of its investment portfolio. Mr Chalmers explained that BoV's internal risk management policies prohibits investment in complex structured products such as Collateralised Debt Obligations and Asset Backed Securities, the opaque nature of which had spread uncertainty and helped to fuel the credit crisis. Instead, the BoV portfolio is deployed across a wide range of plain vanilla bonds in "quality, credit-rated sovereign, supranational, corporate and financial institutions" having a short weighted average maturity of less than 3.5 years. 89 per cent of the portfolio is rated as A- or higher, and a quarter of it consists of Malta Government bonds and Treasury Bills.
There are two other factors underlying BoV Group's financial stability, and which played no small part in the Bank's ability to weather the crisis with relative ease: a strong capital base and a balance sheet flush with liquidity. Thanks to its restrained dividend policy, BoV enjoys a Tier 1 capital ratio of 10 per cent, a level of capitalisation recently described by a Financial Times analyst as "Fort Knox level". Tier 1 is a commonly used indicator of balance sheet strength, relating risk-weighted assets to core equity. Most major European banks have Tier 1 ratios averaging 6 per cent.
Mr Chalmers pointed out that BoV has often been criticised in the past for being stingy with its dividend payouts. A strong capital base, he pointed out, is the long-term fruit of prudent dividend payouts. The chairman went on to remind the media present that BoV did not have the luxury of "a big daddy sitting in London or New York" that would come to its rescue if it were to squander its capital resources. Consequently, BoV gives high priority to capital management, and always seeks to keep its capital ratios at above-average levels. In this respect, Mr Chalmers hinted that BoV would seek to bolster its capital base even further, and would consider going to the market sometime in 2009.
The Group is similarly bullish on liquidity management: BoV enjoys a sturdy on liquidity ratio of over 50 per cent, meaning that half its short-term liabilities are covered by cash and quasi-cash assets. The statutory minimum is 30 per cent. The Group's robust liquidity position is a result of its conservative 67 per cent loans-to-deposits ratio - out of every €100 in incoming deposits, BoV lends out only €67, implying that most of the balance is retained in liquid or marketable assets.
The BoV Group does not borrow from other banks to finance its loan book, but relies wholly on stable customer deposits. Thus, when interbank credit dried up during the credit crunch, the Bank was not affected. This cautious model is in stark contrast to that adopted by a number of European banks, which frequently run loans-to-deposits ratios of over 100 per cent, implying that they have to bridge the gap by borrowing from other banks. When banks stopped lending to each other, those institutions operating on this model went to the wall. Northern Rock, Bear Sterns, Halifax Bank of Scotland and Hypo Real Estate are some of the illustrious names that went under, or had to be bailed out, due to liquidity concerns.
Mr Chalmers then turned to BoV's business fundamentals: a growth of 15.9 per cent in the loan book, which has now reached the €3 billion mark; ongoing improvement in credit quality, where impaired lending as a percentage of the loan book decreased from 4.8 per cent in September 2007 to 4 per cent; and an increase in customer deposits of €322 million, to €4.6 billion at year end.
The latter performance was boosted by the entry of unbanked money into the banking system following the euro changeover.
Other, less positive, developments also left their mark on the bottom line. These included the loss of foreign exchange earnings following the adoption of the euro; the impact on the Group's stockbroking, bancassurance and asset management businesses resulting from the disruption in the financial markets and the consequent impact on investor behaviour and risk appetites; one-off costs associated with the adoption of the euro; and shrinking interest margins. Furthermore, the contributions to the Group's profits from Middlesea Insurance and Middlesea Valletta Life were dampened by conditions in the global financial markets. There was also an increase of 5 per cent in costs, due mostly to the implementation of a new three-year collective agreement which became effective as from January 1, 2008.
Mr Chalmers pointed out that BoV has much to be satisfied about its achievement in coming out relatively unscathed from a financial storm wreaking havoc across the globe. Its emphasis on capital strength, ample liquidity and prudent risk management policies augurs well for the challenging times that lie ahead. But it cannot afford to be complacent. The main challenge will come from the economic downturn afflicting most developed economies, an offshoot of the crisis that has not yet run its course.
BoV chairman Roderick Chalmers, flanked by CEO Tonio Depasquale and other directors and executives, immediately put the financial results for the year ended on September 30 in their context: "The conditions encountered throughout the last year - and particularly in the second half of September - have been unprecedented and truly extraordinary, representing the most profound financial crisis of a generation," he said.
In the prevailing circumstances of market meltdown, massive government interventions and the collapse of banking giants, the BoV Group's pre-tax profit of €40 million could be described as "respectable", Mr Chalmers emphasised.
The Bank's reported profit was €61 million lower than that achieved for the preceding year. Mr Chalmers explained that the Bank had sustained two hits from the ongoing credit turmoil: firstly, an impairment charge of €12.7 million on its holdings of Lehman senior debt, which was marked down in the Bank's books to an estimated recovery value of 15 per cent; secondly, credit spreads, which had widened considerably as a result of the crisis, had remained inordinately high and badly impacted quoted bond prices in an almost frozen market. This had led to unrealised mark-downs of €41 million, of which €14 million arose in the last half of September.
