Bank of Valletta stages a revival in profitability

BOV registers €25.9 million profit before tax for the first six months of 2021

Bank of Valletta Group has today announced the financial results for the first six months of 2021. These results were announced by BOV Chairman Dr. Gordon Cordina, CEO Rick Hunkin and Chief Finance Officer Izabela Banas.

Dr Gordon Cordina – Chairman

The performance of the Bank during the period continued to be conditioned by the uncertainty surrounding the pandemic. The economy is showing strong potential for an effective re-start through tourism and related activities, but this is likely to take place in gradual steps. One of the longer-term costs of the recent resilience of our economy is a higher level of public debt, which needs to be carefully managed over the coming years.

BOV staged a revival in profitability during the first half of 2021. The return on equity, at 4.8%, however remains way below its longer-term potential. A return to a stable and predictable dividend is not advisable at this stage, given the risks in the overall economic environment, the litigation risks facing the Bank, and the need for capital to support the Bank’s ongoing transformation strategy over the coming months.  This view is consistent with regulatory recommendations which prevailed in the first half of the year.

It is nevertheless encouraging to note that Bank of Valletta remains profitable, well-capitalised and liquid, as it emerges from the stresses imposed by the pandemic on its lending portfolio and other assets. Also, greylisting has not implied any immediate significant concerns, thanks to the de-risking programme implemented by the Bank which accelerated in recent months and which is expected to be completed in the current year. A significant prolongation of greylisting status could however have important longer-term implications for the Bank’s performance.

Prospects for the second half of 2021 point to a continued economic recovery and the rollout of the first tangible results of the transformation strategy. The Bank will nevertheless retain its prudent stance towards credit provisioning, sustain its efforts to combat financial crime in all of its forms, while ensuring that its systems and operating methods become more customer centric.

The Board will be actively reviewing its dividend policy later in the year as results are crystallised, the strength of our capital to meet future risks is better ascertained, and in line with the recommendations of our regulators.

I thank our Shareholders for their continued support, as well as our Executive Team and staff for their sterling efforts, meeting and exceeding expectations in these extraordinary times.

Rick Hunkin – Chief Executive Officer

The Bank embarked on BOV 2023 Strategy – a major transformation programme that will see us deliver significant improvements in our customer servicing capabilities. We are investing in new technology and streamlining processes as well as undertaking a significant restructuring of our operating models. This will be supplemented by branch redesign and refurbishment over the next two years. All of this is being delivered whilst retaining our focus on risk and compliance and continuing to address developing regulatory requirements.

Investing in this way will make us a better Bank in the long term and deliver more sustainable profitability.

Such transformation is always a challenging time and I particularly want to express my thanks to our colleagues who are having to deal with major change and challenging workloads. Without their support and dedication such change would not be possible. My Executive team and I are committed to delivering our strategy as agreed with the Board and will provide all the support we can to our colleagues throughout the business. As we move forward our new approach will offer more development and progression opportunities for our staff as we seek to reduce bureaucracy and empower and reward our best talent. To do this, we will make targeted new recruits from whom our existing colleagues can learn new techniques relevant to today’s banking environment.

Our strategy is already starting to deliver early benefits and I am confident in the longer term we will deliver more for all our stakeholders.

Group financial performance

Bank of Valletta Group reported a profit before tax for the first half of the financial year 2021 of €25.9 million (1H 2020: €13.8 million), representing a return on equity (pre-tax) of 4.8% (1H 2020: 2.6%). This result includes the effect of investment activities in Anti-Financial Crime Transformation and BOV 2023 Strategy of €17.1 million (1H 2020: €5.8 million). While the Group is maintaining a cautious stance as the COVID-19 situation remains relatively uncertain, credit provisions saw a net release of €3 million for first half of 2021 (1H 2020: €7.5 million charge).

Excluding the impact of investment in Transformation and Strategy, and credit provisions, the underlying profit stood at €39.9 million in 1H 2021 (1H 2020: €27 million). The increased underlying profit was driven by higher operating revenues, lower operating costs and improved performance from our associates.

Net interest income of €73.4 million (1H 2020: €72.3 million) was underpinned by a steady growth in home loans and in corporate loans issued in support of businesses under the BOV MDB Covid-19 Assist scheme. Growth in deposits coupled with persistent negative interest rates continued to exert pressure on our net interest margin, as did the redemption of securities previously generating positive returns which continue to be reinvested at lower or negative rates. The headwinds challenging our net interest revenue were offset by lower cost of funding, also as the Group’s €71 million 4.8% subordinated bond matured in 1Q 2020.

Commission and Trading revenues of €40.4 million (1H 2020: €36.3 million) benefited from the relaxation of COVID-19 restrictions which in 2020 had severely impacted business lines such as cards and payments. Activity in 2021 however still remains below 2019 levels. Furthermore, the results for the first half of the year included a €1.5 million refund of customer fees and charges which had been introduced late last year. A review of these with the regulator is ongoing.  Subdued volumes continued in the foreign exchange business due to reduced foreign trade and travel. A gain on Visa shares held of €1.2 million contributed to Operating Income in first half of 2021.

Operating costs decreased to €81.5 million as at end of June (1H 2020: €83.7 million) reflecting lower consultancy costs as some aspects of our de-risking programme reached completion, partly offset by an operating loss of circa €1.0 million due to the cost of refunding customers who were recently targeted in fraudulent scams.

