The Bank of Valletta 2008 full-year results have already been given substantial coverage by various sections of the media since their publication last Friday afternoon.
The BoV Group generated a pre-tax profit of €40.6 million, a decline of 60 per cent from the record profitability in the previous financial year to September 30, 2007. The final dividend for the year has been reduced by 40 per cent to €0.0675 gross per share, reflecting the decline in profitability (this year's payout ratio increased to 67 per cent from 50 per cent last year). The bank also recommended an increase in the share capital from accumulated profits. On January 15, 2009 BoV's issued share capital is expected to increase from €100 million to €160 million. This will be done through an increase in the nominal value of each share from €0.75 to €1 and a bonus share of one new share for every five held allotted to shareholders as at close of trading on January 12, 2009.
During the lengthy stockbrokers' meeting held last Friday afternoon, chairman Roderick Chalmers gave a very detailed account of the developments within the international financial markets which eventually led to a substantial hit on BoV's profit for the year. He described the events in recent months, especially since the second half of September, as "truly extraordinary" representing "the most profound international financial crisis of a generation". Mr Chalmers explained that while BoV was affected by this scenario, the policies taken by the Bank in recent years have mitigated the negative impact of the global market disruption.
The gradual build-up of the Bank's capital base (which increased by almost €100 million in the past four financial years) helped BoV maintain a very strong capital ratio of 11.5 per cent (of which 10 per cent is classified as Tier 1 capital) - well above the minimum requirement of 8 per cent. Many foreign banks have seen their capital ratios become depleted in recent months and this forced them to raise more equity and in the process some of these became partly nationalised by their respective governments. BoV's chairman explained that regulators worldwide will probably place increased pressure for higher capital by credit institutions. Although BOV's level of equity (Tier 1 capital) is sufficient, the bank wishes to improve its Tier 2 capital and is considering the issue of a new subordinated bond in 2009. Since BOV's two outstanding bonds are due to be redeemed in 2010, these are being amortised and thus the amount qualifying as Tier 2 capital is being reduced.
The conservative loan-to-deposit ratio of 66 per cent also differentiated the Bank's policy when compared to the operations of the large international banks as BoV did not depend on the inter-bank market for continued funding. Various overseas banks had more aggressive policies with HBOS, for example, commanding a 177 per cent loan-todeposit ratio. This leveraged position made HBOS and other similar European banks depend on inter-bank lending to manage their liquidity positions, and following the collapse of Lehman Brothers and the contraction of the short-term inter-bank market, many banks faced severe funding problems.
BoV maintained a strong liquidity ratio throughout the year at a level exceeding the 50 per cent mark, substantially higher than the 30 per cent minimum requirement. This high liquidity level helped BoV to hold on to its holdings within its bond portfolio and it was not forced to dispose of any bonds at a time of substantially reduced prices.
BoV's portfolio (amounting to circa €2.6 billion) had no direct exposure to sub-prime or toxic assets. The portfolio is spread across 600 issues from 240 different institutions with a relatively short average maturity of less than 3.5 years. BoV's chairman explained during the meeting that the holdings are predominantly high quality bonds issued by governments, supranational institutions, companies and financial institutions. Almost 90 per cent of the entire portfolio is rated A- or higher, which should enable the Bank to recover a large portion of the unrealised paper 'losses' included in this year's results when redemption at par value of the bonds takes place at maturity date.
Notwithstanding the defensive position taken by BoV, its investment portfolio took a direct hit from the collapse of Lehman Brothers. BoV held a small exposure of senior bonds of this investment bank and recognised a loss of €12.7 million from this investment. On September 15, exactly following the collapse of Lehman, BoV had issued a company announcement informing the market that the loss from the Lehman holding "will be modest in the context of the results of the Bank for the current financial year to date".
Mr Chalmers explained that at the time, although the actual recovery rate on such bonds was not known, it was estimated at between 50 and 60 per cent of the face value of the instrument. However, recovery expectations diminished considerably since then on increased complexities with the bankruptcy of Lehman Brothers. As a result, BoV assumed only a 15 per cent recovery rate on its holdings.
Apart from this direct impact resulting from the demise of Lehman, BoV had adopted the International Accounting Standard 39 which implies that its investment portfolio is "marked to market". This means that BoVmust account for any changes in the value of its bond holdings directly in its income statement. This accounting policy was at the centre of various high-level meetings in recent weeks as many commentators claim that this is what led to the various bank recapitalisations.