The total direct impact of the financial crisis was thus just under €53 million, of which half arose during the latter part of September. While Lehman's is being seen as an outright loss, Mr Chalmers expressed confidence that BoV would claw back much of the mark-downs on those other securities which it opted to hold through to redemption. In other words, should BoV hold on to its securities until maturity, and assuming that there is no further impairment on these investments, the accounting mark-downs charged to date would reverse as profits in future years.
It would have been unrealistic to expect BoV's investment portfolio to come through the financial "tsunami" unscathed. But the collateral damage is contained, and reflects a prudent portfolio management stance. While an impact of €53 million is quite material when compared to the Group's profit, when considered in the context of the average size of its banking book of almost €2.6 billion, the impact is equivalent to 2 per cent of the book.
What enabled the BoV boat to sail through the storm, a little bruised and battered, but none the worse for wear? A critical factor was the composition and quality of its investment portfolio. Mr Chalmers explained that BoV's internal risk management policies prohibits investment in complex structured products such as Collateralised Debt Obligations and Asset Backed Securities, the opaque nature of which had spread uncertainty and helped to fuel the credit crisis. Instead, the BoV portfolio is deployed across a wide range of plain vanilla bonds in "quality, credit-rated sovereign, supranational, corporate and financial institutions" having a short weighted average maturity of less than 3.5 years. 89 per cent of the portfolio is rated as A- or higher, and a quarter of it consists of Malta Government bonds and Treasury Bills.
There are two other factors underlying BoV Group's financial stability, and which played no small part in the Bank's ability to weather the crisis with relative ease: a strong capital base and a balance sheet flush with liquidity. Thanks to its restrained dividend policy, BoV enjoys a Tier 1 capital ratio of 10 per cent, a level of capitalisation recently described by a Financial Times analyst as "Fort Knox level". Tier 1 is a commonly used indicator of balance sheet strength, relating risk-weighted assets to core equity. Most major European banks have Tier 1 ratios averaging 6 per cent.
Mr Chalmers pointed out that BoV has often been criticised in the past for being stingy with its dividend payouts. A strong capital base, he pointed out, is the long-term fruit of prudent dividend payouts. The chairman went on to remind the media present that BoV did not have the luxury of "a big daddy sitting in London or New York" that would come to its rescue if it were to squander its capital resources. Consequently, BoV gives high priority to capital management, and always seeks to keep its capital ratios at above-average levels. In this respect, Mr Chalmers hinted that BoV would seek to bolster its capital base even further, and would consider going to the market sometime in 2009.
The Group is similarly bullish on liquidity management: BoV enjoys a sturdy on liquidity ratio of over 50 per cent, meaning that half its short-term liabilities are covered by cash and quasi-cash assets. The statutory minimum is 30 per cent. The Group's robust liquidity position is a result of its conservative 67 per cent loans-to-deposits ratio - out of every €100 in incoming deposits, BoV lends out only €67, implying that most of the balance is retained in liquid or marketable assets.
The BoV Group does not borrow from other banks to finance its loan book, but relies wholly on stable customer deposits. Thus, when interbank credit dried up during the credit crunch, the Bank was not affected. This cautious model is in stark contrast to that adopted by a number of European banks, which frequently run loans-to-deposits ratios of over 100 per cent, implying that they have to bridge the gap by borrowing from other banks. When banks stopped lending to each other, those institutions operating on this model went to the wall. Northern Rock, Bear Sterns, Halifax Bank of Scotland and Hypo Real Estate are some of the illustrious names that went under, or had to be bailed out, due to liquidity concerns.
Mr Chalmers then turned to BoV's business fundamentals: a growth of 15.9 per cent in the loan book, which has now reached the €3 billion mark; ongoing improvement in credit quality, where impaired lending as a percentage of the loan book decreased from 4.8 per cent in September 2007 to 4 per cent; and an increase in customer deposits of €322 million, to €4.6 billion at year end.
The latter performance was boosted by the entry of unbanked money into the banking system following the euro changeover.
Other, less positive, developments also left their mark on the bottom line. These included the loss of foreign exchange earnings following the adoption of the euro; the impact on the Group's stockbroking, bancassurance and asset management businesses resulting from the disruption in the financial markets and the consequent impact on investor behaviour and risk appetites; one-off costs associated with the adoption of the euro; and shrinking interest margins. Furthermore, the contributions to the Group's profits from Middlesea Insurance and Middlesea Valletta Life were dampened by conditions in the global financial markets. There was also an increase of 5 per cent in costs, due mostly to the implementation of a new three-year collective agreement which became effective as from January 1, 2008.
Mr Chalmers pointed out that BoV has much to be satisfied about its achievement in coming out relatively unscathed from a financial storm wreaking havoc across the globe. Its emphasis on capital strength, ample liquidity and prudent risk management policies augurs well for the challenging times that lie ahead. But it cannot afford to be complacent. The main challenge will come from the economic downturn afflicting most developed economies, an offshoot of the crisis that has not yet run its course.