The Bank of Valletta Group announced pre tax profits for its Financial Year ended on 30 September 2011 (FY2011) of €64.4 million. This is 35% below the €98.9 million figure reported for FY 2010. Announcing the results, Bank of Valletta Chairman Roderick Chalmers commented that whilst the retail and corporate businesses of the Group have continued to perform steadily, the uncertainty in the financial markets, particularly in the second half of the year, resulted in an overall fair value charge to the Bank’s Financial Markets book for the year of €24.9 million. The results for the year were also impacted by the charge of €15 million relating to the property fund settlement offer which has been accepted by 99% of investors.

Providing extensive commentary on the eurozone crisis, Mr Chalmers stated that, “the piece-meal manner in which the eurozone political leadership sought to deal with and cauterise the Greek debt problem has led to the inevitable contagion effect that we cautioned against in Bank of Valletta’s FY 2010 Annual Report, and in the half yearly and interim statements that we issued during the current financial year.”

The BOV Chairman commented that while the European Financial Stability Facility (EFSF) always expected to have to deal with Greece, Ireland and Portugal, and had the requisite capacity to do so, it became increasingly apparent that the first Greek package (€110 billion) was insufficient. The second package (€109 billion) discussed in an attempt to resolve the Greek debt crisis sought to impose even greater austerity measures on Greece, as well as securing a ‘voluntary’ private sector contribution. This contribution was portrayed as being ‘voluntary’ and a ‘one-off’ and yet, Mr Chalmers stated, “the markets were spooked by the very notion that a eurozone country was about to default or renege on its sovereign debt obligations.” These sentiments rapidly gathered momentum as did the realisation that debt relief at a significantly higher level was likely to be required if the Greek economy was to recover.

The contagion effect that many commentators had feared took hold upon political insistence on private sector participation in finding a solution for Greece, which in turn led to market speculation that Ireland and Portugal may demand similar relief measures. “Market nervousness soon spread to Spain and Italy, aggravated by the knowledge that the EFSF did not have the capacity to contain the crisis should it spread to Spanish and Italian sovereign debt, given the huge volumes involved,” commented Mr Chalmers.

Describing the second round of bank stress testing by the newly formed European Banking Authority (EBA), Roderick Chalmers stated that the published results, which sought to reassure the markets, had the opposite effect. “Whereas the EBA published the sovereign debt exposures on a bank for bank basis, the tests applied ‘haircuts’ to sovereign debt held in the trading book, but none to the (much higher) levels of such debt held in the banking book”, explained Mr Chalmers. “Analysts quickly identified a number of banks with substantial exposures to “peripheral” European (Greece, Ireland, Italy, Portugal and Spain or ‘GIIPS’) debt. Echoing the September 2008 events, large US money funds withdrew substantial balances from a number of eurozone banks.”

This led to what Mr Chalmers described as, “a full blown eurozone existential crisis.” The ECB was obliged to make unlimited facilities available to European banks to counter any short-term liquidity pressures yet, Mr Chalmers noted, “notwithstanding these measures, extreme nervousness prevailed, with banks, in a manner reminiscent of 2008, reluctant to lend to one another, instead placing funds on deposit with the ECB. GIIPS banks, effectively shut out of the money and bond markets, had to resort to the ECB for their liquidity requirements.”

The Chairman stated that concerns about the fate of the eurozone quickly spread to equity markets on fears that Europe’s problems would trigger a double dip recession. This threat, together with the unseemly political squabble in Washington on the raising of the US debt ceiling, triggered a sudden and sharp fall in asset prices across global markets during the summer.

Roderick Chalmers outlined potential cures for this full-blown existential crisis. “The first of these is to address the fundamental design flaw of the entire euro project – that of having a single currency union and accompanying monetary policy which are not more closely aligned from a fiscal discipline perspective,” explained Mr Chalmers. “Instead,” he commented, “they involve 17 disparate national fiscal policy attitudes that are often driven by domestic political considerations.” He described this flaw as one that is more pronounced during times of financial extremes and that leads to lack of competitiveness and slowing economic growth. “It is now widely accepted that the eurozone in its current form only has a future if the policies of the constituent members are more closely aligned in terms of the exercise of fiscal discipline,” stated Mr Chalmers.

He also noted the need to quarantine the Greek debt problem as being essential, since its debt burden is unsustainable and further austerity measures will suffocate sustainable economic growth – and rapidly render Greece “ungovernable”. Accordingly, stated Roderick Chalmers, an orderly restructuring of Greek sovereign debt in a manner that secures certainty to the outcome is essential.

