Difficult year for Maltese banks (2023)

As the 2020 annual reporting season ends tomorrow, banks whose shares or bonds are listed on the Malta Stock Exchange have released their financial statements for the past year.

A comparison of some key numbers and financial indicators highlights some important findings that may be of use to the Maltese investing public.

As expected, and in line with the circumstances abroad as well, 2020 was a difficult year for the Maltese banking sector in general, with all banks reporting a significant reduction in profitability, largely as a result of higher credit losses. (ECL). derived from the serious economic implications of COVID-19.

Hardest hit were MDB Group Ltd (which is the parent of MeDirect Bank (Malta) plc and also one of three local financial institutions directly supervised by the European Central Bank and Bank of Valletta plc. Both MDB Group and Bank of Valletta recorded charges net for impairment of just over 65 million euros.

In the case of the MDB Group, most of the bank's charges were due to its significant exposure to international credit, as the group only incurred an impairment of less than €0.4 million in relation to local credit and the Dutch mortgage business.

On the other hand, a considerable part of the BOV impairment, amounting to almost 40 million euros, was related to long-term delinquencies (NPLs), since the bank explained that the current economic environment will continue to aggravate the recovery process of liquidation of assets (mainly real estate) held as collateral.

HSBC Bank Malta plc also saw a sharp increase in ECLs, which amounted to €25.6 million, compared to just €0.39 million in 2019. By contrast, although all other local banks such as Lombard Bank Malta plc, Izola Bank plc and APS Bank plc – took additional impairment charges, which were further mitigated in view of multi-billion dollar losses suffered by the three largest financial institutions.

An important consideration, which must be highlighted when analyzing how local banks have withstood the economic shock imposed by COVID-19, is related to their level of capitalization and liquidity, which continued to strengthen even during these difficult times. This development is also reassuring for equity investors as the high level of capitalization will help some of the banks to return higher levels of capital to shareholders once the current European Central Bank restrictions are lifted.

In fact, both HSBC Bank Malta and Lombard Bank Malta have resumed dividend payments to shareholders, albeit at much lower levels than before the start of the pandemic. On the other hand, the Bank of Valletta's decision not to declare a dividend for 2020 must also be seen in the context of the important contingent liability amounting to 363 million euros in relation to the claim made by the trustees of the bankrupt shipping company. Deiulemar, which is also a cause for concern for the overall stability of the entire Maltese financial system.

In fact, BOV remains by far the largest bank in Malta, with total assets exceeding €12.9 billion, almost double the amount held by Malta's second largest bank – HSBC Bank Malta. However, slightly less than 37 percent of the total assets of the BOV are represented by loans to customers, for an amount of 4,700 million euros, the balance being made up mainly of financial assets and investments (3,400 million euros, or the 26.7 percent of total assets) and short term. -liquid term funds (4.3 billion euros, or 33.1 percent of total assets).

In fact, an important metric in the analysis of banks is the level of loans in relation to the deposit base, which becomes even more critical in the current circumstances due to the scenario of negative interest rates that greatly impair the performance of those banks with excessive levels of liquidity.

This is the case for the BOV, which has a particularly low loan-to-deposit ratio of 42.1 percent. In essence, this means that less than half of customer deposits are loaned to private or commercial customers.

In fact, 2020 was a difficult year for the Maltese banking sector in general, with all banks reporting a significant decline in profitability.

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On the other hand, Banco APS's credit/deposit ratio is just below 85 percent, clearly demonstrating the efficient management of the bank's balance sheet with customer loans of €1.8 billion against customer deposits of €2.1 billion. of euros. Another financial indicator that is regularly monitored in the banking industry is the cost-benefit ratio (or the "cost efficiency ratio"). Data for fiscal 2020 shows this metric weakened across all banks as revenues declined as a result of the pandemic, while costs continued to rise, primarily reflecting higher regulatory costs and additional transformation-related expenses. digital for some of our banks.

