Fitch Ratings today affirmed the long-term credit rating (issuer default rating IDR) and viability rating (VR) of Bank of Valletta at BBB+ with a stable outlook.
The rating is based on the bank's strength as a stand-alone institution, and does not take account of any potential external support.
Fitch said the VR reflected the bank's leading domestic franchise, which provided it with robust customer funding and liquidity, as well as healthy operating profitability.
However, the ratings were also influenced by high industry and single-name credit concentrations deriving from the small and undiversified nature of the Maltese economy as well as from the bank's exposure to the Maltese government through securities and related entities.
Fitch said the bank's loan quality has deteriorated, with doubtful loans accounting for a relatively high 9.5 per cent of gross loans at FY14.
The deterioration was primarily driven by exposure to the construction and real estate sectors.
However, over the past two years, BoV applied a more conservative view of collateral, resulting in adequate coverage against doubtful loans (54 per cent).
BOV's Fitch core capital-to-weighted risks ratio was also adequate at 12.9 per cent at FY14, especially in relation to unreserved problem loans and absent of credit stresses in largest risks, most of which were state-guaranteed.
Fitch said that in FY14, deposit growth continued to outpace that of loans and the group's loan/deposit ratio was a comfortable 57 per cent.
As a result, reserves of unencumbered liquid assets were ample and there was minimal reliance on wholesale funding.
The rating agency said BOV's VR could be affected by significant asset quality deterioration, such as from material weakening in any of the sectors to which it was more exposed, potentially putting capital at risk.
Earnings pressures and any unforeseen liquidity shocks could also be negative for the VR.
Fitch noted the inherent risks in the strong links between a country's sovereign and its banks, particularly in small countries.
Downside pressure to the bank's VR could come from the impact that severe austerity measures, which could potentially be imposed by the European Commission on the Maltese government in response to its excessive expenditure, could have on the domestic economy and ultimately on the bank, in terms of asset quality and profitability.
Fitch rated BOV's support rating (SR) at '2' and support rating floor (SRF) at 'BBB-.
BoV's SR of '2' reflected Fitch's belief that there wasa high likelihood of timely support from the state to the bank given its systemic importance, with a deposit market share of over 45 per cent.
At four notches below Malta's Long-term IDR (A/Stable), BOV's SRF of 'BBB-' reflected Fitch's view of the authorities' relatively limited ability to support BOV, if ever required, as the bank's assets represented such a large portion of domestic GDP.
BoV's SRF and SR were sensitive to any weakening of Fitch's assumptions regarding Malta's ability and propensity to provide timely support to the bank.
The government's ability to provide support was indicated by the sovereign rating and any downgrade of Malta's sovereign rating would trigger a downward revision of BoV's SR and SRF.
However, in Fitch's view, the greatest sensitivity was to progress made in implementing the bank recovery and resolution directive and single supervisory mechanism.
In this context, Fitch expected to downgrade BOV's SR to '5' from '2' and to revise its SRF to 'No Floor' from 'BBB-' by end-1H15.
Timing depended on progress made on bank resolution legislation.
All else equal, Fitch said, a downgrade of the SR and SRF would not affect BoV's VR-driven IDRs.