Interest margins, financial markets lead BoV to €47.5m interim profit

Improvements in interest margins, rising investor confidence, and a continuing swing into credit by its financial markets book led Bank of Valletta to report pre-tax profits of €47.5 million for the six months ended March 31 - up from €6.3 million in the comparable period the previous year, chairman Roderick Chalmers told The Times Business.

"Our net interest margin has added €3.5 million to our profits for these six months," Mr Chalmers explained. "Most of that arises from the gradual re-pricing of deposits over the period - but that re-pricing is now done, and there is no more re-pricing to follow. We have increased our loan book, and that has also added to our interest margin. However, interest rate compression is here to stay for a while, and we will not see any relief coming from interest rate margins until rates start to move upwards again. We do not expect that to happen this year given the fragility of the economic recovery."

Commission and trading income added a further €7 million to the interim profits. Mr Chalmers said this development resulted from the excellent work put in across the branch network, and also from several years of investment in BoV's asset management and asset gathering businesses.

Mr Chalmers said that as investor confidence began to improve last summer, customers were regaining their appetite for investment products, boosting the performance of the bank's stockbroking, fund management, bancassurance and wealth management arms. The bank's capital markets division had also been very active.

Income from interest margins and commissions and trading collectively added €9.5 million to the interim profits.

Stringent cost control resulted in costs rising by just €1 million - three per cent year on year - notwithstanding built-in cost increases including the cost of living adjustment and collective agreement provisions.

The bank, the chairman pointed out, has taken a cautious view on its impairment charge.

"Part of the impairment charge arises from specific accounts that have gone wrong - and we have not seen any material increase in accounts that have gone wrong over this period," Mr Chalmers said. "However, as the economy has been distressed, there may be some latently defective loans in our portfolio, and we have, therefore, taken a cautious and prudent view and increased the amount set aside for non-specific collective provisions by €4.6 million."

Year on year, operating profit has risen by €3 million.

The biggest "swing factor" in the results for the six months to March 2010 when compared with those of the previous year came from the financial markets book. This time last year - marking the low point of the financial crisis - the book had taken significant markdowns of €32 million, but the bank said at the time it believed this markdown would be temporary, given the staying power. The benefit has materialised - to the tune of a €6 million addition to the interim profits, following the write-back of €38 million that was reported in the six months to September 2009.

Before accounting for the profits and losses of its associates and jointly held companies, BoV made a half-yearly profit of €51 million.

Driven by an encouraging portfolio performance in the second half of 2009, Middlesea Valletta Life, Bov's bancassurance joint venture with Middlesea Insurance plc, contributed €3.6 million to the bank's results. On the other hand, BoV took a €7.2 million charge in respect of its share of the losses made by Middlesea Insurance plc, in 2009.

With Middlesea's other institutional shareholders Munich Re and Corporacion Mafre, BoV last year took a conscious, and Mr Chalmers believes, a responsible decision to support Middlesea's €40.2 million rights issue. This support resulted in BoV and Mapfre each raising their holding in Middlesea to 31 per cent.

The issue was necessary to shore up Middlesea's balance sheet, following the significant strain it had been placed under by its loss-making Italian subsidiary Progress Assicurazioni SpA. Middlesea has since exited the Italian market.

Asked why the bank had been supportive of Middlesea's rights issue, Mr Chalmers said the institutional shareholders had agreed it was the only way to ensure the issue was successful.

"For this particular rights issue to be successful, it had to be underwritten," the chairman explained. "The institutional shareholders felt it was necessary to underwrite the rights issue because Middlesea Insurance is an important financial institution: it writes around 25 per cent of the (non-life) insurance business in Malta. Failure to support Middlesea would have had significant ramifications on the financial services market in Malta. In the event, the institutional shareholders provided 88 per cent of the capital raised in the rights issue. Whereas the losses incurred by Progress are, of course, a matter of huge regret, we do not regret having provided full support to Middlesea - which can now concentrate fully on its successful and profitable operations in the domestic market."

Meanwhile, the sustained momentum of corporate bond issuance on the local capital markets has proven good for business: last year alone Bank of Valletta was involved in 80 per cent of bond issues as manager and/or registrar. Over €250 million worth of bonds were issued in 2009.

"We would have expected this high level of issuance to affect the liability side of our balance sheet," Mr Chalmers added, "but notwithstanding this, our deposits have continued to increase. We have been able to issue the bonds without cannibalising our deposit base. There is a high savings ratio in Malta, and part of bond subscription involves repatriated funds. The reason Malta's largest organisations are launching bond issues is both because there is a cycle of the refinancing of maturing issues under way, and because interest rates are at a historic low and have only one way to go. Therefore, some businesses believe that they would do well to lock in 10-year money at current rates."

Despite some criticism in the past from financial commentators on its dividend policy, the bank is set to continue with its long-standing strategy to build its capital base through retained profits.

Under a "prudent and diligent" profit retention ratio through dividend restraint, and the conversion of distributable profits into permanent capital, BoV has built its permanent capital up from €33 million to €200 million over five years. Two subordinated bond issues launched by the bank over the past 12 months alone raised €120 million of Tier II capital.

Mr Chalmers believes BoV has so far succeeded to stay ahead of increasingly demanding regulatory requirements, particularly with its robust 14.5 per cent total capital ratio.

The bank will add further to its Tier I capital ratio, currently standing at over 10 per cent, through the retention of profits, and possibly supplemented through other measures, including inviting shareholders, at their discretion, to take additional shares instead of cash dividends.

Replying to suggestion from some quarters that local bank charges were unreasonable, Mr Chalmers cited a September 2009 report issued by the European Commission's DG for Consumer Affairs on charges by European banks.

The study found that Maltese banks scored high marks for transparency and were among the best in class for the moderation of their charges structure.

BoV was not unduly concerned about the Greek crisis "in the micro sense of direct exposure" but shared international apprehension at the potential contagion effect on the rest of the eurozone.

The chairman said the sheer scale of the €100 billion package of emergency loans for Greece agreed upon by eurozone ministers and the International Monetary Fund last weekend was evidence of the concern across the bloc, and a determination to head off any threat of contagion.

"The fact of the matter is that there has been financial maladministration in Greece for generations, and the country is not competitive within the eurozone," he pointed out.

"What is wrong is that it has been allowed to go on for so long. Other countries like Portugal and Spain are also under pressure, but nowhere in the same league as Greece in terms of the parlous state of that country's public finances and their administration. The real issue is not allowing panic to set in, because panic leads to irrational behaviour as we saw with the banking crisis.

The size and structure of the Greek rescue package should serve to calm the markets, but there is no doubt that governments are going to have to toughen up and tighten up - and they will have to pay more for their money. They must get it right."