Turning to the banks, Mr Chalmers described the recapitalisation of “GIIPS afflicted” banks as the only possibility for certainty that contagion through the banking system will be averted, with improvement to the banks’ ratios needing to come from the injection of new capital and not from the shrinking of balance sheets. He went on to say that, “the fragile state of the European economy cannot afford the negative impact of the withdrawal of credit that would inevitably accompany any rapid shrinking of balance sheets.”

Describing Spain and Italy’s problems, Mr Chalmers said that while both countries (unlike Greece) have large economies and are clearly solvent, these need time to get their fiscal houses in order. For both countries, he noted, ways needed to be found (through a very substantially enhanced EFSF mechanism) to secure liquidity and access to debt markets at manageable rates.

Mr Chalmers noted that certain of the above factors had been addressed in the framework agreement reached by European leaders at their summit on 27 October; Greek debt held by banks is to take a “voluntary haircut” of 50%, European banks are to be recapitalized to the tune of €106 billion to reach a 9% capital threshold by June 2012, and the EFSF firepower is to be increased to one trillion euro via a mechanism the full details of which are yet to emerge.

He opined that rapid implementation of the measures described is necessary to, “arrest the very dangerous downward spiral that is afflicting the eurozone and the single currency – a spiral through which lack of confidence in sovereign nations to manage their debt has spilled over into the banking sector – and is now threatening the entire eurozone – and therefore global – economic recovery.”

Mr Chalmers then described the GIIPS sovereign debt as constituting, “a very modest part of BOV’s total portfolio”, and as having been ‘marked to market’ at 30 September 2011. “The total carrying value of these holdings amounted to €23 million, and the charge to the income statement for the year arising on the fair market valuation amounted to €6 million” commented the Chairman.

“Malta’s domestic economy has once again demonstrated resilience but demand for credit has continued to be subdued,” stated the Chairman, and noted that the crisis that erupted in Libya earlier this year had an impact on confidence. Despite this, real GDP growth in the first half of 2011 has held up at over 2%, a little above the EU 27 average. Commenting further on the local economy, Mr Chalmers said that, “exports have continued to grow, as have tourist arrivals, and employment data has remained stable throughout the year under review. Domestic consumption has remained muted, as have the property and construction sectors, although there is some evidence of a number of EU funded infrastructure projects being mobilised.”

Mr Chalmers announced that the Board of Directors is recommending a final gross dividend to shareholders of €0.08 per share which, taken together with the gross interim dividend of €0.0625 per share paid earlier in the year, makes for a total gross dividend of €0.1425 per share for FY 2011, and representing a gross yield of 5.7% by reference to the share price on 30 September 2011. The Board is also recommending, effective 12 January 2012, a bonus issue of 1 share for every 8 shares held.

Providing a more detailed analysis of the results for FY2011, Mr Chalmers explained that several factors affected the final profit achieved. Net interest margin for the year showed an increase of €10.6 million when compared to the same period last year. This was attributed to a combination of increased volumes and improvement of margins earned by Treasury assets. Net Commission and Trading income decreased by a marginal 3.4% as a result of the Libyan crisis and a decline in investment-related contributions during the year. Meanwhile, credit card business showed satisfactory growth.

Operating expenses for the year increased by 4.2%, totalling €82.1 million, reflecting an increased spend on personnel, professional fees and technology. Describing the increase in impairment charge as one that was anticipated, the Chairman pointed out that the difficult economic conditions of the past two years, compounded by the developments in Libya, have had something of a knock-on effect on credit quality in certain sectors. He also described the specific impact as one that, “has remained manageable, and the higher impairment charge for the year as having in part come from an increase in the precautionary non-specific collective allowance.”

BOV’s net operating profit for the year from core corporate and retail operations grew by 2% to reach the €100 million mark, with an increase coming from net interest income while erosion resulted from slightly reduced commission income as well as increases in operating expenses and the impairment charge.

Mr Chalmers gave a detailed account of fair value movements for the year, stating that while the first half of the year to 31 March 2011 took a charge of €5.6 million, “the charge increased marginally in the third quarter, and then very substantially in the last quarter as markets reacted to the eurozone sovereign debt crisis becoming more acute.” This deterioration in sentiment caused spreads to widen on both sovereign and financial holdings, in turn causing a reduction in capital values. Mr Chalmers observed that, “Bank of Valletta’s exposure to GIIPS sovereign debt is very limited, and the fair value movement for the year includes a €6 million charge in respect of these GIIPS sovereign debt holdings.”

Describing the La Valette Multi Manager Property Fund (LVMMPF) saga as, “a most unhappy and unfortunate experience for Bank of Valletta and our customers”, Mr Chalmers said that the offer of €0.75 per share was made to shareholders in an effort to bring ‘the unhappy episode to an early conclusion in the best interest of all parties concerned’. Although a number of regulatory issues remain to be addressed in connection with the Fund, with an acceptance rate of close to 99%, BOV will work to bring “early closure to all material issues relating to the Fund, including the winding up thereof”, noted the Chairman. The FY 2011 accounts include a charge of €15 million in respect of the settlement offer. “This represents the gross cost of the Offer to BOV before any recovery from third parties, in respect of which discussions are ongoing. Credit for any recoveries will be recognised as and when such discussions are concluded,” affirmed Roderick Chalmers.

