Bank of Valletta far exceeded market expectations with the publication of its preliminary results for the year ended September 30, 2005. There were gains across all revenue items, improvement in net impairment losses while operating expenses were kept under strict control.
Interest income increased from Lm85.4 million for the financial year ended September 2004 to Lm88.9 million in the year under consideration and this increase was reflected in a nine per cent increase in net interest income to Lm44.6 million in view of the marginal decline in interest expense. Commissions and trading income increased by seven per cent while the share of profit from associated and jointly controlled entities was up by Lm1 million to Lm2.5 million.
BOV recently increased its shareholding in Middlesea Valletta Life Assurance to 50 per cent and this very successful assurance company is now jointly owned with Middlesea Insurance.
Net impairment losses were down from Lm13.4 million to Lm11.7 million. The provision on the whole loan portfolio, the so-called charge for collective impairment, came to Lm5.1 million, compared to the previous year's write-back of Lm3.8 million, entailing an adverse swing of Lm8.9 million. The provisioning against specific loans, however, came to Lm6.6 million, or Lm10.6 million more favourable than the previous year's. As a result, therefore, the total charge for the year came in at Lm1.7 million lower.
Operating expenses were kept strictly under control and increased by only three per cent, to Lm30.7 million. The operating cost to income ratio for BOV continued to improve and is now at 44.5 per cent. Recently, it peaked at 57.5 per cent for the year ended in 2002 but has since been steadily cut down to favourable levels compared to international benchmarks, especially those of continental banks. The fall in the cost to income ratio pushed an increase in pre-tax return on equity, now at 19.1 per cent. This, too, is a strong figure.
For the three financial years ended in 2001 to 2003, Bank of Valletta reported a pre-tax profit in the mid-Lm14 million range. Profit has now increased sharply two years in succession and nearly doubled reaching Lm26.6 million.
This type of success boosts expectations and often creates an expectations management problem in the sense that the market would tend to forget how hard it is to produce such profits and is also likely to underestimate both the probability and the likely severity of problems in future. After delivering strong records, therefore, many responsible companies try their best to temper such expectations.
As a result, the presentation to stockbrokers last week by Roderick Chalmers, chairman, and by Tonio Depasquale, CEO, was an appropriately finely-balanced view of the group which detailed both the strengths likely to lead to future profit growth and the difficulties which the bank may face in a rapidly changing environment.
It was pointed out by Mr Chalmers, for instance, that while loans to banks increased by 42 per cent to Lm113.4 million, loans and advances to customers remained at around Lm838 million. Business lending was subject to new quality standards but demand for quality business loans and advances was also rather subdued. Demand for mortgages, in contrast, was rather strong and the bank expects it to remain so for years to come.
Lending to property companies was considered to be lending to business and this type of lending was considered different to mortgages where one is lending money to people to buy their own homes and is therefore tantamount to lending people money against all their future income since people are loath to stop paying mortgages for fear of losing their homes.
Bank of Valletta lays special emphasis on lending prudently. In discussing the introduction of the so-called "equity release products" - lending programmes which allow house owners to take out part of the value of the house - Mr Depasquale made clear that while designing such products would not be expected to be difficult, one had to make sure that a source of repayment is in place because, if not, such programmes would be a source of bad debts to the bank and of hardship to customers.
The bank is on guard against faulty credit. Mr Chalmers said that management was not satisfied with the level of non-performing loans, currently at around 9.5 per cent, and intended to bring the level down to below three per cent.
While BOV has retained its market share in spite of rather heavy competition, when Malta converts to the euro it might become more difficult to retain good quality customers since local banks would then face competition from other European banks using the same currency. Euro conversion also meant that the bank lost part of its foreign exchange dealing income.
Asked as to the likely impact of the latter on the bottom line, Mr Chalmers said that the income was significant enough to make the bank determined to replace it but not big enough to cause serious fluctuations.
Another important development had to do with treasury assets, which make up 56 per cent of the bank's total assets. These assets, which banks use as principals, are important profit centres and new accounting standards require that fluctuation in the value of certain classes of treasury assets are accounted for via the profit and loss account rather than against reserves, which was the previous practice.
This treatment may make for more volatility in the bottom line but more faithfully reflect the nature of the business banks are in.
Mr Chalmers again delivered a very well received presentation which very clearly and forthrightly dealt with BOV's results, the group's aspirations and the difficulties which might arise. It is also important that certain critical matters have been worked out by the board and management and that financial people are given unequivocal answers.
One such is privatisation. BOV has adopted a "business as usual" policy and the privatisation process would not be allowed "to defer, delay or postpone strategic, organisational and operational decisions". If future partners would then want to speed up or reverse certain initiatives, a decision about the matter will be taken then with the new partners.
Such a decision has to be put in the context of the challenges facing BOV Group and to which it has to both react and pro-act in an effective and timely manner. One such was the bonus issue which would substantially increase the bank's permanent paid up capital, quite apart from making the shares more affordable and therefore more liquid.
Various priority business areas have been identified during a high level business and organisational review following various major management changes including the appointment of Mr Depasquale as CEO in July 2004 and the appointment of Mr Chalmers as chairman four months later.
BOV believes that there are certain business opportunities which the bank must put in place as soon as may be. In this way, basically every key facet of the bank's business will be involved: credit, the revenue base, personal lending, cost efficiency, IT, risk management, financial instruments and mortgages. This was done in the context of a new top management structure and various governance developments. While management was there to execute strategy, manage the business and deliver results, the board had to go for a "helicopter rather than an engine view of the operation" and set strategy, exercise good oversight and ensure a high level of stewardship. BOV is being guided by the brand promise of "your Success, our Goal".
For the financial year, the board is recommending a final gross dividend of 15 cents per share (2004: 10 cents), making for a total gross dividend of 22c5 (2004: 16 cents). With the price currently at around Lm 6.60, this represents a gross yield of 3.4 per cent. The dividend represent a payout of 46 per cent of profit.
The bonus issue would appropriate Lm13.9 million from distributable reserves to share capital and involves the issue of one bonus share for every share held as at the close of stock exchange business on January 18, 2006.
Recently, FITCH, the credit rating agency, has upgraded BOV's outlook from negative to stable and reaffirmed the bank's ratings (Long Term A-, Short Term F2, and Individual C) in view of the improvement of BOV's asset quality, improving profitability and solid capitalisation. BOV was also awarded the Bank of the Year Award 2005 by the prestigious publication The Banker.
Mr Depasquale commented that "this upgrade in BOV's outlook is a vote of confidence as well as an international acknowledgement of the all round improvement BOV has been sustaining". He said the bank continues to focus on being supportive to its customers and to be responsive to the increasing sophistication of the markets in which it operates.
pva@onvol.net
Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. The company is involved in acting as sponsoring and corporate stockbroker for various listed companies, including Bank of Valletta plc. Mr Azzopardi or related parties, including the company, and their clients, have an interest in securities mentioned.
This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.