The six-monthly profit announcements by Malta’s two largest banking institutions are always key events for the local financial market. Last week’s interim results publication by Bank of Valletta plc was also important as it was the first public appearance by the newly-appointed chairman and provided analysts with an opportunity to understand any policy changes that may be in the pipeline.
One would have expected BOV’s earnings announcement and an 11 per cent hike in dividends to lead to a stronger upturn in the share price
During the first six months of the 2012/13 financial year, the BOV Group registered a 31.5 per cent increase in pre-tax profits to a record level of €64.6 million surpassing the previous record of €56.6 million in the six months ended March 31, 2007.
Chairman John Cassar White described the results as “very impressive especially in view of the turbulent environment” but warned that analysts must be careful not to expect a similar profit also during the second half of the year since the H1 results were positively impacted in a material way by the upturn across international bond markets. This had a double whammy effect with strong upward movements on the bank’s investment portfolio and also on the portfolios of the Middlesea Group insurance companies where BOV has significant stakes in both companies and therefore takes account of such movements in its financial statements.
BOV’s financial statements as at March 31, 2013, reveal that the bank recognised €13.2 million in positive fair value movements (comprising a €9.6 million fair value uplift on its bond portfolio in line with the rising trend of international bond markets as well as €3.6 million in realised gains on other investments and hedging securities) together with its share of profits from the Middlesea Group companies of €8.6 million (March 2012: €1.6 million).
Operationally, the results were marginally unchanged over the previous comparative period when one excludes the one-off interest income recognised last year. While the interest margin dropped due to the non-occurrence of this one-off income and the incidence of higher deposits which were placed in lower-yielding short-term securities, it is encouraging that the BOV Group reported growth in fee and commission income reflecting continued positive performances from investment-related activities as well as the card and payment businesses.
The balance sheet as at March 31 also reveals some important factors. The loan book continued to show subdued growth, especially from the business sector. Total loans were largely unchanged at €3.7 billion as the repayment of some large loans were mostly offset by the continued strong demand for home loans, particularly from first-time buyers. Both the chairman and the CEO partly attributed the slowdown in the local economy to the cautious stance adopted by the business community during the prolonged election campaign.
Chief executive Charles Borg intimated that the performance of the local economy is expected to gradually improve this year and in 2014, and this should have a positive impact on the loan book.
Meanwhile, the deposit base continued to expand with an increase of €300 million in the first six months of the 2012/13 financial year notwithstanding the stiff competition from the Government through the regular stock issues coming to the market and the aggressive pricing by many of the smaller banks operating in Malta.
BOV’s loan to deposit ratio decreased to as low as 63 per cent as at March 31, implying a high degree of liquidity and therefore the need for BOV to see an upturn in loan requests in order to generate higher income levels.
Shareholders ought to be pleased that the bank declared an interim dividend of €0.06 per share – matching the previous record half-year dividend of March 2008. However, it is worth highlighting that although the interim dividend grew by 11 per cent over the March 2012 dividend, profits surged by 32 per cent.
The interim payout ratio declined to 26.3 per cent. When questioned on the reason for the decline in the payout and whether this implies a change in the dividend policy going forward, Mr Cassar White clearly explained that this cannot be excluded in the future and a decision would need to be taken once the new regulatory directives are published in the coming months.
In his first meeting with the financial community, the chairman gave a very clear message to the market and to all shareholders that the banking industry is being governed by increased prudence and this will effect provisioning, dividend distributions and capital requirements. Mr Cassar White stressed the importance of taking decisions with a long-term perspective in mind rather than governing merely to maximise returns to shareholders over the short term.
Another area which was discussed on various fronts is the level of provisioning on possible impaired loans. During the presentation of the 2012 annual report of the Central Bank of Malta, Governor Josef Bonnici highlighted the need for banks to increase their loan provisions. In his recent column in Times of Malta, BOV’s chairman argued that risk management should be at the heart of how a bank is managed to ensure that we do not suffer the same fate as other banking institutions across Europe.
In recent financial periods, BOV had taken an approach to building collective provisions based on a more cautious view on certain sectors of the economy. Meanwhile, during the past six months, BOV adopted a different approach in its provisioning policy. The bank analysed its portfolio of non-performing loans and took a more cautious and prudent view on the value of collateral held. This led to total impairments of €11.9 million during the first half of the year against €15 million in the comparative period.
Moreover, there has also been widespread discussion on the level of capital held by banks. This was another topic that had been raised by the Central Bank Governor who stated that “banks should enhance their capital buffers through higher profit retention”. Lower dividend payments to shareholders are one way of building additional capital over a period of time.
There are other forms such as rights issues and this was intimated by both the chairman and the CEO in last week’s meeting. Although this may have surprised some financial observers, Mr Cassar White indicated that a decision on the method, the amount and the timing of the additional capital requirements for BOV will be communicated to the market by the end of this calendar year.
The chairman’s cautious stance was reflected on the market as the share price reacted mildly to the record financial performance. Under normal circumstances, one would have expected BOV’s earnings announcement and an 11 per cent hike in dividends to lead to a stronger upturn in the share price. Although the equity advanced last Friday and closed 1.3 per cent higher on the day following the announcement, the share price failed to surpass the €2.30 level. The equity has been range bound between €2.25 and €2.30 for many months and the €2.30 level seems to be an important resistance level.
Notwithstanding the muted price movement of BOV’s equity to the record financial performance, the announcement was important in the overall context of market sentiment. It closed off another positive week of earnings reports by local companies following equally record announcements by RS2 Software plc and Simonds Farsons Cisk plc. Although these are smaller companies in comparison to the two large banks and International Hotel Investments plc and therefore their impact on the overall direction of the MSE Share Index may be somewhat limited, it is important that the performance of Rs2 and Farsons was also very positive, helping investor sentiment towards the equity market.
It is encouraging that many companies recently registered improved performances and recommended the payment of higher dividends to shareholders. This subject will be tackled in greater detail in next week’s column but higher income-generating assets for shareholders is important given the expected prolonged downturn in the interest rate cycle.
Meanwhile, BOV shareholders as well as other bank shareholders look forward to hearing about upcoming developments across the banking industry and the impact that new regulations may have on the retail banks listed on the Malta Stock Exchange.
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.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.