BOV chairman's reaction to Fitch report

Bank of Valletta chairman Joseph Zahra yesterday noted that credit agency Fitch's long-term outlook on the bank had been changed from stable to negative, but said he was very satisfied that efforts to consolidate the bank's leading role in the economy had been recognised, and that the bank's short- and long-term rating had been reaffirmed at F2 and A- respectively.

Asked whether the Fitch report would have a bearing on privatisation, Mr Zahra said that what people would be looking at was the strength of the core business - and the indications were positive.

"The most important element is that Fitch has reaffirmed that this is an A- financial institution, which says a lot about us. When you are talking about an A- institution on an international level, it is quite something."

On privatisation, he said the bank, as had already been stated by government, would continue to be Maltese. But there would be a strategic investor who could contribute to product development and technology development. The ultimate decision would be taken by the shareholder.

"Ultimately, the Fitch report is similar to what we had last year. I don't know why this report has been completely blown out of proportion by some quarters.

"The reality is that our market share is improving on both lending and in the area of deposits. If there is competition, it shows that we are making inroads.

"The realities of Fitch are these: It basically confirms the strength of this bank in Malta but takes into account the local and international circumstances in which we are operating. When Fitch analysts were in Malta drawing up their report we had a 46 per cent market share on the deposit side. Considering there are three other banks, that is undoubtedly substantial.

"It also confirms that the bank is a very strong institution on the island. It also acknowledges the prudence with which the bank is operating. The final result is that we retained the same long-term rating as we had in the past. The short-term rating remained the same, that of F2. The support rating remained the same."

Mr Zahra said that as had been well publicised, international credit rating agencies had been applying more stringent criteria in granting credit ratings: "The change in the outlook from stable to negative was a reflection of a number of factors which had affected the bank's profitability in 2001, principally a slow-down in the international and domestic economy and the drop in the profits generated by the bank's associated companies."

Mr Zahra said that the bank's results in the first six months of the present financial year showed that the profitability level had been stabilised, despite a consistent increase in the bank's provisioning reserves and a more stringent approach to credit quality assessment, offset by increased interest and non-interest income.

"It is heartening to the bank that the Fitch ratings have also taken note of the bank's strong position in the Maltese financial system, the very stable retail deposit base and the strong capitalisation. We will be working in the coming months on improving the asset quality of our balance sheet while preserving current levels of profitability."

Mr Zahra said that the effect on the bank of the revised ratings would not have a significant impact on the bank's profitability or funding programmes.

"The most important aspect is that the short-term credit rating of F2 has been affirmed, and the long-term rating left unchanged at A-."

On the point made by Fitch that there had been a significant drop in the bank's income at the end of the last financial year ending September, 2001, Mr Zahra said: "The situation now is completely different. We have seen a growth in operating income of nine per cent during the first six months of the financial year."

He said that the drop in income was a reflection of a decline in the non-interest income due to a fall in the sale-side of the fund management business - the reason being the situation in the international equity markets and the local equity markets.

The second reason which led to the drop in income was lower profits coming from associate companies and subsidiaries.

Mr Zahra also announced that BOV was reviewing its credit policy.

"If one had to look at what BOV is doing at the credit management side, basically we are being criticised for being too strict on advances and lending. But this is a reflection of the way things should be done at this particular stage where companies are actually restructuring.

"We do assist and help but at the same time we have to act with an element of caution and prudence. We have changed our credit policy and we are again reviewing the credit policy of the bank to reflect the change in atmosphere.

"We see that at this particular point in time there are a number of business opportunities which we cannot lose out on which means that we still retain our prudent and cautious approach, but we also feel that we have to be more responsive to business lending opportunities. This is the stage we are at and this is why we think this review is necessary.

"The report issued by Fitch gives us a lot of encouragement. Everything we are doing on our credit management side, including the setting up of a credit risk management unit which has been set up, a change in the credit policy and the way that loans are being sanctioned, are all steps in the right direction."

Meanwhile, a summary opinion issued last month on BOV by credit agency Moody's, which has so far not been published in Malta, said that the outlook of the bank's financial strength was stable.

Any further asset quality problems or indications that BOV's franchise and earning power would be weakening due to higher competition would put negative pressure on the financial strength of the bank, Moody's said.

Changes in the deposit ratings would reflect changes in the country ceiling, which currently has a negative outlook due to the continuing large fiscal deficits and the weak growth prospects.

On Moody's report, Mr Zahra said that one had to realise that the bank was not living in a vacuum.

"We are living in this country and in the world. This is a reflection of what is happening in the international and the local economy. Considering everything, Moody's awarded a good mark."