Updated - See Bank of Valletta reaction below - Fitch Ratings has downgraded Bank of Valletta's (BoV) Long-Term Issuer Default Rating (IDR) and Viability Rating to 'BBB' from 'BBB+' and to 'bbb' from 'bbb+', respectively.
It has also affirmed the bank's Short-Term IDR at 'F2', Support Rating (SR) at '5' and Support Rating Floor (SRF) at 'No Floor'. The Outlook on the Long-Term IDR is Stable.
"The downgrade of BoV reflects our view that its capitalisation is under pressure from increasing regulatory requirements and that its current capital ratios are not fully reflecting operational and market risks. We believe that although the bank is considering strengthening its capital through a new share offer, this would not be sufficient to meet all future requirements and for the bank to maintain its VR at 'bbb+" the ratings agency said.
"Although the bank has put in place a series of measures to reduce risks, we believe its risk controls continue to lack the depth required for the risks it faces in its operating environment."
Fitch said BoV's Issuer Default Rating is driven by the bank's intrinsic strength as indicated by the Viability Rating.
"In assessing the bank's VR we have considered the strong franchise of BoV in Malta, where it has leading market shares, as well as a lack of geographical and business diversification. The bank's operations focus largely on commercial and retail businesses, which in turn have resulted in some concentrations towards government exposures and the real estate sector.
The bank's operations focus largely on commercial and retail businesses, which in turn have resulted in some concentrations towards government exposures and the real estate sector.- Fitch
"The bank has stated its intention to reduce such concentrations but, given the domestic operating environment, alternatives are limited. This, in our view, also continues to put pressure on its risk appetite and underwriting standards. Further, risk controls in the non-credit-risk division have not evolved in line with the growth of certain businesses. While the Maltese regulatory framework has improved over the past few years, its implementation is less thorough than in EU countries with the most stringent framework."
It noted that the bank's balance sheet grew 8% in the financial year to September 2016, following strong growth in deposits, which were partially invested in investment-grade EU bank and government securities. Although the concentration of Maltese government bonds has reduced, it remains the bank's largest sovereign risk.
"By writing off a portion of its impaired loans in FY16, the bank has demonstrated a proactive attitude towards reducing the stock of its impaired loans on its balance sheet, which fell to 5.1% of gross loans (from 6.7% at end-FY15). This figure, however, remains higher than average in similar operating environments. Coverage of impaired loans of 87% compares well internationally."
Fitch said the BoV's Short-Term IDR, which is the higher of the two ratings mapped to 'BBB', continues to reflect the bank's robust funding and liquidity.
"BoV's deposit base is robust, underpinned by a leading domestic franchise, an improving loan/deposit ratio (which reached a comfortable 44% at end-FY16), while unencumbered liquid assets remain stable at a high 16% of total assets."
It added that BoV's Support Ratings (SRs) of '5' and Support Rating Floors (SRFs) of 'No Floor' reflected its view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that a bank becomes non-viable, after the EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism come into effect. This provides a framework for resolving banks that require senior creditors to be involved in burden sharing when necessary.
Bank of Valletta reaction
BOV CEO Mario Mallia.In a reaction, Bank of Valletta CEO Mario Mallia explained that the downgrade in the long term rating is driven by Fitch's view that the bank needs to increase its capital levels, in an environment of rising regulatory requirements.
We are withdrawing from traditional businesses which lie outside our current risk appetite.
"The bank has, in fact, already made public its intention to strengthen its capital buffers, through a combination of fresh capital issues, restrained dividend payouts and the review of the business model."
Mr Mallia said the bank is committed towards strengthening its levels of capital, as well as its risk management framework.
"We have started by beefing up our subordinated debt capital, and are now addressing core equity. We are also putting into place a robust Risk Appetite Framework, and building up from scratch a strong and well-resourced Anti-Financial Crime function.
"At the same time, we are withdrawing from traditional businesses which lie outside our current risk appetite. We are also addressing legacy issues that involved the bank in undue legal and reputation risk. These are the measures we are taking today to ensure the future of BOV as a strong, stable and well-capitalised institution."
No risks for the bank's stability
Meanwhile, the government noted how Fitch had reported that: "BOV's short term rating, which has been assigned at the higher of the two options available for banks rated 'BBB', continues to reflect its robust funding and liquidity".
It had noted that the bank's assets were up by 8% in the first half of the year and that “BOV’s profitability benefits from sound core revenues generated from its commercial business activities, good operating efficiency and contained loan impairment charges”.
This meant that there were no doubts about the stability or the profitability of the bank. Despite a downgrade in 2011, BOV had continued to grow and earn more.
The government however noted changes in regulatory requirements, notably for higher capital, a situation which had led to downgrades for a third of European banks last year.
65 banks were downgraded by Fitch this year.
Nonetheless, as noted by Fitch, BOV was strengthening its capital and reducing its concentration on government bonds.