The Bank of Valletta Group announced profits for its Financial Year ended on 30th September 2009 (FY2009) of €81.8 million. This is more than double the €40.6 million figure registered during the previous year. Announcing the results at a press conference, Bank of Valletta Chairman Roderick Chalmers commented that the marked improvement in profitability had resulted from the gradual stabilisation of conditions in the global financial markets, and the consequent write back of some of the unrealised fair value markdowns on BOV’s Financial Markets portfolio previously recognised in the Bank’s accounts for FY 2008 and the first six months of FY 2009. The Chairman explained that following the collapse of Lehman Brothers in September 2008, banks and other financial institutions lost confidence in each other and credit stopped flowing, resulting in the global financial system shuddering to a halt, triggering the most severe global economic recession since the 1930’s. This led, Mr Chalmers went on to explain, to central banks and other policy-makers taking a series of bold steps in efforts to stabilise the situation, measures that also attempted to contain the spill-over impact into the global economy. Once the financial markets started to believe that the bold action of policy makers was indeed taking effect, the flow of credit between banks was gradually restored. Both equity and debt markets have improved, and the more positive tone and sentiment have been sustained since mid March. “However”, Mr Chalmers observed, “the damage to the global economy has been severe and widespread, and will take longer to repair.”

“As anticipated, Malta’s wide open economy has not been immune to the global recession, although the impact has been more gradual and relatively mild when compared with other developed economies. However, experience has taught us that Malta is often late in and late out of recessionary trends, and the expectation must be that the situation could continue to remain challenging in the short to medium term,” cautioned the Chairman. Mr Chalmers announced that the Board of Directors is recommending a final gross dividend to shareholders of €0.215 per share, which taken together with the gross interim dividend of €0.035 per share paid on May 28, 2009 makes for a total gross dividend of €0.25 per share for FY 2009 (FY 2008: €0.16875 per share). The total dividend will be 1.9 times covered by the post tax profits for the year, thus respecting the dividend distribution policy adopted by the BOV Board over recent years. “This policy has certainly stood the Bank in very good stead in the highly stressed financial environment experienced in FY 2008 and the earlier part of FY 2009, and it is the Board’s belief that the policy should be retained at this time,” noted the Chairman. The Board is also recommending, effective 15th January 2010, a bonus issue of 1 share for every 4 shares held. The bonus issue will be funded by a capitalisation of reserves amounting to €40 million. The Chairman remarked that the bonus issue will serve to “further increase the permanent capital base of the Bank (from €160 million to €200 million), and will also serve to enhance the affordability and liquidity of the Bank’s shares.” Providing a more detailed analysis on the results for FY2009, Mr Chalmers explained that several factors affected the final figure achieved. Net interest margin for the period declined year on year by €10.7 million or 8.5%, principally due to the sustained reduction in interest rates implemented by the ECB. A positive influence on profits was the 10% improvement in net commission and trading income compared to the previous year. “Income from foreign trade business has been strong, as have revenues from the cards business. The Capital Markets division has had an excellent year, managing or co-managing most of the bond issues brought to the market over the past 12 months, which between them raised a total of close to €220 million. Both Valletta Fund Management (VFM) and Valletta Fund Services (VFS) have performed well in very difficult market conditions, with VFM’s funds under management growing to record levels. VFS’ portfolio of international business has shown encouraging growth, playing an important role in Malta’s development as an international financial services centre,” stated the Chairman.

Costs for the year have been maintained at fractionally below FY 2008 levels, as a result of a number of cost control measures taken during the year, particularly in respect of discretionary expense items. “However,” Mr Chalmers added, “this will be difficult to repeat in FY 2010 due to inbuilt increases in the Collective Agreement, and a heavier than usual IT spend.” The impairment charge for the year at €4.0 million is a little under €1 million higher than the charge for FY 2008. Mr Chalmers explained that some deterioration in credit quality is to be expected in the current economic environment. Overall, the net operating profit from core corporate and retail banking operations for the year amounted to €86.0 million, compared to €92.2 million in 2008. “The reduction in core profits can be largely attributed to the compression in net interest margin for the reasons explained previously, mitigated by an improvement in commission and trading income” said the Chairman. He went on to comment that the Board took a policy decision not to pass on the ECB rate cuts totalling 0.75% announced in March and April 2009 to either loans or deposits, since it was felt necessary to maintain deposit rates paid to its customers in order to remain competitive, and also because the Board was entirely satisfied that the Bank’s lending rates compared well with rates prevailing elsewhere in Europe. Revisiting the issue of Fair Value Movements, a significant factor in the reduction of reported profits during FY2008 and the first half of FY 2009, Mr Chalmers stated that, “the significant reduction in the fair value movements charge has been as a result of the marked improvement witnessed in the credit markets since March 2009. Confidence and liquidity have gradually been restored, and these have resulted in narrower spreads and improved prices.” Mr Chalmers noted that, as had been stated many times in the past, BOV’s Financial Markets portfolio is deployed across a wide spread of holdings of moderate duration debt securities issued by quality, credit rated, sovereign, supranational, corporate and financial institutions. “The second half of FY 2009 has seen the beginning of the much anticipated and very welcome claw-back of part of the substantial fair value markdowns (totalling €84 million) registered in FY 2008 and the first half of FY 2009,” remarked Mr Chalmers.

