The results of the Bank of Valletta for the 12 months to September will not help the government's Budget outturn. A 60 per cent drop in profits translates into two lower inputs to the government's revenue. The first results from a lower tax take. The second from a reduced dividend on the 25 per cent shareholding the state still retains in the bank.
At first blush shareholders will not be pleased, either. They want profits and dividend payouts to keep going up. A reversal sounds depressing. And yet the BoV profit outturn for 2007/08 is in reality relatively heart-warming. If you peer through the financial gloom, there is a reasonably good light just beyond.
The Bank of Valletta was arguably the first bank in the western world to report on its performance in the prevailing crisis, since it is one of the few whose financial year ends in that month, rather than in December. An aside of that factor is the fact that the bank could not avail itself of a partial change in accounting practice, which would have allowed it to show a better performance.
The point bears elaborating. The bank had quite a good year, operationally. Its deposit base expanded, though there is an ongoing drop in the domestic saving ratio (the part of income after tax that is not spent). Its loan portfolio expanded without undue need for higher provisions, despite the incipient slowdown in the property sector.
Where the cleaners came in was in two rooms. One was where Lehman assets were held. Nobody expected that synagogue of American finance to go belly up. It was very much in order to include its securities in one's portfolio. The Bank of Valletta took a €12 million plus knock there. But the harder punch was in the larger second room.
Like all financial institutions a chunk of the bank's assets is held in the form of marketable securities, mostly first class bonds. Those assets did not - and could not - escape the mayhem that took place in the global financial system, once the credit crunch triggered by suspect US home loans swelled into a stock market crash that vied with the Great Crash of close to 90 years ago.
The crash accelerated in the second half of September, just before BoV closed its books for the financial year.
That acceleration reduced the value of the bank's securities assets by a further €14 million, on top on the €27 million decline suffered in the previous 11 and a half months. Accounting practice came into play here. Under the prevailing international standards the bank had to "mark" those securities "to market", meaning that the reduction between purchase price and current market price had to be passed through the profit and loss account.
That was the main blow to the bank's profit. Nevertheless, two considerations now come into play. That blow notwithstanding, the reduced final profits outturn still represented more than 10 per cent return on shareholders' funds. Many enterprises would be happy with that outcome in normal, profitable circumstances, let alone in a crisis year.
The second consideration is that the bank can hold the bulk of the depreciated securities to maturity. By that time, even if there isn't earlier appreciation, the securities will recover their value and be redeemed at par. That recovered value will translate into profits.
All this confirms that our banking system - unlike the real economy - is not exactly in the same boat as that of the rest of the world's. It relies on - by our standards - a massive domestic deposit basis. It is not dependent on inter-bank lending. Its loans and advances are based on strong security, at times so strong as to make borrowers bleat in frustration.
There is much underlying strength. Perhaps the Borża share price does not reflect that. In time, it will. Meanwhile, there is much to be grateful for. BoV shareholders will find the annual general meeting interesting, and would not be off target if they decide to freshen up the board. But they have no cause to gnash their teeth. The present is not bad. The future does not look bleak.