The share price of Bank of Valletta plc has climbed by over 19.5 per cent so far during 2013, approach­ing its highest level in over five-and-a-half years. Few shareholders and market participants may realise this because of the price adjustments arising from the various bonus share issues over the years and as a result, the price is viewed in isolation of this corporate action.

In fact, BOV has distributed bonus shares to its shareholders annually for the past six years and following last week’s announcement, this corporate action will take place again next January.

The strong recovery in BOV’s equity from the recent lows both in February 2009 and July 2012 is evident from the share price graph.

This graph depicts the share price movements since January 1996, clearly indicating the strong upswing during the bull markets in 2000 and 2006 and subsequent corrections. Effectively, this graph also shows that only those investors who purchased shares during the period from October 2005 to February 2008 are actually still incurring a ‘paper loss’ on their initial investment.

Otherwise, all other shareholders have seen the value of their equity investment rise.

Additionally, shareholders have received very handsome dividends, paid semi-annually in each year.

At times it is good to look back and consider the performance of individual equities to under-stand the benefits or otherwise that an investor may achieve in a particular company.

Very few shareholders probably calculate the annual returns achieved in their equity holdings over an extended period of time.

As an example, a purchase of some BOV shares at the market price of €6.219 on November 3, 2003 has produced a capital gain of 126 per cent over the past 10 years, i.e. 12.6 per cent per annum, despite the lower absolute share price today. Additionally, an investor who would have purchased these shares 10 years ago would also have received regular dividends each year, increasing the total return from this investment to 20.5 per cent per annum. This clearly shows the benefits of investing in shares and the superior returns compared to bonds over time. Investors (whether cautious or otherwise), ought to have some shares of strong and growing companies that generate some capital gains to offset the negative impact on wealth from inflation.

An investor who would have purchased these shares 10 years ago would also have received regular dividends each year, increasing the total return from this investment to 20.5 per cent per annum

What is also very interesting to note in BOV’s case is that despite the upturn in the share price to a five-and-a-half-year high, the valuation multiples at the moment indicate that BOV is actually cheaper now than at times in the past although the share price is currently €2.58 while at the low in 2009 it was €1.08.

In fact, the equity is today trading on a price to earnings multiple of 9.8 times compared to 12.4 times at its low in February 2009.

Moreover, notwithstanding the significant upswing in the share price the current dividend yield of 7.3 per cent is very attractive, although in 2009 it was 8.31 per cent.

On the other hand, if the price to book multiple is used as a valuation metric, this indicates that the equity is trading at a higher premium to net asset value than in 2009.

A similarly interesting comparison can be made to the previous high of five-and-a-half years ago, when the equity was at €2.60 in February 2008. At the time, BOV’s metrics showed a p/e multiple of 11.5 times, a price to book value of 1.94 times and a gross dividend yield of 6.7 per cent per annum.

BOV’s equity is therefore priced more attractively today on each of these three metrics indicating the superior financial performance by the bank in recent years, notwithstanding the adverse conditions from the onset of the international financial crisis and the subdued economic performance of the past five years.

The impact on the bank’s performance from the subdued economic performance is clearly visible in the September 2013 financial statements published last week.

The bank’s core business profits, which excludes price movements on the investment portfolio and the share of results from the insurance companies, dropped by 14 per cent to €86.5 million. This decline was mostly due to the 11 per cent reduction in net interest income arising from the lower returns on the €2.2 billion investment portfolio reflecting the interest rate environment and the higher level of deposits which were not deployed in loans due to the weak demand.

Although many shareholders would view a higher level of deposits as being beneficial for banks such as BOV, with ample levels of liquidity operating in an environment of subdued demand for loans, this is detrimental to the financial performance in the short-term as evidenced in the past financial year.

On the other hand, an increasing deposit base in a very competitive market indicates a high level of trust in the financial institution.

BOV’s core business profitability was also negatively impacted by the higher level of impairments on the loan book.

During the September 2013 financial period, impairments increased by 12 per cent to €25.6 million with the bank reporting that it continued to make “specific and collective allowances appropriate to our cautious view of the economy”.

This is in line with the recent recommendations by both the Central Bank of Malta and the European Commission for the Maltese banking system to strengthen its non-performing loan coverage.

During a presentation to financial intermediaries on the day of the publication of the 2013 annual results, BOV’s chief finance officer, Elvia George, explained that the large part of the impairments taken in the past financial year reflectsan exercise undertaken by the bank to take a more conservative view of the value of the property held as collateral on the non-performing loans.

While the core business profitability suffered, the overall performance was boosted by the favourable conditions across the local and international financial markets which helped the BOV Group register a 5 per cent increase in pre-tax profits to a record level of €115.8 million.

The positive performance in both bond and equity markets in Malta and overseas helped the bank register favourable fair value movements of €17.4 million on its investment portfolio. Likewise, this helped the performance of their insurance associates (Middlesea Insurance plc and MSV Life plc), as BOV’s share of profits in these two entities increased by 95 per cent over last year to €12.4 million.

While it is reassuring that the bank’s performance was boosted by the positive performances across stockmarkets, the core business of the bank will remain subdued until such time as interest rates begin to rise and a sustained demand for new loans is evidenced.

Until such time as any of these developments materialise, a continuing positive performance of local and international bond markets is necessary to enable the bank to repeat a strong performance and this in turn impacts on the overall level of dividends to shareholders.

The dividend policy has remained unchanged with almost 50 per cent of after-tax profits distributed to shareholders. In last week’s company announcement, the Board of Directors commented that this reflects a balance between dividend expectations and their long-term sustainability. BOV’s chairman, John Cassar White, explained to those present at last Thursday’s meeting that although the dividend policy has been maintained, the regulatory scenario is changing and this policy may need to change too in the future.

The Board of Directors also commented that “BOV is well on its way to meet the stringent requirements of the EU Capital Requirements Regulation and that the bank expects to meet these requirements from its own profit generation and without the need to raise fresh equity capital on the market”. This should be comforting for shareholders, especially following the comments made by the chairman last May, when he had hinted at a possible rights issue.

BOV has now surpassed HSBC as the largest company on the MSE with a market cap of €779.7 million.

It also has the largest shareholder base with over 18,500 shareholders.

Developments at BOV will therefore continue to have an overriding impact on sentiment across the local financial market.

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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