Bank of Valletta to launch bond issue this month

Bank of Valletta is to launch a subordinated bond issue later this month following MFSA approval, chairman Roderick Chalmers told The Times Business.

The bond issue has been several months in the offing, and aims to pre-empt widely expected regulatory changes that will require banks to hold increased levels of capital. The chairman said it was the opportune time to go to the market after unveiling its interim results for the half year up to March 31.

A week ago, BoV reported operating profits for the first six months of its financial year of €10.1 million (FY 2008: €21.9 million). The results were primarily impacted by the decline in interest rates and the unrealised fair value markdowns on the bank's financial markets portfolio. The board has declared an interim dividend of €0.035 per share.

"We have a very strong capital base," Mr Chalmers said, "but we believe that the regulators are going to ask banks everywhere to hold more capital.

"We would prefer to be ahead of the regulator rather than chasing him. In the past, we have been so comfortable in terms of capital that we have really not looked at bond issues as a regular feature of our funding mechanism. However, the world is changing, and in the new (regulatory) environment we think that rather than having an issue every ten years or so, we should make issues in smaller tranches a regular feature of our funding programme. That will also give an opportunity to the Maltese investor to have a regular chance of subscribing to longer-dated paper issued by the bank and carrying an attractive yield."

Despite describing the six months between September and February as "unquestionably, the toughest" in modern inter-national financial history, Mr Chalmers believes the "acid test" for the Maltese economy lies in the next two quarters, the height of the tourism season.

"The winter months are not a good measure of the effect of the global recession on tourism," he pointed out. "It is not just the impact on the airline business or the hotel business - it is also the impact on the wider economy, as the tourism sector has a rapid and significant multiplier effect. It is a combination of a number of simple facts that cause us to be preoccupied: Malta is still obtaining around 40 per cent of its tourist business from the UK; the devaluation of sterling against the euro over the last 12 months; and the deterioration of the British economy, which is among the hardest hit in Europe. Add these together and you will quickly appreciate our concerns regarding the potential effect on the tourism sector in Malta in 2009.

"The next three to six months will tell us whether the economic situation is going to be more challenging, or whether we will continue to see a mild impact (of the global recession). We have to watch developments in that sector carefully."

Last week, Mr Chalmers illustrated how BoV's prudent policy led it to report liquidity at 49.8 per cent, Tier 1 capital of 10.5 per cent, and a loan-to-deposit ratio of 66.7 per cent. In terms of Tier 1 ratios, Malta's largest financial institution trails only Credit Suisse and UBS from among the larger European banks. At 6.5 per cent, its tangible equity to tangible assets ratio places it in the "best in class" category, well ahead of major institutions across Europe and in the United States.

The chairman explained that the decision not to pass on the last two interest rate cuts announced by the European Central Bank stemmed from its determination to be fair to both borrowers and depositors.

"Our view was that we could not reduce our deposit rates without being uncompetitive, eroding our deposit base or potentially risking the gradual migration of deposits - which would be bad for the bank, and also bad for the Maltese economy. We can only lend money if we have deposits.

"Then the issue would not be about borrowers paying 25 basis points or 50 basis points more than they think that they should, but whether funding would be available - that is what the so-called 'credit crunch' is all about.

"The real issue which is exacerbating the impact of the global recession is not so much the cost of money, but the availability of it. The bank is committed to sustaining the Maltese economy, and we are able to do that because we have liquidity. To continue to attract depositors, we have to offer reasonable deposit rates. Although some other countries have passed on the ECB rates, they have compensated for that by widening the spreads on loans."

Mr Chalmers pointed out that the bank is faced with a delicate balancing act. "We have to get this balance right between the affordability of borrowing - and here we are competitive by any measure on a European basis - and making sure we are competitive and attractive on the deposit side of our balance sheet. That is the tightrope BoV walks every day. The ECB pushing down the rates is not so much to stimulate the general credit market as to stimulate the inter-bank market - and to get credit flowing again. We are not big borrowers or lenders in that market."

Over the six months under review, loans and advances rose by €78 million and deposits grew by €51 million; year-on-year deposits increased by €160 million.

€115 million issued on home loans were mostly to first-time buyers. Mr Chalmers said that figure was "fractionally ahead" of last year's, although the run-up to the general election between January and March 2008 stalled property transactions generally. The average loan is less than €70,000, well covered in terms of loan-to-value ratio, with affordable monthly instalments.

Loans to businesses increased by €160 million. "The business sector is cautious and nervous, and rightly so," Mr Chalmers said. "We have a broad customer base that we are supporting ... good businesses are good businesses, and we will continue to provide credit to them."

Credit cards still constitute a "very small part" of BoV's business. The usage of credit and debit cards is increasing and there is a continuing shift from cash to cards. "What we are not seeing is any shift from the cultural reluctance to use personal credit on cards," Mr Chalmers remarked. "Customers use the credit cards and then pay the bill at the end of the month. The outstanding amount on credit cards is very modest."

A year ago, BoV implemented cost control measures which have led to a one per cent cut over the corresponding six-month period in 2008. Travel costs have been trimmed and marketing, telecoms, paper and postage expenses have been reviewed.

Over 60 per cent of the bank's overheads are people-related and escalate because of in-built cost- of-living increases and collective agreement terms.

Mr Chalmers said the bank was currently only undertaking very limited new recruitment, with every single addition requiring the chief executive officer's personal sign-off.

"We do not have a hire and fire mentality," Mr Chalmers said. "Elsewhere in the banking world, there are tens of thousands of jobs being lost. That is not our approach."