He noted that €38 million had been recovered in the second half of FY 2009, adding that “it remains the Board’s view that most, but not all, of these mark downs will be clawed back over time.” Mr Chalmers then turned to the share of losses reported by BOV in respect of its shareholdings in jointly controlled and associated entities. “The clear disappointment in the results for FY 2009 is the negative share of results of jointly controlled and associated companies,” he said. These amounted to a loss of €9.9 million, as compared to a profit of €1.7 million last year. Mr Chalmers stressed that the domestic operations of Middlesea Insurance and those of Middlesea Valletta had performed well in what were difficult market conditions. “However, the results of Progress Assicurazioni (the Italian subsidiary of the Middlesea group) were wholly unsatisfactory, with significant losses being reported for the year ended 31st December 2008, and the six months to June 2009,” stated the Chairman. Mr Chalmers pointed out that the causes behind the deterioration in Progress’ results had been articulated in the various statements issued by the Middlesea Group – as had the remedial steps that are being taken to address these matters. However, he cautioned that the “tail” nature of the insurance business was such that the impact of remedial measures is not immediate. He noted that the losses incurred by Progress have inflicted “significant damage” on the Middlesea Group balance sheet, and it is clear that a re-capitalisation of the Group is required.

He noted that (as was indicated in the Middlesea Company Announcement issued on 25th August 2009), discussions are ongoing with the major shareholders and the regulators in connection with measures to be taken to strengthen the Middlesea Group balance sheet through the raising of additional capital. Roderick Chalmers outlined what he described as the “deliberately prudent and conservative manner” in which BOV has managed its balance sheet. This resulted in strong liquidity at 45%, a Tier I capital ratio of 11.2% (well above European and US banking sector norms) and a total capital ratio of 14.0%. The Chairman commented that this latter ratio was reinforced during the year with the successful €50 million subordinated bond issue completed in June 2009, which added a further 150 basis points to the Bank’s already very strong Capital Ratio base. Speaking about the Loan to deposit ratio, Mr Chalmers stated that this “remains modest at 69%, and the Bank continues to be in the position whereby our loan book is wholly funded by retail liabilities, with no dependence for this purpose on the short term inter-bank or commercial paper market.” Total assets at the end of September 2009 stood at €6.2 billion, much in line with the September 2008 level, while shareholders equity amounted to €434 million, as compared with €393 million of a year earlier. Advances stood at €3.3 billion at the year end, an increase of €207 million, or 6.8%, since September 2008. Credit quality has remained good, with Non Performing Loans standing at 3.9% of gross advances (September 2008: 4.0%). During the year to 30th September 2009, the Bank approved €261 million of new home loans (of which €217 million were drawn down), whilst credit actually utilised by the business sector over the year increased by €210 million (or 10.7%), net of two large identified facilities that were repaid in full during the early part of the year. The Chairman described the steady growth of customer deposits, having increased by €141 million over the year, to stand at €4.8 billion as at 30th September 2009. “Notwithstanding acute competition for deposits and a high level of bond issuance activity, FY 2009 has, once again, seen a further consolidation of BOV’s position as the market leader in the domestic euro-deposit retail and corporate sectors,” stated Mr Chalmers.

He concluded “the Bank has recognised that it has to manage both sides of its balance sheet, and has accordingly maintained deposit rates at competitive levels, introducing “special product” campaigns at regular intervals over the course of the year, which campaigns have seen strong take up from our existing retail and corporate customer base as well as from new customers.” Looking ahead, Mr Chalmers commented on economic conditions in a wider context, cautioning that despite the degree of stability that has been restored to the global financial system since March of this year, the financial crisis has caused significant and lasting damage to the global economy. “Credit remains tight, unemployment high and consumer confidence low in many large economies. Government finances everywhere are under pressure, with demands for stimulus support coming against a backdrop of a contraction in tax revenues,” stated the Chairman adding that he expected that “repairing this damage is going to be long and sometimes painful – and the global economic recovery is likely to be a fragile and gradual process, with set-backs occurring from time to time.” Looking forward, Roderick Chalmers stated that it is very much hoped that the higher level of confidence in the financial markets will be sustained. He remarked that the extent of the impact of the global recession on the Maltese economy remains an important issue, ,but it is BOV’s expectation that some degree of deterioration in credit quality will be experienced as the current economic downturn continues into FY 2010, something that is being watched by the management team with “extreme vigilance.” Mr Chalmers ended by affirming that Bank of Valletta’s deliberately prudent funding, asset quality, liquidity and capital ratio policies had stood it well through the financial crisis, allowing BOV to provide credit and liquidity throughout the downturn to the Maltese economy and to its customers in the retail and business communities. “We will stay with these policies through 2010” emphasised the Chairman, concluding by saying that “we will continue to manage our balance sheet in a prudent and conservative manner, maintaining high liquidity and strong capital ratios; we will also continue to actively manage both sides of our balance sheet, seeking to meet the reasonable demands and expectations of our depositors and borrowers alike, whilst at the same time being acutely aware of our responsibilities to our other stakeholders – shareholders, employees and the wider community.”

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