The International Accounting Board therefore decided to lift these rigid restrictions and to allow banks to discontinue this method in respect of an institution's "trading book". However, much to the disapproval of many commentators including BoV's chairman, these restrictions were not lifted for those banks with an "investment book".
In this respect, only last week Deutsche Bank was the first institution to adopt these new rules and this helped the Bank to record an unexpected profit during the third quarter of its financial year, as it "only" had to effect a €1.2 billion write-down, €800 million lower than the write-down required under the mark-to-market system. BoV's bond portfolio is classified as an "investment book", hence it could not adopt this new accounting method.
BoV's chairman also revealed that if the Bank adopted the same method used by Deutsche Bank (which was also followed this week by Royal Bank of Scotland and Lloyds TSB) and did not take any mark-to-market movements during the final quarter of the year, BoV's pre-tax profitability would have amounted to €58 million instead of the €40.6 million. The effectiveness of the "mark to market" accounting policy is highly debatable, especially at such times when the market for some bonds is frozen and the actual price is definitely not reflective of the bonds' true worth. However, one should also question whether it would be correct for BoV to continue to subject its income statement to so much volatility arising from unrealised "paper losses or gains".
BoV's 2008 year-end results also highlighted some positive attributes mainly relating to the continued increases in deposits and advances despite the difficult international scenario and increased local competition. In fact, during the year deposits increased by over €300 million (+7.5 per cent). Mr Chalmers explained that in recent weeks, despite a rise in cash withdrawals experienced by banks across the world, BoV's deposit base continued to grow also as a result of the repatriation of funds from certain overseas jurisdictions such as Jersey and Guernsey.
Loans increased by €418 million (+15.9 per cent) during the 12 months to September 30, with BoV's market share edging up to 43.8 per cent.
Furthermore, reporting a return on equity of 10.2 per cent for the year ended September, 2008, despite the unprecedented market conditions is indeed commendable. Also the bank's costs remained under strict control despite the one-time fees related to the euro changeover.
BoV's chairman concluded the meeting by providing an understandably cautious outlook in the wake of the expected slowdown in worldwide economies next year and on the possible repercussions on the local economic performance.
However Mr Chalmers reiterated that BoV's fundamentals remain strong and the financial performance should be substantially higher in calmer market conditions.
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 BoV Group generated a pre-tax profit of €40.6 million, a decline of 60 per cent from the record profitability in the previous financial year to September 30, 2007. The final dividend for the year has been reduced by 40 per cent to €0.0675 gross per share, reflecting the decline in profitability (this year's payout ratio increased to 67 per cent from 50 per cent last year). The bank also recommended an increase in the share capital from accumulated profits. On January 15, 2009 BoV's issued share capital is expected to increase from €100 million to €160 million. This will be done through an increase in the nominal value of each share from €0.75 to €1 and a bonus share of one new share for every five held allotted to shareholders as at close of trading on January 12, 2009.
During the lengthy stockbrokers' meeting held last Friday afternoon, chairman Roderick Chalmers gave a very detailed account of the developments within the international financial markets which eventually led to a substantial hit on BoV's profit for the year. He described the events in recent months, especially since the second half of September, as "truly extraordinary" representing "the most profound international financial crisis of a generation". Mr Chalmers explained that while BoV was affected by this scenario, the policies taken by the Bank in recent years have mitigated the negative impact of the global market disruption.
The gradual build-up of the Bank's capital base (which increased by almost €100 million in the past four financial years) helped BoV maintain a very strong capital ratio of 11.5 per cent (of which 10 per cent is classified as Tier 1 capital) - well above the minimum requirement of 8 per cent. Many foreign banks have seen their capital ratios become depleted in recent months and this forced them to raise more equity and in the process some of these became partly nationalised by their respective governments. BoV's chairman explained that regulators worldwide will probably place increased pressure for higher capital by credit institutions. Although BOV's level of equity (Tier 1 capital) is sufficient, the bank wishes to improve its Tier 2 capital and is considering the issue of a new subordinated bond in 2009. Since BOV's two outstanding bonds are due to be redeemed in 2010, these are being amortised and thus the amount qualifying as Tier 2 capital is being reduced.
The conservative loan-to-deposit ratio of 66 per cent also differentiated the Bank's policy when compared to the operations of the large international banks as BoV did not depend on the inter-bank market for continued funding. Various overseas banks had more aggressive policies with HBOS, for example, commanding a 177 per cent loan-todeposit ratio. This leveraged position made HBOS and other similar European banks depend on inter-bank lending to manage their liquidity positions, and following the collapse of Lehman Brothers and the contraction of the short-term inter-bank market, many banks faced severe funding problems.
