It is the season of mid-year announcements when listed companies publish their interim results. Malta’s two major banks, BOV and HSBC, recently announced their interim results. Shareholders of these banks are eagerly drawing their conclusions on the published figures.
BOV registered a pre-tax profit of €68.1 million for the period January to June 2017 which represents an increase of eight per cent over the same period last year when one adjusts for the non-recurring gain on the Visa shares sale in 2016. Lending increased by €100 million driven by demand for home loans and business projects.
HSBC, which has a somewhat different business model, registered a pre-tax profit of €25.9 million which shows a decline of €4.6 million when compared to the adjusted figures for last year to reflect the one-time gain of the Visa shares sale. While HSBC also registered growth in demand for mortgages, their loan book was reduced by €100 million as corporate clients ‘secured alternative funding through bond issuance’.
HSBC will pay a gross interim dividend of €0.047 while BOV will pay €0.045. The return on equity of HSBC is at a level of 7.1 per cent while that of BOV stands at 12.6 per cent.
Taking in consideration the diverging business models of Malta’s two major banks, investors would probably rightly conclude that Malta’s larger banks are performing satisfactorily despite the low interest rate regime that always hurts retail banks. It is also encouraging that both BOV and HSBC are absorbing the increase in regulatory costs adequately well.
Maltese banks’ results must be seen in the context of what is happening in the European banking sector. Local banks have the enviable record that despite the financial crisis of 2007, they weathered the storm with remarkable success. Not only did they not need government, taxpayers’ or investors’ support to remain in business but they flourished and continued to grow.
Balancing risk with rewards is always tough but also achievable
More important, Malta’s major banks are now supervised directly by the European Central Bank that is helping banks improve their risk management and corporate governance. BOV recently successfully sought approval from its shareholders to increase its capital base to prepare for future growth with sufficient capital buffers. This reflects the prudent approach to sustainable growth.
Banking is one of the most intensively regulated industries and rightly so. Regulators want to protect the interests of depositors and shareholders by ensuring that major retail banks follow prudent strategies with viable business models that promote growth while not putting depositors’ money at risk. This is good news for investors with a medium to low risk appetite who look for an adequate return on their money.
Financial markets offer a myriad of investment opportunities. Investors need to understand the trade-off between risk and return before considering putting their hard-earned money in a particular product. The risk tolerance of people varies and one would do well not to rely solely on the superficial headline elements tied to particular investment products like the coupon rate of high-yield bonds.
It is always wise for inexperienced investors to seek advice from qualified and independent financial consultants who can demonstrate the pros and cons of investing in different financial instruments. This little effort can help people make the right decisions and sleeping well at night knowing that their money is safe.
Investments in equity can form part of any portfolio of investors who have a medium risk appetite as long as proper analysis is made on the shares one is considering to buy. Both the local and foreign banking sector offers opportunities for those looking for growth as well as adequate return at a manageable risk.
Regulators rightly advise those who are not familiar with understanding the dynamics of banks’ profitability to seek professional advice. But this advice is equally valid for apparently simple investment products that may contain hidden risks that an inexperienced investor may not detect so easily.
Malta’s economy is passing through a good phase at the moment. Banks are critically important in supporting this growth even if their first obligation will always be that of protecting depositors and shareholders’ value.
The local banking sector remains strong as confirmed by the successful stress tests conducted by EU regulators and by rating agencies. Banks quoted on the Malta Stock Exchange have the added advantage of offering liquidity when one decides to sell bank shares.
Balancing risk with reward is always tough but also achievable.
The author of this article is a former chairman of BOV and a current director of its subsidiaries.
johncassarwhite@yahoo.com