Financial analysis: Banks dominate the headlines

The banking sector dominated headlines over recent days with various news stories regarding the potential sale of the 70% stake of HSBC Bank Malta plc. A number of news portals that do not normally delve too much into capital market developments, revealed the identities of the other possible bidders apart from APS Bank plc that had been known for the past few months.

In the midst of these news stories, including comments from government officials regarding their views on the sale of HSBC Malta, the largest bank in Malta published its annual financial statements.

Given the increased frequency and detail of reporting adopted by Bank of Valletta plc over the past two years, it should have come as no surprise that the BOV Group was on course for another record performance. Many media outlets gave prominence to the bank’s press release of March 26. As such, by now, shareholders and followers of the domestic capital market ought to know the headline figures and the background to such a strong financial performance.

The pre-tax profit figure of €302.4 million represents an absolute record in the 50 years since the bank’s inception. This equates to a profit after tax of just under €200 million and a return on equity of 14.9%.

As the media and the investment community speculate on the identity of the possible new majority shareholder of HSBC Malta (being the second-largest bank in Malta), it is worth highlighting the sheer dominance of BOV across the local banking sector.

BOV’s profits after tax of just under €200 million in 2024 are exactly double the record profits registered by HSBC Malta last year amounting to €100 million and significantly ahead of APS Bank at €17.6 million. Meanwhile, Lombard Bank Malta will be publishing its annual financial statements on April 16 (the 2023 profit after tax of Lombard Bank was of €9.1 million).

As at December 31, 2024, BOV’s total customer deposits of €12.8 billion (these increased by €652 million during the year despite the lack of pass-through of the current positive interest rate environment to its numerous customers) are more than double those of HSBC Malta at €6.16 billion. Customer deposits at APS Bank as at December 31, 2024, amounted to €3.7 billion.

Likewise, customer loans of BOV as at December 31, 2024, amounting to €6.8 billion (loan-to-deposit ratio of 53.5%) are more than double those of HSBC Malta at €2.87 billion. Interestingly, the amount of loans of APS Bank at €3 billion exceeded those of HSBC.

While these figures clearly evidence the size and importance of BOV to the overall banking sector, and indeed to Malta’s economy as a whole, the shareholders of BOV and other participants of the local capital market possibly focused on other more important announcements and initiatives revealed by BOV last week.

During the five-year period between 2018 and 2022, BOV only distributed a dividend to shareholders on one occasion in December 2021 in view of litigation issues and the impact from the COVID-19 pandemic. Over recent years, BOV Chairperson Gordon Cordina has regularly emphasised that the bank aims to restart distributing on a regular basis to shareholders dividends that are sustainable taking into consideration the bank’s capital requirements.

The semi-annual dividend distribution policy resumed in the 2023 financial year (net interim dividend of €0.03 per share and a final net dividend of €0.0455 per share, bringing the total net dividend in respect of FY2023 to €0.0755 per share). Meanwhile, in December 2024, the net interim dividend doubled to €0.06 per share and, last week, BOV announced that it will recommend the payment of a net final dividend of €0.0854 per share.

The share buy-back/market-making function announced by BOV last week is a very positive development for the local capital market

Despite the considerable upturn in the share price over the past two-and-a-half years, the final dividend equates to a yield of 4.1% on the current share price of €2.08. Meanwhile, the total net dividend of €0.1454 per share for FY2024 (equivalent to a record dividend of €85 million and a dividend payout ratio of 42.6%) gives a dividend yield of 7%.

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A few hours before the publication of BOV’s annual financial statements, the bank obtained a credit rating upgrade from Fitch Ratings to ‘BBB’ from ‘BBB-’. In its commentary published on March 25, the rating agency noted that BOV has locked in yields through a larger and longer-dated securities portfolio compared to the past.

The credit rating upgrade is important in the context of the recent bonds issued by BOV in December 2022 and November 2024. Moreover, the rating upgrade comes at an important time in view of another imminent bond issue by BOV. The issuance of another tranche of bonds as part of the programme of up to €250 million announced in October 2024 provides further evidence that BOV will be availing itself of its early call option on the €350 million bonds issued in December 2022 at 10% per annum.

While BOV has been giving more prominence to regular reporting by disclosing its financial performance on a quarterly basis, for the first time ever, the bank provided guidance on its financial expectations for 2025 and some indications for the following years.

BOV anticipates that its return on average equity will remain in double-digit figures during the three-year period between 2025 and 2027. In view of the fact that some of its interest income is sensitive to a decline in interest rates, as it is pegged to international benchmark rates, BOV announced that in 2025, it expects its profit before tax will range between €200 million and €250 million (compared to €302 million in 2024) with improvements expected in the following two years. BOV also indicated that its dividend payout ratio in respect of the 2025 financial year will be set to a maximum of about 50%. This clearly indicates the strategy to stabilise dividends to shareholders going forward.

Moreover, the other key financial highlight provided in the forecasts related to the net asset value (NAV) per share. In my view, this is a clear indication by the bank that the NAV per share is a key metric for shareholders to monitor. On the assumption that the bonus share issue of one new share for every 10 shares held is approved by both the regulators and shareholders at the bank’s annual general meeting, BOV’s NAV per share is expected to be in the range between €2.28 and €2.32 per share by the end of 2025.

Finally, BOV announced that in order to support the liquidity of its shares on the Malta Stock Exchange, it will be launching a share buy-back programme. However, contrary to Malta International Airport’s upcoming programme, this will not involve the cancellation of any shares. The BOV chairperson indicated last week that the shares that will be bought back as a first step will not be cancelled, and will be kept in Treasury for future objectives, such as resale on the market (for market-making purposes to improve liquidity) or for other needs such as executive share ownership schemes.

The share buy-back/market-making function announced by BOV last week is a very positive development for the local capital market. The two largest capitalised companies on the MSE are now not only providing financial guidance but will also be conducting share buy-backs which should instil a great deal of confidence to high-net-worth and institutional investors on a possible exit route from these two equities. Hopefully, these important initiatives will instigate other equity issuers to follow suit, which could lead to a more active secondary market.

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