Last Updated on Thursday, 30 March, 2023 at 3:08 pm by Andre Camilleri
Bank posts robust performance in its core banking business
Bank of Valletta Group today announced the financial results for Financial Year ended 31 December 2022, reporting a profit before tax of €48.7 million. Excluding the effect of the Deiulemar settlement, the adjusted profit before tax was €151.7 million, an increase of €71.0 million or 88% compared to FY2021. Pre-tax return on equity (‘ROE’) was 4.3% (2021: 7.3%) and earnings per share €5.3 cents compared with €9.6 cents in the comparative year. Excluding the one-time impact of Deiulemar settlement, ROE was 13.3%.
Solid Revenue Growth and Management of Costs
The Group delivered solid revenue growth with client-driven activities and positive interest rate dynamics, supported by lower costs and net release of Expected Credit Losses (‘ECLs’). Total operating income increased by 21% or €50.4 million to €293.4 million compared to €242.9 million in 2021. The most significant growth was in net interest income (‘NII’). Net interest income of €201.9 million increased by 29% compared to 2021 as a result of a healthy growth in lending portfolios supported by rising interest rates which further reduced the burden of interest expense. Net Commissions stood at €76.6 million, increasing by 3% year on year (2021: €74.6 million).
Positive performance was also registered on the cost side. Total costs amounted to €192.6 million resulting in a 2% decrease or €3.0 million (2021: €195.6 million), inclusive of Strategy initiatives. Employee compensation and benefits increased by €18.5 million or 23% driven by human capital requirements in specialised areas and associated growth rate in the average compensation. The Group has also introduced a voluntary pensions scheme and stepped up its early retirement scheme (an increase of €5.6 million vs prior year). The growth in employee costs was more than offset by slowed strategic investment from €23.1 million in 2021 to €7.8 million in 2022 and reprioritisation of other projects as the Bank balanced its efforts to deliver superior controls in line with regulatory requirements.
Net release of ECLs amounted to €49.1 million compared to a net release of €18.9 million in the previous year mainly as a result of COVID-19 provisions release (€24.9 million) accounted for in previous years. The Group’s share of the insurance associates’ results was €1.9 million (2021: €14.5 million), a significant decline, largely driven by the volatility of global financial markets during the year and the rising of interest rates.
Group Financial Position
Group total assets stood at €14.5 billion as at 31 December 2022, a marginal increase compared to 2021 which stood at €14.4 billion. Customer deposits have seen a growth of 3% compared to December 2021. New market opportunities have eased excess liquidity from €4.6 billion in 2021 to €3.4 billion in 2022 and as a result led to growth in investments of 27% compared to the previous year.
During the fourth quarter of 2022, the Bank issued €350 million Callable Senior Non-Preferred Notes maturing within 5 years at a coupon rate of 10% per annum. These issued notes stemmed from regulatory requirements pertaining to the minimum requirement for own funds and eligible liabilities (‘MREL’).
Net loans and advances amounted to €5.6 billion (2021: €5.2 billion) increasing by €436.4 million, or up by 8% compared to 2021. The ECLs coverage of credit impaired assets was marginally lower at 53.8% (2021: 54.1%). The Liquidity ratio was 426%, down from 444% as at 31 December 2021, and remained significantly above the minimum regulatory requirement. This decline reflected an increase in investments yielding a higher rate of return. The Group’s gross advances to deposits ratio stood at 46% (2021: 44%). The CET 1 ratio and total capital ratio remained strong and above regulatory requirements, with the CET1 decreasing marginally from 21.9% to 21.8% and the total capital ratio decreasing from 25.5% to 25.4%.
During 2022, the Bank reached an out of court settlement agreement, without admission of fault bringing all legal claims surrounding the Deiulemar issue to an end. The net impact of this settlement to profitability in 2022 was €103 million whilst a total of €363 million in pledged assets were released and are free from encumbrance.
In respect of the current period, the directors did not declare any interim dividends in view of the net loss reported for that period arising from the settlement of the Deiulemar litigation, and the need to remain aligned with regulatory expectations within this context. The Bank staged a significant recovery in underlying profitability for the year as a whole, which however remains weighed down by the cost of the Deiulemar settlement. For this reason, the Directors are not proposing any dividend for the year. This is consistent with efforts to sustain the capital and liquidity strength of the Bank’s balance sheet, generating the capacity for further business growth over the coming years. This approach meets the exacting regulatory expectations on the Bank and is consistent with a prudent approach in the context of overall developments in the global economy and financial markets.
Group’s continued business momentum in 2022
On announcing the results, BOV Chairman Dr Gordon Cordina stated that these results continue to reinforce the progress that the Bank has made during the past year. “As we stated on numerous occasions, we are steering the Group along the right path and these results are a true testament to this effort. We are now looking at 2023 and beyond with renewed optimism for the Group”. Kenneth Farrugia, BOV CEO also commented positively on the results, noting the solid revenue growth, increase in operating income, healthy growth in lending portfolios and decrease in total costs.
“In 2020, the Board approved a strategy which planned to take BOV on a transformation journey over three years. Although external factors such as COVID-19 and the global economic effects from the outbreak of the war in Ukraine posed several challenges, the Bank continued moving forward with its strategic ambitions of digitalisation and simplification. In 2022, we needed to balance the pace of change when managing staff through a significant transformation, whilst continuously improving the Group’s risk and control environment to ensure compliance with current, new, and emerging regulatory requirements.
Nonetheless, we implemented several quick wins on service delivery using the latest techniques to provide low-cost, high-speed improvements. Moreover, the Bank took forward the re-engineering of a number of processes as well as the streamlining of procedures to deliver customer service improvements. Overall, we have made good progress in many areas, and further improvements are in the pipeline”, said Mr Farrugia.
Disclosures in the Annual Financial Statements
Bank of Valletta reported that there have been no instances of fraud or suspected fraud that the Bank is aware of involving the Group’s management or employees who have significant roles in internal control. There have been no known instances of non-compliance or suspected non-compliance with laws and regulations.
Bank’s Current Approach to Reputation Management
In his intervention, Dr Cordina reiterated the Bank’s fundamental principles in managing its reputation, which is ultimately founded on its activities and behaviours. These are based on robust onboarding and credit governance and management practices effected through all of its lines of defence, including independent internal audit oversight and Board governance, as well as the reassurances received from the Bank’s external auditors and legal counsel. He highlighted that no material decision is dependent on any single individual or group.
The Bank remains fully engaged in keeping the market informed, through company announcements, on material developments in line with legal and regulatory obligations. In terms of its approach towards communications, the Bank is guided by the imperatives of safeguarding, on the one hand, client confidentiality and, on the other, its legitimate commercial interests.
Dr Cordina and Mr Farrugia thanked customers, shareholders, and employees for their continued support and commitment to the Bank as it supports the growth and development of Malta’s economy, while maintaining our commitment to responsible and sustainable banking practices.