BoV maintained a strong liquidity ratio throughout the year at a level exceeding the 50 per cent mark, substantially higher than the 30 per cent minimum requirement. This high liquidity level helped BoV to hold on to its holdings within its bond portfolio and it was not forced to dispose of any bonds at a time of substantially reduced prices.
BoV's portfolio (amounting to circa €2.6 billion) had no direct exposure to sub-prime or toxic assets. The portfolio is spread across 600 issues from 240 different institutions with a relatively short average maturity of less than 3.5 years. BoV's chairman explained during the meeting that the holdings are predominantly high quality bonds issued by governments, supranational institutions, companies and financial institutions. Almost 90 per cent of the entire portfolio is rated A- or higher, which should enable the Bank to recover a large portion of the unrealised paper 'losses' included in this year's results when redemption at par value of the bonds takes place at maturity date.
Notwithstanding the defensive position taken by BoV, its investment portfolio took a direct hit from the collapse of Lehman Brothers. BoV held a small exposure of senior bonds of this investment bank and recognised a loss of €12.7 million from this investment. On September 15, exactly following the collapse of Lehman, BoV had issued a company announcement informing the market that the loss from the Lehman holding "will be modest in the context of the results of the Bank for the current financial year to date".
Mr Chalmers explained that at the time, although the actual recovery rate on such bonds was not known, it was estimated at between 50 and 60 per cent of the face value of the instrument. However, recovery expectations diminished considerably since then on increased complexities with the bankruptcy of Lehman Brothers. As a result, BoV assumed only a 15 per cent recovery rate on its holdings.
Apart from this direct impact resulting from the demise of Lehman, BoV had adopted the International Accounting Standard 39 which implies that its investment portfolio is "marked to market". This means that BoVmust account for any changes in the value of its bond holdings directly in its income statement. This accounting policy was at the centre of various high-level meetings in recent weeks as many commentators claim that this is what led to the various bank recapitalisations.
The International Accounting Board therefore decided to lift these rigid restrictions and to allow banks to discontinue this method in respect of an institution's "trading book". However, much to the disapproval of many commentators including BoV's chairman, these restrictions were not lifted for those banks with an "investment book".
In this respect, only last week Deutsche Bank was the first institution to adopt these new rules and this helped the Bank to record an unexpected profit during the third quarter of its financial year, as it "only" had to effect a €1.2 billion write-down, €800 million lower than the write-down required under the mark-to-market system. BoV's bond portfolio is classified as an "investment book", hence it could not adopt this new accounting method.
BoV's chairman also revealed that if the Bank adopted the same method used by Deutsche Bank (which was also followed this week by Royal Bank of Scotland and Lloyds TSB) and did not take any mark-to-market movements during the final quarter of the year, BoV's pre-tax profitability would have amounted to €58 million instead of the €40.6 million. The effectiveness of the "mark to market" accounting policy is highly debatable, especially at such times when the market for some bonds is frozen and the actual price is definitely not reflective of the bonds' true worth. However, one should also question whether it would be correct for BoV to continue to subject its income statement to so much volatility arising from unrealised "paper losses or gains".
BoV's 2008 year-end results also highlighted some positive attributes mainly relating to the continued increases in deposits and advances despite the difficult international scenario and increased local competition. In fact, during the year deposits increased by over €300 million (+7.5 per cent). Mr Chalmers explained that in recent weeks, despite a rise in cash withdrawals experienced by banks across the world, BoV's deposit base continued to grow also as a result of the repatriation of funds from certain overseas jurisdictions such as Jersey and Guernsey.
Loans increased by €418 million (+15.9 per cent) during the 12 months to September 30, with BoV's market share edging up to 43.8 per cent.
Furthermore, reporting a return on equity of 10.2 per cent for the year ended September, 2008, despite the unprecedented market conditions is indeed commendable. Also the bank's costs remained under strict control despite the one-time fees related to the euro changeover.
BoV's chairman concluded the meeting by providing an understandably cautious outlook in the wake of the expected slowdown in worldwide economies next year and on the possible repercussions on the local economic performance.
However Mr Chalmers reiterated that BoV's fundamentals remain strong and the financial performance should be substantially higher in calmer market conditions.
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.