The domestic banks too, like most of the international counterparts, are back to making good profits. After HSBC Malta reported rather subdued net earnings for the second half of its last financial year a number of the smaller local banks reported a good outturn. Now the Bank of Valletta has come out with a very robust performance in the first six months of its own financial year.
Comparisons between the two major banks are not straightforward since they have different financial years. That for HSBC Malta is the calendar year, whereas BoV's financial 12 months run from October to September. This means the BoV results captured the six months from October 2009 to September 2010, which saw a good recovery in the international financial markets, enabling the bank to recover another part of the losses in fair value of foreign investments it had reported a year ago. But then, the second six months of HSBC Malta's financial year also coincided with a good upturn in capital markets.
The robust profits of the Bank of Valletta from October 2009 to March 2010 reflected a positive gain of just under €6 million in fair value movements against a deterioration of €32 million a year earlier. That helped the profit outturn. Other important drivers forward were its operating activities. The net interest margin and net commission and trading income both improved, while operating expenses were well contained.
The bank thought it prudent to increase its general provision against impairment (bad debts) by €4.6 million while not requiring much change over the specific (individual borrowers) impairment charges. These movements allowed BoV to turn in an operating profit of €45.2 million, with the year-to-year gain restricted to €1.1 million because of the deliberate increase in the general provisions against impairment.
Operating profits were negatively affected by the bank's share of results of jointly controlled and associated companies (particularly Middlesea Insurance p.l.c., which at the end of 2009 wrote off its investment in an Italian Subsidiary, Progress Assicurazioni, to allow it to operate during 2010 looking forward to further improved outturn in the domestic market).
Bank of Valletta's profit before tax, at €47.5 million against €6.3 million a year ago, more than met its shareholders' expectations. Shareholders always tend to look ahead, taken announced results as given. They will no doubt mull carefully over the cautious economic prognosis given by the bank's chairman when he announced the financial results.
BoV chairman Roderick Chalmers said he expected the general economic environment to continue to improve - but warned that the recovery will be slow and somewhat erratic. No doubt he made that assessment because a domestic bank tends to reflect the fortunes of the economy it operates in, in addition to being heavily influenced by whether the fair value of its own investments appreciates or depreciates, which largely depends on the international financial markets.
The shareholders of a bank are not the only important factor in considering such an institution's operations. There are other stakeholders. These include its employees, who by all accounts continue to get quite a fair deal, depositors and borrowers. The latter two categories are jointly influenced by the interest rate regime under which a bank operates. At the moment it's nominally very low. Adjusting for inflation it is not so low, but lenders (depositors) and borrowers tend to go by the nominal factor.
By that yardstick depositors are not very happy these days, which partly explains why corporate bonds were snapped up with extraordinary appetite last year, and continue to do so this year as well. Borrowers probably feel they rarely ever had it so good, in terms of their servicing costs. But what borrowers value most of all is the readiness with which a lending back helps to finance their capital and operating requirements.
In this regard there is a widespread feeling that the banks have become rather chary of lending to the property sector.
Their prudence in this respect is understandable, given the extent to which they are already exposed and the overhang of unsold and unutilised built-up property on the market. In Ireland they have a similar problem, possibly larger in its mad proportions.
There they talk of "ghost estates", projects built with little relevance to the real requirements of the areas where they were located. Some even talk of a possibility that a number of them will be knocked down.
Between October and March, notwithstanding the issue and take up of bonds and government stock in that period, BoV continued to attract a good flow of net deposits. And, notwithstanding too the downturn in the property market and soft confidence elsewhere, the chairman was able to report that, overall, credit quality remained satisfactory, "with the proportion of non-performing accounts to total loans and advances showing only a marginal increase." The bank also increased its loans and advances during the period under review, to help underpin economic activity.
Of all this I find the "prudent" increase in the provision for possible loan impairments of particular significance. HSBC Malta too went down that road. The economic outlook, though improving, still signals that all is not nearly quite well in the state of Malta.