Low interest rates, MSI loss dent BoV interim profits

Bank of Valletta Group on Thursday reported operating profits for the first six months of the 2009 financial year of €10.1 million (FY 2008: €21.9 million). The final net profit for the period was reduced by €3.8 million, being BoV's share of the results of its Middlesea Group insurance associates (2008: profit of €3.1 million). Rapidly falling interest rates impacted the bank's profits by an estimated €6 million.

The board declared an interim dividend of €0.035 per share (2008: €0.1125). Bank chairman Roderick Chalmers described the six-month period between mid- September and the end of February as "unquestionably the toughest six-month period in the history of modern banking and finance".

He said that, as was generally forecast, Malta's wide open economy had not been immune to the global recession, although the impact to date had been relatively mild.

"We will seek to balance the requirements of depositors and borrowers. We are aware of our responsibilities to shareholders, employees and the wider community," Mr Chalmers said.

"Our expectation is that emerging regulatory regimes for banks will require increased levels of capital to be held. As announced last autumn, in anticipation of this regulatory change, and to replace issues that mature next year, we will shortly be proposing a subordinated bond issue, to further strengthen our capital ratios."

Net commission and trading income for the six months was marginally above the previous year's. Commission income on investment products had remained soft, but income from cards and foreign trade business had been strong. Stringent cost control measures resulted in overheads at fractionally below 2008 levels.

The net operating profit from core banking operations for the six months stood at €42.1 million (2008: €47.9 million), with the reduction in profits largely attributed to the compression in net interest margin.

The fair value charge of €32 million (2008: €26 million) was due to distinct elements. Over 60 per cent of the charge arose from "hedge ineffectiveness" on BoV's interest rates swaps (IRS).

The board was confident that this ineffectiveness - much of which relates to holdings of Malta government or other sovereign holdings - will reverse over the duration of the holding.

BoV's investment portfolio remained deployed across a wide spread of quality holdings of moderate duration debt securities. The board expected that "much, but not all," of the fair value markdowns of €84 million incurred in 2008 and the first half of the 2009 financial year, will be clawed back as the investments are held to redemption.

Fair value gains for the period on investment holdings classified under accounting standards as 'available for sale' amounted to €5 million before taxation (2008: €7.4 million), and were taken directly to reserves.

Liquidity remained strong at 49.7 per cent, and the core Tier I and total capital ratios remained well above European and US banking sector norms. The loan-to-deposit ratio remained modest at 66.7 per cent.

Customer deposits over the 12 months from March 2008 increased by nearly €160 million. Credit quality remained "good", with non-performing loans standing at 4.1 per cent of gross advances.