The Bank of Valletta Group registered a pre-tax profit of €117.9 million but chairman John Cassar White warned future profits at such levels could not be taken for granted.
“In the past, the business model was basically about ‘growth, growth, growth’. We need to do some soul-searching and ask whether these are sustainable,” he told the media at a briefing on the results.
“There has been a seismic shift in banking supervision and everything has to be approached from this point of view. What we will end up with is a safer bank but possibly one that is less profitable,” he added.
The bank reported higher profits despite an increase of €13.3 million in the provisions it makes for bad debts, with the total now reaching €32.7 million.
“Many of the loans on which we are now taking provisions were granted years ago and you have to wonder whether many of them would ever have been approved had the present cautious criteria been applied then,” he said.
BOV joined the Single Supervisory Mechanism last November and had to go through rigorous testing by both the European Central Bank and the European Banking Authority. Regulatory pressure was far from easing, he noted. One of the main future thrusts was the recapitalisation of banks, which had an impact on dividends, that must now be approved by the regulators. In fact, last year, the dividend payout went down from the traditional one-third of profits to 27.7 per cent and this year’s was even lower.
“Even 25 per cent will be too high in the future as more needs to be put into reserves,” he said, adding that the ECB had approved the bank’s proposals to increase its capital beyond the already announced subordinated bond being issued soon.
The board is also recommending a bonus issue of one share for every 12 shares held. The bonus issue will be funded by a capitalisation of €30 million from reserves, which will increase the permanent capital to €390 million.
Looking ahead, Mr Cassar White stressed that the bank would have to reassess its business model and if the revenue from certain business lines did not merit the risk, then they would be dropped.
He spoke at length and in various contexts about risk, making it clear he felt this was not given enough attention in the past. “We were recently embroiled in an international court case about trusts. You have to wonder whether the bank was aware of what risks it was going into,” he said.
He was very critical of the bank’s IT system saying it would require substantial investment over the next few years. “Let me say that there was benevolent neglect in the past. IT needs annual investment and we are now having to make up for all that was not done in the last 15 years,” he said.
Mr Cassar White also shrugged off recent reports on, among other things, bank loan charges and credit card fees by the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority. “First of all, banks in Malta have to offer similar services as those given by much bigger banks, so we always suffer from economies of scale. Secondly, I can assure you that there is considerable competition and clients do shop around. Let me be clear. No one can impose on a bank how to calculate its risk premium. This is the prime responsibility of the board. If we underprice risk, we could undermine the bank and most of all its depositors,” he said.
In numbers
Profit before tax: €117.9m (+13%)
Core operating profit: €91.3m (+4%)
Net interest margin: €144.7m (+15%)
Operating costs: +16%
Deposits: €8.6bn (+€1.4bn)
Loans and advances: €4.3bn (+4%)
Total dividend: 12.4c per share
Common equity tier 1 ratio: 11.3%
Liquidity ratio: 50%
Return on equity: 18.4%
Cost-to-income ratio: 41.8%
Happier with Enemalta risk
Bank of Valletta is now much happier with its loan portfolio to the energy sector, bank chairman John Cassar White said yesterday.
This was because of the move from unsecured loans to Enemalta to the syndicated loan BOV and three international banks gave Electrogas, he added.
Speaking at a press conference to announce record pre-tax profits of €117.9 million for the financial year ending September 30, 2015, he said the bank was not happy in the past with the concentrated risk it had in the energy sector, noting that part of the bank’s loan to Enemalta was unsecured.
“It has been said many times in public that the debt ran to hundreds of billions and with no security. Had Enemalta gone bankrupt, then Bank of Valletta would have lost its money,” he stressed.
He said the government needed to offer a guarantee to Electrogas because its business model relied on only one client – Enemalta – and this was why a ‘security of supply’ agreement was needed.
“As has been stated in public, BOV was one of four banks that offered Electrogas a syndicated loan after months of complex and technical negotiations.
“I believe the situation is much better now for BOV than it was when we were exposed to Enemalta’s debt. It is much less dangerous that when I became chairman,” he said.