The reporting season is now in full swing with two companies issuing their 2012 financial statements last week and Go plc, Malta International Airport plc and Medserv plc this week.
The decline in Lombard’s share price and the valuation discount on a net asset value per share basis is probably more to do with the uncertainty related to Lombard’s largest shareholder
Lombard Bank Malta plc was among the three companies which published their financial results last week. As was widely expected, given the first-half performance and the recent declarations by the bank, profitability declined by 16.7 per cent to €9.4 million. However, despite the lower profitability, which may not be as bad as some investors may have expected, the board of directors recommended that during the upcoming annual general meeting scheduled for April 25, shareholders approve a 4.3 per cent increase in dividends to €0.12 gross per share.
This is a record dividend for Lombard shareholders representing a gross yield of 6.3 per cent per annum based on the current share price of €1.915 per share. The bank increased its dividend payout ratio from below 30 per cent in 2008 to above 49 per cent for 2012.
It is also worth noting that for the third successive year, the dividend is payable in cash only and shareholders do not have the option to receive the dividend in new shares rather than in cash. This is possibly as a result of the high capitalisation of the bank which was again very evident in the 2012 financial statements published last week as the board highlighted that the bank has a strong capital adequacy ratio of 18.5 per cent.
It may come as a surprise that despite the robust capital ratios, the directors of Lombard also recommended that shareholders approve a one for 10 bonus share issue at the AGM. All members on the share register as at close of trading on May 22 will be entitled to the bonus shares. However, when analysing the equity component of the balance sheet, the capitalisation of reserves is amply justified given the low level of permanent capital of €9 million compared to retained earnings of €46.3 million. The bonus issue will be funded by a capitalisation of reserves amounting to €0.9 million and this will take place on May 28, if it is approved during the AGM.
The 2012 financial performance of Lombard Bank Group must be analysed in the context of the one-off transactions that took place in 2011, the weaker performance of Malta Post and the overall challenging economic climate. During 2012, non-interest income dropped by 6.4 per cent to €23.3 million solely due to the €2 million gain on the disposal of financial instruments that took place in 2011 which was not repeated during the year under review. Meanwhile, the other components of non-interest income reflect a 19.5 per cent rise in net fee and commission income to €2.4 million which Lombard attributed to the increased focus being placed to capture more international banking business. The largest component is postal income which was practically unchanged at €20 million.
The challenging economic conditions and Lombard’s prudent treasury management policies also impacted net interest income flows during 2012 with a 2.7 per cent decline to €13.8 million.
The impact of the change in regulation at the postal subsidiary was evident on the expenditure side of the income statement. Lombard Group’s overall non-interest expenses increased to €26.7 million mainly reflecting the higher costs emanating from Malta Post plc linked to the new cross border tariffs imposed by the Universal Postal Union. Lombard also suffered a higher depreciation charge following a number of property investments undertaken both by the postal subsidiary as well as the bank itself.
One of the more positive indications from the 2012 financial statements is the lower level of impairment provisioning despite the economic conditions. Lombard Bank stated in last week’s announcement that despite the fact that the bank remains predominantly exposed to project finance through its loan book (Lombard does not offer home loans unlike all other local retail banks), the impairment allowance recognised in 2012 of €0.99 million (2011: €2.2 million) is considered adequate in the circumstances.
A further analysis of the composition of the loan book including any delays in repayment will be possible once the 2012 annual report will be published in the coming weeks.
Another important indicator when analysing banks is the cost-to-income ratio. In view of the higher costs mainly related to the change in regulation within the postal industry and the lower overall income, the cost-to-income ratio of the Lombard Group deteriorated from 65.2 per cent in 2011 to 72 per cent in 2012. However, when computing this only at the bank level, the ratio of 43.9 per cent for 2012, although showing a deterioration from the extremely low level of 38 per cent in the previous year, compares well to the other retail banks across Malta. The 13.3 per cent decline in net profits of the Lombard Bank Group to €5.7 million results in an earnings per share figure of €0.1585 and compared to the current share price of €1.915, the price to earnings multiple is of 12 times when compared to a cheaper ratio for BOV at nine times and at a discount to HSBC’s valuation multiple of 13 times.
On the other hand, another valuation metric shows a different scenario as the price to net asset value per share of Lombard is at a discount to those of the other local banks. The balance sheet as at December 31, 2012, shows total shareholders’ funds of €77.5 million which equates to a net asset value per share of €2.15. Lombard Bank’s share price dropped significantly in recent months and this resulted in the equity trading at a discount to the net asset value per share. At a share price of €1.915, Lombard’s equity trades at an 11 per cent discount to the net asset value.
Meanwhile, the equity of BOV trades at a premium of 28 per cent to its net asset value while HSBC trades at double its net asset value. One way of interpreting this is the different returns to shareholders being generated with HSBC having the highest return on equity of over 23 per cent on a pre-tax basis compared to 12 per cent for Lombard. BOV also generated a return on equity of over 20 per cent in 2012 but the bank’s performance has been more erratic in recent years reflecting the significant impact of the movement of the bank’s international bond portfolio on profitability.
However, the decline in Lombard’s share price and therefore the valuation discount on a net asset value per share basis is probably more to do with the uncertainty related to Lombard’s largest shareholder than to the returns being generated.
Cyprus Popular Bank has a 48.9 per cent shareholding in Lombard and this Cypriot bank suffered tremendously from its significant exposure to Greece with the result that the Government of Cyprus saved Cyprus Popular Bank through a bailout. The uncertainty surrounding the fate of Cyprus Popular Bank and its future intentions regarding its stake in Lombard impacted local sentiment negatively towards the bank. On various occasions last year, Lombard formally made specific announcements on its relationship with its largest shareholder clarifying that it holds no exposure whatsoever to any member of the Cypriot Banking Group nor to any other Greek or Cypriot entity.
Investor sentiment towards Lombard in the coming months could continue to be conditioned by the fate of Lombard’s largest shareholder especially following last weekend’s development on the one-off tax being imposed on Cypriot depositors. However, Lombard’s financial performance is expected to improve primarily as a result of the recovery expected at Malta Post plc.
The postal subsidiary was granted approval by the regulator (the Malta Communications Authority) to increase postage tariffs from November 2012 and a further increase will take place on April 1.
Confirmation of this expected recovery in profitability was also made by Malta Post when in the interim statement published on February 19, the company stated that its profitability since the start of its new financial year on October 1, 2012, improved and further growth is expected in the second half of its financial year (between April and September) given the anticipated positive impact from the new revised tariffs for standard local mail which will come into force on April 1.
The Malta Post plc financial statements to be published in May for the six-month period to March 31 will therefore be closely scrutinised also by Lombard Bank shareholders. Malta Post is also likely to benefit from higher revenues from the increased local mail that normally takes place during an election campaign.
Cautious optimism on the future was also evident in last week’s announcement when a rare statement by chief executive Joseph Said referred to the bank’s ability to “capitalise upon emerging opportunities in 2013 and beyond”.
Minority shareholders will hope that such opportunities could help Lombard to get closer to the record levels of profitability achieved in 2008 and 2010 of around €14 million before tax.
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.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.