Fitch Ratings has affirmed Bank of Valletta's (BoV) Long-term Issuer Default Ratings (IDR) at 'BBB+' with a Stable Outlook, Short-term IDR at 'F2', Viability Rating at 'bbb+', Support Rating at '2' and Support Rating Floor at 'BBB'.
The affirmations, it said, reflect the bank's strong funding base, satisfactory liquidity and adequate profitability. The ratings also reflect the bank's reliance on the country's small and concentrated economy and its asset quality, which is still weak despite some of the improvements achieved by management in the past few years.
"As the largest bank in Malta, the bank continues to benefit from large volumes of stable and inexpensive customer deposits. As loans only account for just over half of total assets, liquidity is also satisfactory, with the balance of assets largely invested in relatively highly rated EU sovereign bonds. At end-September 2011, the bank had EUR1.1bn of unencumbered securities eligible for ECB refinancing."
The affirmation by Fitch of BOV’s ratings and stable outlook assumes even greater significance at a time when many large financial institutions and EU sovereigns have been hit by downgrades- BOV
The agency added that given the bank's strong market shares, its ability to price risk has remained relatively unaffected by competitive issues. Its net interest margins continues to be high despite the low interest rate environment, thus allowing it to absorb the larger loan impairment charges generated by subdued credit conditions. It has also enabled it to report adequate profitability despite lower non-interest income resulting from falling financial markets.
Asset quality deteriorated in 2009 and 2010 because of weakening conditions in the real estate and construction sectors, which together account for around 15% of total lending. Asset quality deterioration during FY11 was more contained than in the previous two years.
Fitch said it acknowledged management's efforts in improving reserve coverage of problematic loans in recent years, but nevertheless considered that BoV's asset quality remains weak.
In addition, high concentrations in BoV's portfolio both by industry and by individual borrowers were constant features of the bank's loan book, given the small size and concentrated nature of the Maltese economy.
It said that BoV's exposure to Libya was minimal, and has not generated relevant credit losses to date, but in view of the country's vulnerability to political unrest, BoV had increased reserve coverage against it.
BoV had an adequate Fitch core capital ratio of 11.49% at end-September 2011. While this figure was higher than the minimum regulatory requirements, Fitch said it considered it necessary given the concentrations in its loan book and the small absolute size of its equity base.
Bank of Valletta Chief Executive Officer Charles Borg, welcomed the ratings report as yet another confirmation of the strength and resilience of the BOV Group.
"The affirmation by Fitch of BOV’s ratings and stable outlook assumes even greater significance at a time when many large financial institutions and EU sovereigns have been hit by downgrades," he said.
“The latest ratings action by Fitch underlines the strong capital base and liquidity position of Bank of Valletta as well as the Bank’s ability to sustain adequate profitability despite the challenges resulting from falling financial markets,” he added.