Fitch Ratings has today affirmed the long-term credit rating of Bank of Valletta at BBB+ with a stable outlook, the Bank said.

The rating is based on the Bank’s strength as a stand-alone institution, and does not take account of any potential external support.

The Viability Rating reflects the bank’s leading domestic franchise, which provides it with robust customer funding and liquidity, as well as healthy operating profitability. However, the ratings are also influenced by high industry and single-name credit concentrations deriving from the small and undiversified nature of the Maltese economy as well as from the bank’s exposure to the Maltese government through securities and related entities,Fitch said.

“he bank’s loan quality has deteriorated, with doubtful loans accounting for a relatively high 9.5% of gross loans at FY14. The deterioration has been primarily driven by exposure to the construction and real estate sectors. However, over the past two years BoV has applied a more conservative view of collateral, resulting in adequate coverage against doubtful loans (54%).”

BoV’s Fitch core capital-to-weighted risks ratio was also adequate at 12.9% at FY14, especially in relation to unreserved problem loans and absent of credit stresses in largest risks, most of which are state-guaranteed. BoV undertook the ECB’s comprehensive assessment and no capital shortfalls were identified, also suggesting adequate loss-absorption buffers, Fitch said.

“BoV’s profitability benefits from strong core revenues generated from the commercial business and healthy efficiency ratios. Pre-impairment operating income was only marginally eroded by impairment charges, which decreased slightly in FY14.

Fitch added that BoV’s deposit base far exceeds the loan book. In FY14, deposit growth continued to outpace that of loans and the group’s loan/deposit ratio was a comfortable 57%. As a result, reserves of unencumbered liquid assets are ample and there is minimal reliance on wholesale funding.

“Upside VR potential is limited due to the bank’s high credit concentrations, which Fitch expects to remain largely unchanged in the foreseeable future. Conversely, BoV’s VR could be affected by significant asset quality deterioration, for example from material weakening in any of the sectors to which BoV is more exposed, potentially putting capital at risk. Earnings pressures and any unforeseen liquidity shocks could also be negative for the VR.”

Fitch notes the inherent risks in the strong links between a country’s sovereign and its banks, particularly in small countries. Downside pressure to the bank’s VR could come from the impact that severe austerity measures, which could potentially be imposed by the European Commission on the Maltese government in response to its excessive expenditure, could have on the domestic economy and ultimately on the bank, in terms of asset quality and profitability.

At four notches below Malta’s Long-term IDR (A/Stable), BoV’s SRF of ‘BBB-‘ reflects Fitch’s view of the authorities’ relatively limited ability to support BoV, if ever required, as the bank’s assets represent such a large portion of domestic GDP.

SR and SRF BoV’s SRF and SR are sensitive to any weakening of Fitch’s assumptions regarding Malta’s ability and propensity to provide timely support to the bank.

The government’s ability to provide support is indicated by the sovereign rating and any downgrade of Malta’s sovereign rating would trigger a downward revision of BoV’s SR and SRF. However, in Fitch’s view, the greatest sensitivity is to progress made in implementing the Bank Recovery and Resolution Directive and Single Supervisory Mechanism.

In this context, Fitch expects to downgrade BoV’s SR to ‘5’ from ‘2’ and to revise its SRF to ‘No Floor’ from ‘BBB-‘ by end-1H15.

Timing depends on progress made on bank resolution legislation. All else equal, a downgrade of the SR and SRF would not affect BoV’s VR-driven IDRs.

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