BoV reports a substantial recovery in performance

The much-awaited results of the Bank of Valletta Group for the year ended September 30, 2009 were released last Friday afternoon. The BoV Group reported a pre-tax profit of €81.8 million, substantially higher than the performance in the previous year which was marked by significant write-downs on the Bank's overseas investment portfolio.

In line with the much improved profitability, a final gross dividend of €0.215 per share was recommended for approval at the forthcoming Annual General Meeting. The 2009 final dividend is very welcome news to the bank's wide shareholder base as it represents a significant increase to the dividend payments received in the past two reporting periods (a final gross dividend of €0.0563 per share for the September 2008 year-end and €0.035 per share as at March 2009).

Apart from this dividend declaration, BoV also announced a one for four bonus share issue which will become effective on January 15, 2010 through a capitalisation of reserves totalling €40 million. This is being done in order to further strengthen the permanent capital base of BoV to €200 million. This doubles the issued share capital of BoV over a 12-month period following the €60 million bonus share issue of January 2009.

The main impact giving rise to the substantial recovery in BoV's financial performance was the €37.7 million in "recoveries" from the bank's overseas investment portfolio as a result of improving conditions across international bond markets. During the previous reporting periods, the BoV Group had recognised write-downs totalling €85 million which severely impacted the bottom line performance. In fact in the financial year to September 30, 2008, the BoV Group had reported a pre-tax profit of €40.6 million. Furthermore a profit of only €6.3 million was registered in the six months to March 31, 2009.

While the amount of recoveries of €37.7 million falls short of the total unrealised mark-downs of €85 million, the BoV board of directors again re-iterated that "most, but not all, of these mark-downs will be clawed back over time". During a stockbrokers' meeting held last Friday afternoon shortly after the publication of results, BoV chairman Roderick Chalmers explained that the discrepancy between the amount of mark-downs and the recoveries recognised to date are mainly in respect of interest rate swaps which have yet to be recovered. This is expected to materialise once interest rates begin to creep up in the coming years. Mr Chalmers again re-iterated that the bank's portfolio does not contain any toxic assets and over 90 per cent of the holdings are rated A- or higher.

Meanwhile, the core operations of the BoV Group also continued to perform positively despite the fact that net operating profit before fair-value movements declined by seven per cent to €86 million. This result must be seen in the light of the adverse economic environment as the net interest margin decreased by 8.5 per cent to €115.4 million following the sharp reduction in interest rates during a short period of time. However this margin tightening is expected to subside as more deposits have begun to reflect the lower interest environment leading to improved margins for the bank.

A positive contributor to the profitability of BoV was a 10 per cent increase in net commission and trading income coming from increased foreign trade and card business as well as the heightened activity in bond issuance on the primary market of the Malta Stock Exchange. Meanwhile, on the cost side, the stringent cost control measures adopted by BoV have helped to reduce overall operating expenses by around €700,000 from the previous year.

However the chairman warned that this may not be sustained during the current financial year ending September 30, 2010 due to increases in wages as a result of the existing collective agreement. Although impairment provisions on the loan book increased from €3.1 million to €4 million, the level of non-performing loans compared to the overall loan book remained below the four per cent level, which is a healthy indicator. BoV's chairman highlighted the probability that this level of impairment could continue to hike up if the local economic recession extends into 2010.

The most disappointing bit of news in BoV's announcement was the €9.9 million negative impact from the bank's shareholding in Middlesea Insurance. This related to the recent sharp losses announced by Middlesea reflecting heavy losses incurred by its Italian subsidiary. Although remedial measures are being taken at the Middlesea level to address the situation, the nature of the insurance business is such that loss-making activities cannot be stopped immediately. As indicated by Middlesea in recent weeks, due to the heavy losses suffered in the past 18 months, the Middlesea Group is finalising plans to raise additional capital. Since BoV is Middlesea's single largest shareholder, the bank will be expected to support this capital raising exercise.

BoV's positive performance was also reflected in its balance sheet movements as further growth was registered in both the deposit base as well as in the level of loans. On the deposit side, BoV reported that total deposits during the past twelve months increased by €141 million. This ought to be considered a very positive development given the increased competition within the banking industry as well as the high level of corporate bond issues in recent months. Moreover this contrasts to the decline in the level of deposits by HSBC during the first half of the financial year to June 30, 2009.

Loans to customers by BoV increased by €207 million with the loan to deposit ratio remaining healthy at 69 per cent. Mr Chalmers explained that the growth in the loan book was seen across all three sectors (business, personal and home loans) and the chairman made particular reference to the home loans sector indicating that a total of €217 million were drawn-down by customers over the past 12 months with close to €100 million in repayments. More importantly, Mr Chalmers highlighted that there was no deterioration in the home loan book and customers continued regular repayments on home loans.

The substantial recovery in BoV's profitability had a sudden positive reaction on the equity market with BoV's share price rising by 13.8 per cent in the two trading days following last Friday's announcement. This renewed air of optimism also spilled over into some other local share prices this week and could very well be the start of a more sustained improvement in investor sentiment towards local equities as was the case in overseas international stockmarkets which commenced their strong recovery much earlier.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

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