Bank of Valletta saw its pre-tax profits slump to €64.4 million this year on the back of investment losses caused by market volatility and an out-of-court settlement with shareholders of a property fund that went bust.

The bank yesterday published the financial results for the year ending in September, which showed that profits dropped by €34.5 million, or 35 per cent, when compared to the previous year.

Uncertainty in the financial markets, especially in the second half of the year, saw the bank lose €24.9 million in the value of its investment holdings. This in-cludes €6 million in Greek sovereign bond holdings, which were written-off even before a decision by the eurozone leaders on Thursday for banks to accept just such a default.

The bank’s sovereign debt in Greece, Ireland, Italy, Portugal and Spain amounted to €23 million, which bank chairman Roderick Chalmers described as “a very modest part” of the bank’s portfolio.

He said the bank’s Tier 1 capital ratio stood at 10.5 per cent, well above the nine per cent threshold set by eurozone leaders as part of the solution to the debt crisis.

The bank’s bottom line was also negatively impacted by the €15 million in compensation to shareholders of the La Valette Multi-Manager Property Fund earlier this year.

Despite the market losses and the one-off compensation, Mr Chalmers said the bank’s core retail and commercial operations registered a two per cent increase in profit when compared to the previous year.

He announced that the board of directors was recommending a dividend of 8c per share, which would be added to the interim dividend of 6c per share paid earlier in the year.

Mr Chalmers said deposits went up by 6.5 per cent and now stood at €5.5 billion while the loan book only increased by three per cent, with credit requests coming mainly from first-time home buyers.

“There was a subdued demand for credit and domestic consumption was muted, which are signs that people are worried about the market volatility brought about by the eurozone crisis,” Mr Chalmers said.

He noted that the bank’s performance had to be viewed within the context of a eurozone debt crisis that kept dragging on and a Libyan conflict that had a direct impact on some domestic business.

Mr Chalmers described the latest eurozone deal as “a much bolder attempt” than the previous ones but insisted on caution since previous solutions always resulted in short-term gains that were reversed immediately as market confidence deteriorated.

He said it was positive that the Greek debt problem was isolated with the proposed 50 per cent haircut to bonds held by private institutions but expressed concern that the commitment to increase the European Financial Stability Facility to €1 trillion was not accompanied by the details of how this would be done.

“The €1 trillion is closer to what many were saying was required but eurozone leaders have not yet told us how they are going to get there, so we do not know how this will work,” he said.

Mr Chalmers said the eurozone’s biggest long-term problem was to get the Mediterranean countries to behave like the Germans in terms of fiscal prudence. “This is a cultural challenge and one that will take time to resolve,” he said.

The eurozone sovereign debt crisis, he added, would continue to cast a dark shadow over the next 12 months and a double-dip recession would still be “a distinct possibility” as governments across the eurozone cut expenditure to contain public deficits.

Focusing on Malta, Mr Chalmers said the property market would remain “soft” because of oversupply but the construction sector was expected to get a boost as more EU-funded capital projects came on stream.

He said Libya could offer an opportunity as the reconstruction process got underway although the timing was uncertain.

“The government played a good hand in Libya and this will serve us well when the reconstruction of the country starts,” Mr Chalmers said. The eurozone crisis could still pose a risk and the government’s obligation to exercise fiscal discipline could possibly dampen economic sentiment, he said.

Bank learns lesson but ‘did nothing wrong’ with property fund

Bank of Valletta is undertaking “a top to bottom” review of its sales processes as a result of the ­property fund saga, which saw the bank dish out €15 million in compensation to investors.

When presenting the bank’s annual accounts for 2011, the chairman, Roderick Chalmers, said the bank “learnt its lessons” but insisted it did nothing wrong.

“We are undertaking a top to bottom review of our sales processes not because we believe we did anything wrong but because we believe we should learn from problems that crop up from time to time,” Mr Chalmers said.

The review, he added, would also look into the relationship with fund managers because the property fund was not run by the bank.

Investors in the La Valette Multi-Manager Property Fund lost millions of euros when the fund went belly-up. Trading had been suspended in the summer of 2008 and after a protracted saga that involved an investigation by the Malta Financial Services Authority, in May, the bank proposed an out-of-court settlement for 75c per share.

It offered to buy back the shares and included in the price was a premium for compensation as a result of the fund’s underperformance.

The offer was taken up by 97 per cent of the fund’s shareholders and, according to Mr Chalmers, since June the amount had gone up to 99 per cent as a result of bilateral transactions. He said only 25 investors still held shares in the fund.

“This has been an unhappy experience for the bank and its customers but it was also the first time that a financial institution reached an out-of-court settlement at such an early stage,” Mr Chalmers said.

In three investigations concluded in June, the regulator found the bank guilty of breaching the conditions of the fund’s prospectus when investments were made in high risk sub-funds. The MFSA fined the bank and its subsidiary company a total of €347,816 for regulatory breaches.

The bank had not accepted the MFSA’s conclusions but stopped short of appealing to avoid protracting the saga. The MFSA is still examining whether the property fund was sold to investors who were not eligible and investigating allegations that persons connected to the licence holders divested their holdings when in possession of information that was not in the public domain.

Asked about the pending investigations, Mr Chalmers said he was confident the bank will not be found guilty.

“Bank of Valletta has been asking the authorities to conclude the pending investigations and I am wholly confident that the inquiry will show there was no wrongdoing. I hope that those who made unsubstantiated allegations will then be as vocal to retract them,” Mr Chalmers said.