Financial data for 2020 indicates that APS Bank had the best value for money among banks whose securities are listed on the MSE. The cost-to-income ratio of 61.5 per cent was much stronger than that of the two largest banks, BOV and HSBC Malta, which had almost identical ratios of 73 per cent.

Meanwhile, MDB Group was more than 100% profitable, with total operating income contracting to €51.4 million in 2020, compared with an annualized figure of more than €70 million in the previous nine-month period, after for the group to change its accounting year. late March to December early 2019.

When looking at the efficiency ratio, it is worth noting that Lombard Bank Malta's consolidated financial statements include the results of MaltaPost plc and therefore comparison of some line items with other banks can be somewhat misleading due to the inclusion of sales and revenue from postal services within Lombard Group's non-financial income, as well as the associated costs of the subsidiary.

In fact, while the cost-to-income ratio at the group level is 75.8 percent, the ratio at the bank level is much healthier at 52.4 percent. This would also rank Lombard Bank as the most profitable financial institution in Malta. Looking at the data over several years, it is clear that the benefit-cost ratio of BOV has deteriorated the most, rising from 45% in 2016 to 73.6% in 2020.

As a result of the extremely challenging conditions that resulted in a sharp increase in ECLs, the overall profitability levels of each of the banks fell sharply in 2020. The most profitable bank in absolute terms remained BOV, with a profit after taxes of 13.8 million euros. (2019: €63.5 million), followed by APS Bank with a profit after tax of €9.9 million (2019: €19.1 million) and HSBC Malta (€7.6 million). The most important profitability ratio, however, is return on capital, which compares after-tax earnings to average capital.

Due to the large amount of shareholder funds on the BOV balance sheet of over €1 billion, the return on equity was a paltry 1.29% in 2020. Although the return on equity should not be expected of the BOV returns to double digits in the year. The next numbers that many investors were used to before the start of the global financial crisis in 2008, when the regulatory environment and interest rate landscape were markedly different from today, it would be reasonable to expect higher returns from investment banks. capital in the coming years.

Lombard Bank posted the highest returns on equity in 2020 at 5.4%, closely followed by APS Bank at 5.2%. While it is important to note that APS' return on equity was 11.7% in 2019, it was below the 10% level in prior years as the bank's 2019 performance was driven by realized and unrealized gains in instruments, financial assets, as well as the record income generated by fees and commissions and the associate that operates in the fund business.

Furthermore, Lombard's return on equity has been below the 10% level since 2010, as operating expenses nearly doubled during that time, while Lombard's capital base grew significantly to €126 million compared to with 71.7 million euros at the end of 2010.

As highlighted above, capitalization levels across all banks remained strong despite challenging circumstances and the large amount of ECL incurred in 2020. Common Equity Tier 1 Capital Ratio and Total Capital Ratio are observed indicators of closely by professional investors, regulators and credit rating agencies. .

It is therefore very reassuring to note that the BOV CET 1 ratio has passed the 20 percent level in 2020. However, this must also be seen in the context of the large pending litigation facing the bank and as such, It is expects that these high capital levels should be maintained until this litigation case is resolved.

It is also worth noting that HSBC Malta had a CET 1 ratio of 18% in December 2020, which is an all-time high and also indicates the likelihood of more attractive dividends for shareholders once regulators' restrictions are lifted. .

Meanwhile, in its 2020 Annual Report, APS Bank once again referred to its Capital Development Plan, for which the bank explained that in 2022 "it will campaign to raise what would be the largest capital round in history for APS Bank”.

Following the successful issuance of €55 million in new subordinated bonds at the end of 2020, a new fundraising exercise by APS Bank promises to be another defining moment for the bank as it looks to expand its business and achieve its investment targets. growth. .

Following the recent acceleration of the vaccine rollout in Malta and the reopening of the tourism sector from June 1, it would be interesting to assess the extent of the economic recovery over the summer months and how it might affect non-financial income and ECL in various banks. This could be one of the driving factors for banks to report more significant levels of profitability and hopefully higher dividends for shareholders.

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