BoV €50 million bond issue to further strengthen 'already sound' capital base

Bank of Valletta has an application with the Malta Financial Services Authority to come to the market with Malta's largest ever corporate bond issue next month to continue to strengthen its already sound capital base, Charles Borg, chief officer, Financial Markets and Investments, told The Times Business.

In terms of the most important gauge of a bank's strength, Bank of Valletta stands on the global podium: Its Tier I ratio as at September 30, 2009, stood at 11.2 per cent, after Credit Suisse and UBS; its total capital adequacy ratio at 14 per cent, behind Credit Suisse and Standard Chartered.

The intended €50 million 4.8 per cent subordinated 10-year bond issue, which comes with an over-allotment option of up to €20 million, seeks primarily to redeem a €46 million 10-year bond which matures on March 15.

Bank of Valletta had stated at last year's annual general meeting that it would tap the Maltese capital market more regularly as part of its funding policy. Investors' response to last year's bond issue in June was overwhelming: total demand for its €35 million 5.35 per cent subordinated bonds exceeded €120 million. The issue had an over-allotment option of €15 million.

"It is an amount we are confident of achieving," Mr Borg said of the forthcoming issue. "There is a reason for the bank to tap the Maltese capital market more often. Internationally, credit and financial institutions are the key issuers of corporate paper. Last year, we came to the market after several years and the major objective was to strengthen our Tier II capital. We wanted to be ahead of the curve since banks should expect more stringent regulatory capital requirements.

"Tier I capital is pure equity and new regulations will mean Tier I capital will become even more important than it is today. Tier II capital includes subordinated paper, like the one we are issuing.

"Liquidity is fundamental for any financial institution. When one looks at the bank's balance sheet one would immediately realise that BoV's main source of funds is retail deposits. The figure of retail deposits as at the end of the last financial period was €4.8 billion. Very often these funds are 'sticky' money and remain with the bank for a long period of time."

Mr Borg added that long-term funding provides more stability to the liabilities side of the balance sheet.

Before the international financial crisis, the bank used the syndicated loan and bilateral facilities market to maintain a healthy funding mix while tapping different sources of finance.

"These markets are still not functioning efficiently and the costs are very much on the high side.

"Compared to these rates, the local bond market provides a cheaper alternative source of medium to long-term funding and demand from our investors is very encouraging," Mr Borg pointed out.

Bank of Valletta, he emphasised, continues to provide liquidity to the economy responsibly - one-third of the bank's loan book is home loans.

The bank needs to have long-term funding to bridge the gap or mismatch between its short-term deposits with its long-term loans.

"Today, the bank borrows on the inter-bank market and from the European Central Bank, but these options are short-term, traditionally between three to 12 months. Before the crisis, banks had the option to also tap the syndicated loan facilities but that alternative has evaporated."

Significantly, Bank of Valletta today funds its operations entirely from Malta, a measure even the regulator looks upon positively. It is a more cost-effective approach - with Malta's A+ rating, tapping overseas funding options is relatively expensive - despite the bank having to offer local investors higher returns. Mr Borg emphasised that Bank of Valletta has emerged from two years of international turbulence "virtually unscathed", a status confirmed by Fitch.

"We have projections for this year that are ambitious and we are on track," he said, alluding to the quarterly company announcement which stated there were no material events that would have an impact on the bank's or the group's financial position.

Deposits are monitored rigorously and advances continue to grow. The bank remains close to its corporate clients, particularly those in need of assistance in difficult times. Not only is the loan book increasing, Mr Borg insisted, but the quality of the loan book is also improving. There is continued growth in other areas of business as well, including fee income, bancassurance, and the card and foreign exchange business, he added.

Among the most significant events of the last six months, Bank of Valletta increased its stake in Middlesea Group to 31 per cent after subscribing to the insurer's recent rights issue. Asked about the bank's continued support for Middlesea, Mr Borg said BoV's primary objective was to continue to strengthen Middlesea's operation in Malta.

Mr Borg, who is largely responsible for Bank of Valletta's involvement in local corporate bond issuance, said a renewed spate of activity on Malta's capital markets this year was in line with what is happening abroad, particularly in a scenario where interest rates are at unprecedented low levels.

"Every organisation which is looking to sustain its long-term business has to find ways to reduce its costs.

"Finance costs are one of the major items in every profit and loss account. With interest rates at these levels, organisations examine the potential of fixing costs for the next seven to 10 years.

"This is a hedge for when interest rates start rising. That is why corporations are interested in issuing bonds now."

Bank of Valletta continues to be committed to finance the economy, and supporting corporate bonds falls within that pledge.

"Our commitment to financing the economy sees the bank supporting organisations to come to the market or through loans. But not every company can come to the market," Mr Borg cautioned.

"The major local banks conduct detailed analysis and due diligence before they accept to bring companies to the capital market.

"This is serious business because we are offering these financial instruments to a large number of personal investors. The major banks and the financial community have an obligation to ensure that whoever taps the capital market has a good business model and is able to manage stringent listing and regulatory requirements. As long as we do this, then everyone stands to gain.

"There is confidence in Malta's capital markets because bond issues have been of high quality. Bank of Valletta cannot - and will not - bring bond issuers to the market if they are not capable of succeeding."