The Lombard Group also registered a 1.4 per cent increase in non-interest income to €12.2 million mainly reflecting the 2.6 per cent rise in revenue from the postal subsidiary Maltapost plc.The Lombard Group also registered a 1.4 per cent increase in non-interest income to €12.2 million mainly reflecting the 2.6 per cent rise in revenue from the postal subsidiary Maltapost plc.

Lombard Bank Malta plc published its interim financial statements last week, revealing a 5.7 per cent increase in total operating income to €19.9 million but a 3.3 per cent decline in pre-tax profits to €4.2 million. The lower profitability generated during the first six months of 2013 was solely due to the recognition of higher impairment provisions, which increased to €1.6 million from a level of €0.5 million during the first six months of 2012.

Lombard’s directors did not specifically indicate any particular reason for the increased provisioning, but the continued weakness across certain segments of the construction industry and the property market is likely to have had an impact on this decision. Moreover, the increased level of provisioning also falls in line with recent recommendations to all retail banks by the Central Bank of Malta.

Otherwise, it is encouraging to see that net interest income grew by 13.4 per cent to €7.7 million, mainly reflecting higher revenue from debt instruments on improved Treasury management while interest expenses decreased as customer deposits dropped in the first six months of the year. In fact, it is worth highlighting that the interest margin increased to a record level of 63.7 per cent.

The Lombard Group also registered a 1.4 per cent increase in non-interest income to €12.2 million, mainly reflecting the 2.6 per cent rise in revenue from the Maltapost plc subsidiary.

Cost control continued to remain one of the key attributes for Lombard, with administrative expenses only edging 0.6 per cent higher during the first half of the year and the Bank’s cost-to-income ratio at a very attractive level of 39.3 per cent.

Another encouraging revelation from the interim financial statements was the slight increase in lending during the first half of the year and the substantial drop of €41 million in balances with the Central Bank of Malta, treasury bills and cash. This should be one of the reasons for the higher interest income generated by Lombard during the first half of the year.

On the other hand, customer deposits dropped by €12.5 million, reflecting the intense competition in the local market from other banks as well as from the regular debt issuance by the Government of Malta. While it is important for banks to attract deposits to be in a position to extend credit to their customers, a decline in deposits may not be too bad in the current circumstances where demand for credit is subdued and the investment of such deposits may not be too lucrative.

Lombard’s share price has been on a downward trend in recent years, with the equity also trading below its book value earlier this year before it recovered by 16 per cent from a multi-year low of €1.636. The drop in the share price from as high as €2.85 in January 2010 is partly attributable to the weakening profits, reflecting the low interest rate scenario and subdued economic conditions impacting the demand for loans. Lombard Group’s profits also declined in recent years from annual pre-tax profits, which touched €14 million in both 2008 and 2010 as a result of the regulatory impact on Maltapost’s financial situation.

Another factor which is very likely to have negatively impacted sentiment towards the equity, contributing to the downturn in the share price, is the recent developments with respect to the largest shareholder. Lombard’s largest shareholder was Cyprus Popular Bank with a stake of 48.9 per cent. These shares are now held by an administrator after the bank went into liquidation following the well-documented developments in Cyprus over recent years. The role of the administrator is to wind down Cyprus Bank, which entails the sale of some of its assets including the stake in Lombard.

It is therefore only a question of time before this sizeable stake is sold to a new institutional investor or a group of investors. Until such time as the identity of the buyer is known and the price for the transfer of the Lombard shares held by the administrator is established, sentiment towards Lombard’s equity may remain subdued. In fact, the share price is currently trading at a level very close to book value. On the other hand, shares of other retail banks are trading at a premium to their book value.

Since the matter is purely a shareholder issue, with the administrator of the shares seeking to find an interested investor, Lombard Bank cannot actually make any statements on such developments unless the administrators themselves notify Lombard of any specific progress on the matter. However, in recent years the Bank clarified some incorrect press articles on the relationship between Lombard and its largest shareholder. Lombard’s directors were right to point out that the Bank holds no exposure to any non-Maltese sovereign and corporate instruments. In effect, Lombard Bank has always operated independently of its largest shareholder.

Until such time as the identity of the buyer is known and the price for the transfer of the Lombard shares held by the administrator is established, sentiment towards Lombard’s equity may remain subdued

In view of the fact that sentiment towards the Bank is being conditioned by this unresolved issue at shareholder level, Lombard Bank ought to make an increased effort to communicate more regularly and effectively with the market. Unfortunately, Lombard is one of the few equity issuers that do not convene regular meetings with the financial community. Occasional briefing sessions for financial analysts are very important because they enable members of the financial community to understand the story behind the financial performance.

Such meetings are also an opportunity for the executive management to explain the company’s strategy going forward. While some may view this as unnecessary or detrimental in view of competitive pressures, companies must understand that financial analysts and the market at large need to be aware of strategic initiatives being undertaken to improve shareholder returns if they wish to maintain loyalty from shareholders and other investors.

Many local investors seeking to invest in shares are rightly following company deve-lopments more closely. As such, companies such as Lombard Bank need to maintain a constant dialogue with the market and the financial community to enable investment advisers to have added information to explain specific developments to shareholders and other interested investors.

While a constant flow of information is necessary for any public company, certain strategic developments may merit more regular or detailed announcements and briefing sessions. The current situation at Lombard should warrant this and once the shareholder matter is resolved, this may be even more necessary. The identity of a new substantial shareholder at the Bank could have wide implications for the future strategy. Over the years, Lombard adopted a very selective business model centred around project finance.

However, competition intensified in recent years mainly from various smaller banks entering the market, some of which also offer home loans. As such, due consideration to the effectiveness of the current strategy in today’s environment should be among the main items for discussion once the shareholder issue is resolved. Likewise, given Lombard’s majority stake in Maltapost, a change in shareholder could also have implications for the postal operator. This should then be communicated to the market because it also could affect sentiment towards the equity.

These are interesting times for Lombard Bank, its shareholders and the entire Maltese banking sector in general as a new entity or group of investors is eventually likely to be in control of a long-established and respected local bank which also has a majority stake in the postal operator.

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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