The Chairman described the Bank’s balance sheet as one that has been managed prudently and deliberately, resulting in a very satisfactory liquidity ratio of 44.4% and a strong Tier 1 capital ratio of 10.5%. Total capital ratio stood at 15%, a level that already meets the more demanding ratios being required as a result of recent EBA and Basel III requirements.

Mr Chalmers stated that the Loan to Deposit ratio of 68% places the Bank in a position where the entire loan book is funded by retail liabilities, “a very significant plus factor at this time of a return to tight liquidity in the eurozone market.” BOV had issued a €55 million Medium Term Note during FY 2011 to lengthen duration of deposit liabilities in anticipation of Basel III liquidity requirements. “This was well received by the market,” commented Mr Chalmers, “and further issues are planned as part of this programme.” Total assets at the end of September 2011 stood at €6.6 billion, while shareholders’ equity amounted to €474 million.

The Chairman remarked that the results of the recent stress tests carried out by the EBA “confirmed the strength and resilience of BOV as a well-capitalised bank by all international standards.” Further deterioration of the eurozone crisis led to the EBA carrying out an additional review of actual capital positions and sovereign debt exposure across a number of eurozone banks – including BOV. The EBA announced that it will require certain banks to raise additional capital estimated at €106 billion by June 2012. “BOV’s holdings of GIIPS sovereign debt is very modest,” stated the Chairman, “and the EBA has confirmed that BOV is not required to raise additional capital as a result of this further review.”

The Chairman described the new regulatory regime that requires banks to hold higher and better quality capital as well as future measures that aim to protect economies from excessive credit growth. “BOV has been preparing itself for the new regulatory regime,” he stated, “and plans to achieve compliance by building up core capital through profit retention, and does not at this time foresee any need to raise new equity from shareholders or from the market.” He added that, “in line with most of the banking sector, BOV anticipates some regulatory-induced pressure on profitability in the coming years.”

Turning to credit, Mr Chalmers announced that, “During FY 2011, BOV supported the Maltese economy and the business community in a responsible manner through these economically challenging times.” He stated that BOV’s support was extended to those businesses that operated in Libya and expressed optimism about the opportunity for Maltese businesses to be involved in the substantial reconstruction programme in the stricken country. While demand for credit has been subdued, an increase of €114 million saw BOV’s loan book grow to €3.7 billion, an increase of just 3% since September 2010. Non-performing loans stood at 5.1%, a marginal improvement on the previous year.

Deposits had exceeded €5 billion for the first time during 2010. “Notwithstanding acute competition, these deposits continued to increase through FY 2011, and reached a level of €5.5 billion as at 30 September 2011 – an increase of €339 million or 6.5% year on year, with the increase coming from both the euro denominated retail and corporate/institutional sectors.”

Looking ahead, Mr Chalmers said that within the uncertain outlook for 2012 and beyond there remains certainty that a number of eurozone countries will adopt stringent fiscal restraint, that European banks will continue to de-leverage their balance sheets, and that the sovereign debt of Greece will be re-scheduled. Despite our history of resilience, reflected Roderick Chalmers, Malta will not be exempt from the downward pressures to our economy emanating from our major markets.

“On the positive side, tourist arrivals to date seem to be holding up, and the services sector generally (including financial services) remains strong – as does employment. The further mobilisation of a number of EU funded infrastructure projects brings important long term capital investment to the economy, and could also bring relief to the subdued construction sector, although the industry continues to be affected by the turgid planning application and approval process,” stated the Chairman. He went on to comment that, “Malta’s debt and budget deficit to GDP data remain respectable by EU-wide standards, but do require continuing discipline and vigilance.”

Referring to Bank of Valletta’s outlook, the Chairman confirmed that, “BOV will continue to manage its balance sheet in a prudent and conservative manner, maintaining high liquidity and strong capital ratios. We will also aspire to meet the reasonable demands and expectations of our savers and borrowers alike, whilst being acutely aware of our obligations to our other stakeholders – our shareholders, employees and the wider community.”

Roderick Chalmers concluded the press conference by, on behalf of the Board of Directors, expressing gratitude to Tonio Depasquale, CEO, who will retire following the forthcoming AGM after 42 years of service during which, “under the CEO’s leadership the Bank has gone from strength to strength, weathering the storms of the greatest financial crisis since the 1930’s in a manner achieved by very few European financial institutions.”

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