The annual financial reporting season is currently in full swing and while most observers of the Maltese capital market would correctly expect strong performances by most companies given the robust dynamics of the Maltese economy (in fact the large majority of companies are reporting encouraging figures and some companies are recommending high dividend payments to shareholders), developments within Bank of Valletta plc over the past 12 months may have led to a certain build-up of anxiousness among the investing public ahead of the bank’s reporting date.
BOV published its annual financial statements on March 15 and while at first glance one generally looks out for some key performance indicators once a company’s financials are released, the litigation provision was surely the main item that most analysts and shareholders would have looked out for in the BOV company announcement.
In the first half of the 2018 financial year, BOV had accounted for a litigation provision of €75 million which naturally hugely impacted the overall financial performance and, for the first time in its history as a publicly traded company, this led the bank not to declare an interim dividend to shareholders. At the time of the publication of the 2018 interim financial statements on July 31, the bank had also warned its shareholders that it did not intend recommending a final cash dividend for the 2018 financial year following “extensive discussions with regulators”.
The extent of the litigation provision as well as the cancellation of the dividend in summer 2018 left a deep impact on investor sentiment towards BOV. This had already been weakening following the announcement exactly one year ago (on March 27, 2018) that the bank had received notice that the Italian Tribunal had issued a precautionary warrant (sequestro conservativo) for €363 million against the bank related to the Deiulemar case which, in turn, was first revealed on April 2, 2015 when BOV had issued an unexpected announcement on Maundy Thursday.
The share price of BOV has been negatively impacted by the series of announcements over the past twelve months. At the start of 2018, the equity had started to edge higher following the successful €150 million rights issue in December 2017 reaching a 2018 high of €1.91 on March 26, 2018. The share price however quickly entered into bear territory in the following months as the strong financial performance registered in 2017 was overshadowed by other developments shortly after the publication of the 2017 financial statements on March 23, 2018 related to the issue of the precautionary warrant.
The equity managed to hold on to a tight range above the €1.70 level for a couple of months prior to the release of the 2018 interim financial statements in July even though it was revealed on July 20 that the Italian court had rejected the bank’s appeal and confirmed the issue of a precautionary warrant of €363 million.
As the bank published its interim financial statements on July 31, that also included a litigation provision of €75 million and a decision to halt dividend payments for the 2018 financial year, the share price tanked. The equity performed negatively throughout the rest of 2018, at first momentarily supported at the €1.50 psychological level until mid-September, but then dropping below this level and reaching a 2018 low of €1.30 before partially rebounding to end the year at the €1.33 level. This represented a drop of 26.1 per cent during the 2018 calendar year and the negative trend in the equity continued during the start of 2019 with the share price dropping to a multi-year low of €1.235 on February 18, 2019 before ending the month at €1.26.
The equity staged a relief rally following the 2018 financial results announcement on March 15 as BOV confirmed that it did not account for an additional provision during the second half of 2018 and it generated a profit of €146.2 million (excluding the litigation provision of €75 million) which represents an increase of 5.8 per cent over the annualised profit for 2017. The share price jumped by 17.5 per cent within a few days to a high of €1.48 before easing partially to a current price of €1.45.
It would be ideal for the bank to follow best practice and reconsider the reinstatement of the semi-annual publication of the Interim Directors’ Statement
Although the bank’s operational performance remained strong in 2017 and in the first half of 2018 and the latest financial statements for the 2018 full-year proved this once again, the market was indicating a high level of uncertainty related to the bank’s various litigation cases over recent months. The recent upturn in BOV’s equity is therefore possibly attributed to the fact that no further provisions were taken in the second half of 2018.
Following the strong operational performance by BOV in 2018 and the amount of profits being retained within the bank since no cash dividends are being paid, BOV’s CET 1 ratio as at December 31, 2018 improved to 18.3 per cent which is a high capital ratio and should reassure shareholders given the extent of the ongoing litigation issues.
Another very important highlight included within the recent announcement was the capital raising plans. BOV stated that it intends to issue an instrument amounting to €150 million, eligible for additional Tier 1 (“AT1”) capital. Moreover, the bank intends issuing a new subordinated bond during the third quarter of 2019 to replace the existing €50 million 5.35 per cent subordinated bonds which are due for repayment on June 15.
The ‘additional Tier 1’ bonds are deeply subordinated bonds that count as regulatory capital and these have become common instruments used by banks across international financial markets. Two banks in particular made headlines in this respect in recent weeks. In November 2018, UniCredit SpA placed USD3 billion of AT1 bonds at a coupon of 7.83 per cent in a private deal with Pimco and a few weeks ago, the Italian bank easily raised an additional €1 billion of AT1 bonds at a coupon of 7.5 per cent (with an issuer call after seven years). Moreover, last month, Banco Santander became the first bank which did not exercise the call option at the first opportunity and it extended its €1.5 billion 6.25 per cent perpetual Additional Tier 1 bond.
The success or otherwise of the issuance of additional capital (both the €150 million in AT1 bonds and the €50 million in subordinated bonds) could be one of the determining factors behind the resumption of dividend payments by BOV. In a recent meeting with financial analysts, BOV’s Chairman indicated that dividends will be reinstated “when prudent to do so”.
Any approval by the regulators for the resumption of dividends will possibly be dependent on developments related to the litigation issues, namely the Deiulemar case, as well as the success of BOV’s capital raising plans.
The last subordinated bond issued by BOV was in November 2015 and at the time there were new procedures required by financial intermediaries since these bonds were classified as ‘complex financial instruments’. Under MiFID II regulations effective as from January 2018, the distribution of complex financial instruments to retail investors poses additional challenges since such investors are prohibited from applying for these bonds unless they are able to demonstrate a level of knowledge and experience in the technicalities of ‘subordination’ and the EU’s bank recovery and resolution directive (‘BRRD’). Given these issues, it would therefore be interesting to gauge investor appetite for these new complex financial instruments in the next few months.
Given the need for BOV to issue a sizeable amount of new capital in the months ahead, it would be ideal for the bank to follow best practice and reconsider the reinstatement of the semi-annual publication of the Interim Directors’ Statement in May and November. This should help keep BOV’s numerous stakeholders well aware of ongoing business developments including any comments by the international credit rating agencies who were quick to react to developments over the past 12 months.
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