Bank of Valletta will have to hold back €16 million from the money it would normally pay out as dividends after the recent asset quality review found it underestimated potential bad debts in corporate lending.
Bank chairman John Cassar White said the review, carried out by the European Central Bank, scrutinised hundreds of accounts, applying a much more rigorous definition, which not only looked at when borrowers actually fell into arrears but also when their turnover dropped in a way that could affect their potential to keep up with payments in the future.
The shortfall in this provisioning – which is different to normal accounting provisions – was noted in BOV’s corporate lending.
The review also found that the bank had been over-prudent when it came to mortgages and lending to small- and medium-sized enterprises. However, the overprovision could not be offset against the underprovision of €16 million, which would have resulted in a net overprovision of €5 million.
BOV was the first of the 130 banks subjected to the asset quality review to announce its financial reports.
Mr Cassar White said that although the bank had passed the capital requirements test, there were several other aspects that still required clarification. He pointed out that the review had been carried out on accounts as at the end of December 2013, noting that 10 months had passed since then.
“We were informed yesterday during a video conference with the ECB that the review will be repeated, possibly on an annual basis, and even though it might not be as intense, it will certainly be just as intrusive and tough,” he said.
“It is important for people to understand how the asset quality review will change the very nature of banking. We all have to expect much deeper scrutiny than before.
“Banks will need to change their internal management structures and boards will have a much greater role, forcing them to be much tougher on their executive arm.”
He said this would mean changes in bank lending policies and risk management that would, in turn, have an impact on businesses. “I am already on record saying that they are undercapitalised. The business culture must change,” he warned.
Banks were given detailed instructions by their regulators on what action needed to be taken. BOV will be making “substantial increases” in its IT investment to improve data collection and will also have to invest further in other systems and processes.
Mr Cassar White explained that the comprehensive assessment reaffirmed that the bank’s capital base exceeded the regulatory capital requirement even in an adverse scenario. The initial CET1 (common equity tier 1) ratio of 11.2 per cent at December 2013 fell to 10.7 per cent as a result of the asset quality review.
In the stress test, the CET1 ratio rose to 11.93 per cent, being the lowest ratio over a three-year period under the baseline scenario, compared to the threshold of eight per cent set by the ECB.
Under the adverse scenario, the CET1 ratio dropped to 8.92 per cent compared to the required threshold ratio of 5.5 per cent.