The reporting season for local public companies is now in full swing and HSBC Bank Malta plc’s announcement earlier this week starts off a busy period for analysts as many companies will be issuing their financial statements in the coming weeks.

The local market offers a number of alternatives for dividend-oriented investors with various companies offering yields in excess of six per cent per annum

It is also a time for investors to try to gauge the immediate and longer-term outlook for these companies in order to reposition their investment portfolios accordingly seeking to maximise the exposure towards those companies that may offer higher growth opportunities and on the other hand possibly reduce exposure to those companies with weaker growth expectations and as a consequence possibly lower dividend payments.

Investor sentiment across the local equity market has generally been more positive over recent months as evidenced by the increase in the MSE Share Index to a 21-month high earlier this week. The local benchmark index has advanced by over 14 per cent from the 2012 low in April as the market responded to the overall positive newsflow. More importantly however is the improvement in trading activity across many of the publicly traded companies indicating a return to favour of the equity market possibly in view of the more appealing dividends from a number of companies.

The announcement last Monday morning by HSBC Malta showing a growth in pre-tax profits of eight per cent to €95 million and the recommendation of a final gross dividend of €0.079 per share should continue to boost overall sentiment towards the market. When also taking into consideration the interim dividend of €0.10 per share distributed in August 2012 in respect of the first half of the year, dividends for HSBC Malta shareholders for the 2012 financial year have grown by 16 per cent to €0.179 per share before tax. This translates into a gross dividend yield of 6.5 per cent based on a current share price of around €2.77 per share.

The local market offers a number of alternatives for dividend-oriented investors with various companies offering yields in excess of six per cent per annum (before tax). An updated dividend league table will be published once all companies report their 2012 financial statements. Among the more consistent dividend-paying companies, Bank of Valletta plc leads the pack with a gross yield of 7.4 per cent followed by another five companies currently offering yields in excess of six per cent per annum namely HSBC Bank Malta plc, Lombard Bank Malta plc, Malta International Airport plc and the two property-related companies Plaza Centres and Malita Investments plc.

The highest dividend at the moment is that of Grand Harbour Marina plc with a yield of over nine per cent. However the company’s business model and track record to date clearly indicates that this is dependent on the company managing to conclude the sale of super-yacht berths to finance this dividend and this has been inconsistent from one year to the next.

Back to the HSBC announcement, the performance for 2012 was very much helped by the strong improvement registered by the life insurance business which benefited from the upbeat performances across the international and local financial markets. HSBC also registered modest growth in net interest income to a record level of €133.1 million and double-digit growth in trading profits (mainly foreign exchange) as the bank adopted a focused strategy to secure more international business.

The HSBC Malta performance also benefited from profits arising from sale of investments of €4 million as the bank repositioned its portfolio to gain advantage of market opportunities. The 2012 financial performance must also be analysed in the context of the sale of the card acquiring business towards the end of 2011. This impacted net fee and commission income which dropped by nine per cent to €30.5 million.

The overall cost base dropped by two per cent to €96.3 million. Staff costs declined by seven per cent to €54.7 million as the bank began to reap the benefits from the early retirement scheme which commenced some years back. However, the figure also includes a further provision of €5.6 million related to further costs to be incurred as HSBC Malta continues to implement the major global reorganisation exercise conducted by all HSBC companies with the aim of simplifying business structures and accelerating the speed of business decisions.

The cost base also includes higher amortisation expenses related to the implementation of a new IT system and an increased contribution to the Depositor Compensation Scheme. The slight reduction in costs led to an improvement in the group’s cost to income ratio from 50.4 per cent in 2011 to 48.7 per cent in 2012 which according to HSBC Malta’s CEO Mark Watkinson places the bank among the “best in class” compared to other HSBC businesses internationally.

HSBC Malta shareholders must be pleased to note that operating profits before impairment allowances of just under €101 million (+4.6 per cent) is the highest level since the previous record of €114.7 million registered in 2007.

While overall impairment allowances decreased by 31.7 per cent to €5.6 million, it is important to highlight that the 2011 figure comprised a one-off impairment of €4 million taken on the Greek government bonds held by the life insurance subsidiary which was not repeated in 2012. In fact, when excluding this in one’s analysis it transpires that impairments on the bank’s loan book increased by €1 million to €5 million in the light of the prevailing challenging economic environment which characterised 2012. During the press conference held earlier this week, HSBC argued that non-performing loans as a percentage of overall loans (a key indicator for the banking sector) remained stable at five per cent and very much in line with local trends.

The balance sheet shows tepid growth across the loan book with a net increase in loans of only €10 million to €3.3 billion. Mr Watkinson commented that the real estate market remained soft although there was good momentum during the second half of 2012 and the first two months of 2013 was “slightly above expectations” reflecting increased confidence across the markets. HSBC also noted that the increased demand for mortgages over recent months was also in response to the targeted marketing strategy adopted by the bank.

HSBC’s CEO concluded the press conference earlier this week by commenting that he believes that there are “genuine growth opportunities” for Malta in certain sectors by leveraging on the island’s geographical positioning. More specifically, on HSBC’s outlook, he expressed his confidence that the bank can continue to generate positive returns for shareholders despite the tough global economic conditions that are again anticipated to characterize the best part of 2013. HSBC has consistently registered pre-tax returns on equity of over 23 per cent per annum over the past four years and the recent performance must also be seen in the context of the current interest rate scenario where low and stable rates are not ideal for profitability levels.

The local retail banks have all continued to register strong returns for shareholders (measured by the double digit returns on equity) even in recent years as the local banking industry remained robust in contrast with the severe difficulties across many eurozone nations. Shareholders of HSBC Malta and other local banks should be pleased with the returns being generated by the banks including attractive dividends over the years.

Despite the natural risks related to loan exposure to particular vulnerable sectors of the local economy, investors should look forward with confidence as the Maltese retail banks have been successful in generating strong returns in recent challenging times (coupled with attractive dividends) and are well-positioned to grow profitability levels in the future once interest rates rise reflecting an improvement in local and international economic conditions.

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 from 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.

© 2013 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

www.rizzofarrugia.com

Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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