Bank of Valletta said that while it had passed much of the rate reductions made by the European Central Bank on to customers, this would have an adverse effect on its profitability and 2009 would be a "very challenging" year for it.
It also reported that with regard to retail and home loans it had seen no evidence of any significant deterioration in credit quality, but a modest slowdown in the demand for credit, particularly on the home loans side.
In a long interim directors' statement to the Malta Stock Exchange, it said demand for investment and insurance products had remained subdued, although there had been something of an improvement since the turn of the year.
In its statement, BOV said the first quarter of the current financial year (which started on October 1) witnessed a continuing period of extreme nervousness and volatility in the international financial markets.
This happened as international governments took exceptional measures in an attempt to stabilise the global financial system, following the widespread fallout in the wake of the failure of Lehman Brothers in mid-September 2008.
In this environment, the markets continued to re-price risk and to turn attention and concerns to the likely impact of the impending recession on the wider economy.
This, together with the substantial ongoing deleveraging being undertaken by financial institutions and hedge funds, had kept both bond and equity prices under considerable pressure.
Turning to interest rates, BOV said that between October 1, 2008 and the end of January, the ECB intervention rate had been reduced by 2.25 per cent, from 4.25 per cent to two per cent, an adjustment in rates unprecedented in both speed and severity.
"BOV has passed on much of this rate reduction to our customers, and this will have an adverse effect on the profitability of the bank - both because of the lag or delayed time effect on the re-pricing of term deposits, and also because continuing competition for deposits has resulted in a compression of the net interest rate margin," it said. The bank said the re-pricing of credit through the application of margins appropriate to the current environment was underway, but would necessarily be a gradual process.
Demand for investment and insurance products had remained subdued, although there was something of an improvement since the turn of the year.
Commission income on other banking services had shown a satisfactory increase over the corresponding period last year.
"The current levels of volatility experienced on the international markets on an almost daily basis make it extremely difficult to forecast forward performance, as does the global economic recession that is presently unfolding. However, the expectation remains that 2009 will be a very challenging one for the BOV group.
"BOV remains wholly committed to supporting Malta's economy and our business community in a responsible manner through the current economic downturn, and the conservative loan-to-deposit ratio and liquidity policy adopted by the bank means credit is readily available for our customers."