Bank of Valletta Group on Friday announced profits for 2008 of €40.6 million, down from 2007's €101.8 million profit.
"After several years of reporting record profits, it was disappointing, but not at all unexpected, to report a downturn in profits for the year just closed," bank chairman Roderick Chalmers said. "The conditions encountered throughout the last year - and particularly in the second half of September - have been unprecedented and truly extraordinary, representing as they did the most profound financial crisis of a generation. In the prevailing circumstances, it is hoped that the reported profits for the year will be regarded as respectable."
The board is recommending a final gross dividend to shareholders of €0.0675 per share, which taken with the gross interim dividend of €0.1350 per share paid on May 28, makes for a total gross dividend of €0.2025 per share for 2008. The dividend for the year will be 1.5 times covered by the profits for the year.
The board is also recommending, effective January 15, an increase in the nominal and paid-up value of the ordinary shares in issue from €0.75 to €1 per share (the increase to be funded by a capitalisation of reserves), amounting to €33.33 million, and a bonus issue to shareholders of one share for every five held. "These two moves will serve to further strengthen the balance sheet through the increase of the permanent paid up capital of the bank to €160 million, and will also serve to enhance the affordability and liquidity of the bank's shares," the chairman said.
The chairman explained that BoV had weathered the storm relatively well thanks to the policies it had adopted and measures taken. Notwithstanding considerable pressure to the contrary, there had been a drive to secure the gradual build up of BoV's equity base, and to ensure that it was strongly capitalised at all times. Close to €100 million had been added to reserves over the four years to September 2008, and this led to BoV carrying a capital ratio of 11.5 per cent, which compares very favourably with the levels prevailing at most other European banks.
In spite of the satisfactory growth of the loan book, BoV had maintained a conservative loan to deposit ratio of below 70 per cent. This meant that the bank did not rely on the short-term inter-bank or commercial paper market for the funding of its lending business.
Loan-to-deposit ratios in excess of 100 per cent were not at all uncommon for major banks in Europe, a factor that had caused them severe funding problems when the credit crunch caused the short-term markets to contract severely.
Throughout the year, BoV had maintained a liquidity ratio in excess of 50 per cent, well above the prudential statutory minimum of 30 per cent.
BoV has rigorously excluded sub-prime mortgages, Collateralised Debt Obligations (CDOs), Asset Back Securities (ABS) and other structured products from its financial markets portfolio. Instead, the BoV portfolio was predominately deployed across a wide spread of multiple holdings across nearly 240 institutional names in quality, credit rated sovereign, supranational, corporate and financial institutions with a relatively short weighted average maturity of less than three and a half years.
Mr Chalmers explained that notwithstanding the defensive posture adopted by BoV, it had not escaped the crisis totally unscathed. Earnings for 2008 had been adversely affected by two distinct factors, with almost 50 per cent of the impact occurring in the last two weeks of the financial year. The first was a 'direct hit' as a result of Lehman's failure.
Whereas initial indications were for recoveries on senior debt of between 40 and and 60 per cent, the complexity of winding up Lehman's affairs has led to a downwards adjustment. At the year end, BoV marked down its holding to 15 per cent of nominal value which impacted the 2008 results by €12.7 million.
Besides, the credit spreads at September 30 had remained extremely elevated, and had had an impact on quoted bond prices in an almost frozen market. This caused further mark downs as a result of the mark-to-market accounting policy adopted by the bank.
Mr Chalmers explained that, excluding Lehman's position, unrealised fair value mark-downs for 2008 amounted to €41 million, of which €14 million arose in the last two weeks of September alone. Given the relatively short duration of most of the holdings, BoV hoped to claw back much of the mark-downs on the securities it elected to hold through to redemption.
"Disappointing though the Lehman hit and the fair value mark downs have been, these should be viewed in the light of the extraordinary crisis that has engulfed the global banking sector - and in the context of the size of the average book of almost €2.6 billion managed by BoV's financial markets team," Mr Chalmers pointed out. "Accordingly, the impact is equivalent to approximately two per cent of the FM+I book."
The chairman described the domestic, corporate and retail activity as satisfactory. A growth of 15.9 per cent had been registered in the loan book, coupled with a sustained improvement in the quality of the credit business. Deposits had shown strong growth with an increase of €322 million over the year. Valletta Fund Services saw a growth of funds under administration to €1,040 million from €850 million a year ago. Increases in costs, year on year, came in at five per cent, attributable mostly to the impact of the new three-year collective agreement which came in effect last January 1.
"With our open economy, it is likely that Malta will be affected by the wider downturn, and therefore the outlook for the next 12 months must be a very cautious one," Mr Chalmers pointed out, adding that the bank is carefully considering the potential repercussions of an economic downturn, but will be doing all that is possible to continue to provide credit to the economy and ready support to its customers.