If there was ever need of proof that Bank of Valletta’s fortunes are intricately linked to the performance of Malta’s economy, the interim results (interim as due to change of financial year calendar the final financial statements will cover a period of 15 months to December 2017) published for the 12 months to September 2017 remove all doubt. These show a performance as stellar as that of the general economy.
An increase of 23 per cent in pre-tax profits compared to adjusted (removal of an exceptional item) results of 2016 is impressive especially considering that its main revenue generator, net interest income, is under stress and has actually fallen in 2017. This is the challenge of zero to low interest rate environment where BoV is charged negative rates for excess liquidity held at the Central Bank without actually passing on such negative rates to its large retail depositor base.
In spite of the challenge from the low interest rate environment, which seems to be staying with us for quite some more time, BoV results were boosted by two line items which are directly related to the macroeconomic growth.
Provisions for impairment of assets has generated an improvement of over €30 million.
As the economy gathers momentum and as the property market moves forward and becomes more liquid, non-performing loans, being the main source of impairment losses in prior years, revert to actually performing or outright get repaid from sale of collateral or refinancing on the capital markets. A proof, if one was needed, that the best medicine for the serious non-performing loans problem in European banks is economic growth.
The other line item which has generated substantial improvement in BoV’s performance is the more than €10 million improvement in the results of non-subsidiary investee business primarily Mapfre Middlesea (general insurance) and MSV (life insurance).
These two line items generated a combined improvement of €40 million which richly made up for the erosion of net interest income and the substantial increase in administrative expenses mostly related to increased cost of regulatory compliance. Employee costs remain well controlled as IT investments deliver efficiencies.
This excess liquidity was discussed at a seminar organised by the Central Bank of Malta
BoV’s key performance indicators all tell a story of stability and efficiency. Return on Equity (pre-tax) ROE of 19 per cent, Return on Assets ROA of 1.3 per cent, and cost to income ratio of 46.8 per cent are solid figures normally associated with investment banking rather than retail and universal banking operations. But most impressive is the fall of loan to deposit ratio to a historical low of 43 per cent, indicating an abundance of liquidity beyond what the bank can actually and productively lend and invest within acceptable risk parameters.
This excess liquidity was discussed at a seminar organised by the Central Bank of Malta on October 31, where Aaron Grech, chief officer – economics of the CBM, gave several reasons for such excess liquidity which is common amongst core domestic banks.
He mentioned better access for borrowers to the capital markets and the shift of the economy to more service oriented sectors where investment needs are lower.
Take for example that a lot of the growth in tourism numbers reflect private accommodation which is generally directly financed by the owners rather than in huge hotel investments which traditionally needed bank finance.
What may at first glance appear to be confusing is why BoV needs to tap shareholders with a rights issue of €150 million when it already has more than ample liquidity and a Common equity Tier 1 (CET1) of 14.1 per cent, up from 12.8 per cent in 2016 though dividend distribution now scheduled for December 2107 could shave off this a bit.
Regulatory requirements are ever demanding a larger capital cushion and the growth patterns in BoV’s liabilities, where deposits now exceed €10 billion (almost equal to the GDP of the country) mean that the bank needs additional capital in spite of its excessively liquid position.
Inevitably this capital increase and the need to build eligible liabilities cushion outside the insured deposit base, would lead to some erosion of the ROE ratios but these are at very elevated levels and any erosion would still leave the BoV with highly respectable ROE ratios.
When the going gets so good, BoV does well to invest for the future.
Alfred Mifsud is former deputy governor, Central Bank of Malta.