Bank of Valletta published its interim financial statements for the six months ended March 31, 2005, and stockbrokers and other investment intermediaries were last week invited by the new group chairman, Roderick Chalmers, to what turned out to be a very informative and forthright discussion of the group's financial position, recent results and prospects.
The results for the six months were very good and show the group maintaining its momentum of solid operating profit gains coupled with effective cost control.
The group improved net interest income by Lm1.6 million, or nine per cent, during the period October 2004 to March 2005 compared to the equivalent period last year and made an additional net Lm1 million from fees and commissions.
Trading profits, from the group's financial investments, added another Lm1.1 million (up 29 per cent over the equivalent period). As a result, operating income increased by Lm3.7 million, or 14 per cent, over the equivalent six months.
Importantly, non-interest income grew faster than interest income, due to sales of investment products, credit cards and trade finance. This means that the group is moving further along the path of diversifying its revenue stream.
Administration expenses and depreciation were nearly Lm1 million higher and net impairment losses Lm0.6 million higher, totalling Lm1.6 million, leaving Lm2.1 million of operating income to flow down as operating profit, which increased by 30 per cent, from Lm6.9 million to Lm9 million. Profit after tax was 26 per cent ahead, at Lm6.97 million (equivalent period 2003/2004: Lm5.54 million).
Looking at the results in more detail, interest receivable increased by Lm0.6 million and the increase came from interest on fixed income securities which more than compensated for the marginal lowering of interest received on loans and advances, balances and the Central Bank and Treasury bills. Interest on loans and advances, however, was charged with Lm3.5 million as a result of a change in policy of how interest on potentially impaired loans is treated.
A more prudent policy has been adopted in that, henceforth, interest stops being credited to income just as soon as loan repayment performance is defective rather than wait, as was the previous policy, and common practice, for a suitable period to elapse to confirm such non-performance. The effect of this change of policy was the said one-off charge of Lm3.5 million.
Loans and advances to customers increased by Lm0.7 million and the bank reported that "while there was a decrease in business lending during the period under review, this was more than offset by higher lending to the personal sector, especially for home loans."
This shift in lending was dealt with at some length by Mr Chalmers during his presentation. From the bank's experience, the personal loan sector, especially mortgages, were among the best performing.
Mr Chalmers further illustrated this from his experience noting that, even when property prices in Hong Kong dropped sharply, the rate of default on mortgages kept to their previous low level, hardly reacting to the falls. He said that, in contrast, the speculative end of any market, not just property, has to be watched very carefully because entrepreneurs, and their bankers, can easily get burned if they are not prudent.
This emphasis on prudence ties up with BOV's loan impairment provisioning. As I noted, impairment allowances for the six months under consideration were Lm6.6 million (up by Lm0.6 million). These allowances included a specific impairment charge of Lm5.2 million, Lm0.4 million less than for the period to March 2004. Although the bank, in recent years, has been brought fully in line with the banking directive requiring, among other things, "automatic" provisioning (in contrast to a more discretionary systems in common use previously), the bank thought it fit to go even further and took a very conservative view of the estimated value of collateral, engaging in a clean-up exercise and setting aside even more profit in the period under consideration.
The general impairment allowance at Lm1.4 million (equivalent period: Lm0.4 million) resulted from a change in method of computation to ensure greater reserves against uncertain borrower performance.
Deposits, by customers and other banks, increased only marginally as customers are seeking alternative saving and investment avenues.
The slowing loans and deposit growth rates, however, are industry-wide phenomena and BoV has maintained its market share. It has 47 per cent of bank deposits and 41 per cent of advances.
Looking over a longer period, according to calculation by the group, return on equity was 14 per cent in March 2001 and is 15 per cent now, although it had touched 11 per cent in March 2003. The cost to income ratio has been brought down from 56 per cent in March 2001 to 47.5 per cent in March 2005.
An interim dividend of 7c5 gross (March 2004: 6c0) is being declared which means that around 40 per cent of profit after tax is being distributed to share-holders.
In spite of the increasing competition in all areas, Mr Chalmers noted that the "underlying profit trend is positive and the Board expects that the positive improvement in results can be sustained for the second six months." Mr Chalmers also noted that the underlying strength of operations is even stronger than that immediately apparent from the results due to the very conservative provisioning.
The board has adopted a very sensible policy of not letting the privatisation issue constrain management's planning and action and the group is continuing with business as usual striving to enhance service, implementing business plans, improving the quality of the loan portfolio, and investing in people, processes and technology.
Three chief officers have recently been appointed: Victor Denaro, for Information Technology, Mario Mallia, for Finance, and John Soler, for Credit. Top management has now been streamlined by function, a process which started some years ago. It is also expected that the first staff transfer to the new Santa Venera operations centre will take place by the summer.
BoV's usual pragmatic approach is evident in its strategy towards overseas expansion and the eventual introduction of the euro, two areas dealt with openly and at length by Mr Chalmers. The eventual introduction of the euro will give rise to system conversion costs but this process should present no special problems. With the introduction of the euro, borrowers are likely to find more competing sources of funds and, while this is unlikely to impact the bank's existing loan portfolio, making new advances then might involve a tougher effort.
BoV's relationship management programmes, however, are fostering customer loyalty. A third aspect of the euro's introduction would be foregoing some currency conversion revenue.
Mr Chalmers explained that new products, including pension schemes, which will provide the group with an opportunity to extend its fund management capabilities, and the fact that BoV's financial products can now be delivered via various channels, according to the customers' preference, should make up for revenue losses. At the same time, every threat often presents its own opportunities and the introduction of the euro is itself likely to lead to new revenue sources.
Overseas expansion is also expected to enhance revenues. Mr Chalmers explained that BoV's overseas expansion is likely to consist of the bank supporting existing customers who are developing business abroad and concentrating on developing the provision of financial services rather than engage in financing operations.
pvazzopardi@usa.net
Mr 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.