The results published by Bank of Valletta plc for the year ended September 30, 2010 show that the group registered a pre-tax profit of €98.9 million during the past 12 months. This represents a growth of 20.9 per cent over the previous year, and is just €2.8 million below the record level of profits achieved in 2007.

The 2010 financial statements make very interesting reading and clearly indicate that the BoV Group has registered substantial progress over recent years. BoV’s net interest income improved by €11.4 million (9.9 per cent) to €126.8 million mainly as a result of the sharp decline in interest payments to depositors as deposits re-priced in line with the low interest rate environment. This helped the net interest margin increase to a record level of 57.6 per cent compared to 48.1 per cent in 2009. The group also reported growth in non-interest income with fees and commissions from card usage and investment services increasing by 16.4 per cent to €44.1 million.

A surprisingly positive movement was registered in income from foreign exchange activities. The 2010 financial statements reveal that the BoV Group earned over €20 million from foreign exchange transactions representing a strong growth rate of over 55 per cent from the previous year. As all banks suffered from this source of income following Malta’s adoption of the euro in 2008, the level of income from foreign exchange activities in 2010 is higher than that registered in 2006 and not much lower than the record level of income from foreign exchange earned in 2007.

BoV chairman Roderick Chalmers confirmed that this growth rate reflects the growing importance of Malta becoming recognised as an international financial centre of repute with various multi-national companies transacting substantial business through the local banking system with some of these movements involving conversion from one currency to another. It is interesting to compare this level of growth with that of the other major bank in Malta. At the 2010 half-year stage, HSBC Bank Malta plc had registered a 20 per cent decrease in forex income to only €2.9 million.

All income items at BoV registered progress from the previous year, however, the fair value recovery on the bank’s international bond portfolio amounted to a mere €1.2 million compared to a €4.1 million recovery in 2009. Mr Chalmers indicated that during the second half of the 2010 financial year from April to September, the overall net fair value movements worsened from a recovery of over €6 million at the interim stage to only €1.2 million at year-end.

The deterioration was mainly due to the eurozone sovereign debt crisis which affected the value of some of the hedging instruments used by BoV. Nonetheless, total operating income of the BoV Group during 2010 increased by 10.7 per cent to a record level of €191.2 million.

On the expenditure side, the cost control initiatives are commendable with costs increasing by only 2.3 per cent to €78.8 million. The higher growth in income helped BoV improve the cost to income ratio to 41.2 per cent – a remarkable indicator by international standards and the best ever ratio for the BoV Group.

Although the Maltese economy proved to be remarkably resilient during the global economic downturn, some sectors of the economy were worse hit than others leading the BoV Group to increase net impairment allowances to €12.9 million compared to €4 million the previous year. The level of impairments recognised in 2010 is the highest level since 2005. Shareholders may be disappointed with this amount of impairments, however, it is noteworthy to highlight that despite the increased level of impairments compared to previous years, the resultant operating profit after impairments for 2010 of €99.5 million stands at a record level surpassing the previous record of 2007 by 3.7 per cent.

The lower return from the bank’s equity interests within the insurance sector precluded the BoV Group from surpassing the 2007 record results by a thin margin. While in 2007 the share of profits from Middlesea Insurance plc and Middlesea Valletta Life Assurance Co. Ltd amounted to €5.8 million, during this year the BoV Group absorbed a further loss of €0.5 million. This is a substantial improvement from the huge loss of €9.9 million in 2009 although it is disappointing that the bank’s large insurance investments continue to depress BoV’s performance.

When making reference to the 2007 record results, Mr Chalmers rightly pointed out that three years ago the interest rate scenario was very different. The group would have reported substantially higher profits than in 2007 assuming an unchanged level of interest rates. The strong rate of growth in the balance sheet of the group (a 33 per cent increase in the loan book over the past three years and a rise in deposits of almost €900 million) points to expectations of substantial further profitability growth once interest rates increase to more normalised levels. BoV shareholders will therefore be pleased to hear the news of the first rise in official interest rates by the European Central Bank possibly during the course of next year or in 2012 as this will immediately help the bank to improve its net interest income further.

Mr Chalmers also explained that BoV’s capital ratios are above the more stringent Basle III requirements coming into force and hence the directors maintained the dividend payout ratio and recommended the payment of a final gross dividend of €0.16 per share. Although this represents a seven per cent decline from last year’s final dividend payment in December 2009, when one includes the higher interim dividend already distributed in May, the total dividend for 2010 represents a growth of 17.5 per cent over the previous year.

For the fourth successive year, the board of directors of BoV also recommended a bonus share issue. Shareholders on the bank’s share register as at close of trading on January 7, 2011 will be entitled to a bonus issue of one new share for every five held. This however should be reflected in a downward adjustment to the share price following the distribution of the bonus shares in January 2011.

During the summer months sentiment towards BoV was clouded with the unfolding news related to the property fund and this resulted in a subdued stockmarket performance of bank’s equity. Although this incident was given ample exposure in the bank’s financial results commentary last Friday, market sentiment towards BoV turned bullish. This was immediately evident last Monday when over 55,000 BoV shares traded.

Few people may have observed that this increased activity and the subsequent sharp upturn in the share price on Monday to an intra-day high of €4.00 (+19.4 per cent) was possible as a result of the revised rules implemented by the Malta Stock Exchange during the summer months. These allow for the complete lifting of trade ranges following a results announcement. This proved to be a good initiative by the Borza since the market could have witnessed no trading activity on Monday had the old procedure been still in place. Hopefully other positive initiatives will follow by the MSE to improve the depth of the local equity and bond markets for the benefit of all market participants.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member 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.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

www.rizzofarrugia.com

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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