The share of profit from insurance associates for the first six-month period was €7.6 million (1H 2020: €2.1 million).  The increase in profitability was largely driven by an increase in market value of investments and higher written premiums.

Financial position

The Group’s total assets were €13.7 billion as at June 2021 which was 6.4% higher than December 2020. The funding of the Bank remains through customer deposits with more than half of these driven by retail deposits. Customers continued to prefer short-term deposit products and channelled their savings into the banking system due to the lack of more beneficial opportunities in the market.

Net loans and advances as at end June 2021 were just below the €5 billion mark, with a growth rate of 3.9% over December 2020. BOV provided substantial customer support through payment moratoria and provision of government guaranteed funding to business customers through our BOV MDB COVID-19 assist scheme. These measures, which were granted to eligible customers in line with CBM Directive 18, were key in alleviating business specific liquidity shortages inevitably brought about by the pandemic. The loan book was also sustained by a continued growth in home loans.

Despite the momentum in the loan book, the liquidity position remained very strong with cash and short-term funds increasing by €365 million in the first half. This significant increase primarily arose after the Bank participated in the TLTRO III Eurosystem funding during the first quarter of 2021. This funding seeks to support lending growth in banks, and as we are achieving growth the funding cost is negative, contributing to lower overall funding cost. This also supports our desire to maintain our position as a key player in the provision of finance to local businesses and households.

The pressure of excess liquidity continued to be mitigated, to the extent possible, by investments in both local and foreign securities. The majority of treasury assets are measured at amortised cost reflecting the Bank’s primary business model to hold securities until maturity, collecting interest revenues over the life of the investment. The risk appetite for investment quality remained unchanged with asset quality of more than 90% in A- or higher.

The Group’s capital ratios remained stable, with the CET 1 and total capital ratios as at June 21 of 20.9% and 24.5% respectively.  With the Deiulemar claim still outstanding and the current COVID-19 uncertainties, the Board has committed to maintain strong capital reserves and has responsibly decided not to declare any interim dividend for the first half of 2021.  The position will be assessed again at the end of the year.

Litigation update

The Deiulemar litigation situation has not changed during the last six months. The Group maintains its position, based upon robust legal opinions (including one from Italy’s leading independent and specialist authority in these areas), that this claim is wholly without merit. An offer to settle out of court made last year was based solely upon a desire to end this long-standing matter quickly to remove uncertainty and avoid costs associated with addressing the matter. This would also enable us to make a more effective use of its capital surplus. Significant efforts continue on a number of fronts to resolve this situation and no additional provision for litigation is considered necessary.

‘Greylisting’ of Malta

On 25 June, the Financial Action Task Force placed Malta on the so-called greylist. The Maltese authorities have pledged continued commitment to fight money laundering and the financing of international terrorism and implement the required reforms.

The greylisting is not expected to have an immediate impact on the Bank’s operations and rating. However, greylisting could raise transaction costs and impact cross-border transaction flows for the whole banking sector. Increased monitoring by foreign banks and counterparts is also expected. Initial indications are that our international trading partners had factored in such an eventuality, but we will watch closely as there remains a risk that a prolonged period before removal from the grey list may lead to some potentially changing their view.

The Group has robust policies and disciplined practices to support its commitment to protect its customers and society from financial crime. Over the past years, we invested heavily in a comprehensive AFC transformation programme and as a result strengthened the Anti-Financial Crime controls and enhanced its automated systems for the monitoring of payments and transactions and customer screening, amongst others.

Update on the BOV 2023 Strategy

The BOV 2023 Strategy continues to build momentum in the first half of 2021. In the first 6 months, we moved key workstreams forward and started to deliver tangible benefits. Building on the achievements to significantly reduce over-the-counter transactions and cheques processed and encashed in branches, we have also increased the customers’ usage of our online platform and digital application. As part of the Strategy to improve the customer experience, we have delivered new customer facing solutions for our Investment advisors with significant reduction in time to collect all the requisite information and assess suitability in line with regulatory requirements. New Digital factories have been established to deliver improvements and simplification across Account Opening, Web and Mobile applications and Home Loans allowing our front-line colleagues more time with our customers.

Underpinning the Strategy is a significant investment in systems, people and controls.  To date, we have already embraced reskilling with training of our employees. In the first half of this year, more than 600 colleagues went through targeted training programmes to enhance customer service and meet customer needs more effectively.

Finally, the Group continues to build on our solid foundations put in place by the Risk Transformation and de-risking programmes. We continue to invest in our Risk, Compliance and Audit functions, resourcing them with the necessary manpower and giving them effective tools and training to perform at their best.

Dr Gordon Cordina on behalf of the Board of Directors and Rick Hunkin on behalf of the Executive team expressed gratitude to all employees for their continued perseverance during these challenging times as the Bank embarked upon a significant transformation programme and firmly believe that employees, customers and shareholders appreciate the need for change in order to improve our quality of service to our customers and longer-term profitability and sustainability of the Bank.

Issued by Bank of Valletta p.l.c., 58, Triq San Żakkarija, Il-Belt Valletta VLT 1130.  Bank of Valletta p.l.c. is a public limited company regulated by the MFSA, licensed to carry out the business of banking and investment services in terms of the Banking and Investment Services Acts (Cap.370, 371 of the Laws of Malta).