BOV experiences 25% drop in profit before tax, bank subjecting future plans to stress testing

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The BOV Group Interim Financial Statements for the first half of 2020 show that the bank has seen a 25% drop in its profit before tax when compared to results of 2019, however, it is focused on retaining its resilience by subjecting its future plans to stress testing.

This was announced during a press conference in which the BOV Group gave a presentation of its Interim Financial Statements for the first half of 2020, ending 30 June.

“There are two major issues, which have affected these financial statements – COVID-19 and also self-investments and costs for the bank itself so that the highest standards of governance and risk assessments are carried out,” BOV Group Interim chairman Alfred Lupi said.

He added that these results need to be taken in the current context wherein the economic situation is still going through disruptions which have obviously had an impact on results.

BOV Group CEO Rick Hunkin explained that for the first six months of 2020, BOV reported a profit-before-tax of €13.8m representing an annualised return on equity (pre-tax) of 2.6%. Notably, this is a 75% decrease from last year’s statistics which saw a total of €54.3m in PBT.

Net interest income, which remains the main revenue driver for the Group, amounted to €72.3m, €5.3m less than the income registered for the same period in 2019.

“The persistently low to negative interest rate environment, coupled with a conservative risk appetite, limited investment opportunities and increased levels of liquidity which attract negative interest, resulted in lower earnings on the bank’s investment portfolio,” Hunkin explained.

Demand for credit was primarily related to liquidity shortages brought about by the COVID-19 pandemic. During this period, the demand for home loans was subdued when compared to previous years and this is mostly attributed to changed consumer behaviour influenced by the pandemic situation.

Commission and trading profits amounted to €37m, 19% lower than the first six months of 2019. The economic slowdown caused by COVID-19 had an adverse effect on commissions earned, especially those relating to the card and payment business and investment related products. Income from foreign exchange transactions was also negatively impacted.

Nonetheless, Hunkin said that the de-risking programme and its execution is proceeding at an accelerated pace. “While the bank is registering lower revenues, within the expected parameter, as some customers and business lines which fall outside the bank’s risk appetite are exited, it is nonetheless improving the bank’s risk position and long-term sustainability.”

Total costs for the first half of the year increased by €8.2m to €89.5m.

The increase is attributed to IT costs related to the new core banking system which went live at the start of the year, increasing staff costs mainly in recruitment in the Risk and Compliance areas and professional fees engaged in the implementation of the transformation programme with ongoing initiatives geared towards lowering the risk profile of the bank.

“Expected credit losses are highly sensitive to judgements and assumptions and, as with any economic forecast, subject to a degree of inherent uncertainty which has been augmented in the current circumstances which remain fluid and undefined,” Hunkin explained. The net impairment charge of €7.5m includes circa €10m which is predominantly attributed to COVID-19; offset by strong recoveries of past debts previously provided for.

Despite these hindrances, the Group ensured that it remains highly liquid, with cash and short-term funds increasing by €178.3m (4.3%) during the six months. Customer deposits increased by over €500m since the start of the financial year and reached €11.1bn at the end of June. Net loans and advances increased by €91m since December 2019, an annualised growth rate of 4% and stand at €4.7bn at 30 June. 

Interim chairman Lupi said that the Group wants to remain in a strong position in order to meet these unprecedented challenges and it is taking extra measures by subjecting its financial and liquidity plans to stress testing of plausible challenging scenarios “so that BOV has enough oxygen to provide for the local economy”.

“I am confident that the revised BOV strategy will not only deliver marked improvements in customer and employee satisfaction, but will also lead to improved financial performance, continuing to build upon a stronger risk and governance position. Post COVID, we also expect to be able to demonstrate a more positive and stable return for our shareholders,” he said.

Asked what their outlook is for the future of Malta’s economy, Lupi said that there is too much uncertainty around so it is difficult to guess but the Group’s view has always been about looking at the future and stress testing its plans without being too pessimistic or optimistic.

From his end, Hunkin said that there are many different views and it depends on the person one speaks to. “The central bank view is an 11% drop in GDP and we believe that this is a reasonable assumption. However, Malta has shown that it is resilient and if there is no second wave we will remain cautiously optimistic.”