The interim reporting season is now in full swing. At the start of the week, Bank of Valletta plc published its financial statements as at June 30, and delivered a presentation to analysts providing a detailed walkthrough behind the results.
BOV’s performance is a key focus of attention for the investor community given its dominant position in the banking sector with a market share of deposits at over 49% and share of over 43% in loans.
Reporting on their 2023 financial statements some months ago, I had stated “the profits of €251.6m are well and truly reflective of a bumper year largely brought about by the increase in interest rates by the ECB”.
That statement is important when placing into perspective the impressive financial performance in the first half of 2024 showing pre-tax profits of €148.2m, a 40.9% rise over the same period last year. This again reflects the current interest rate environment which has boosted local and international banks’ profitability after a long period of subdued results as rates were held at historically low and, at times, negative levels for years.
The main driver of BOV’s profit surge in the past six months is once again net interest income – the difference between the interest banks receive from loans, investments and cash at the central bank and the interest they pay on deposits and other liabilities.
During the first half of 2024, net interest income surged 21.1% to €193.6m compared to €159.9m in the first half of 2023, and €352m in all of that year.
An analysis of the components within the net interest income is the most important area of focus for investors as this remains the bank’s core business.
BOV’s strategy of balance sheet optimisation was very clear last year as it aimed to reduce the bank’s dependency on future changes to the ECB interest rate to the bank’s overall interest income. This was also highlighted by BOV in the presentation of the Q1, 2024 results some months ago and once again earlier this week.
Analysis of the components within the net interest income is the most important area of focus for investors since this remains the core business of the bank
The sensitivity of BOV’s income to interest rate fluctuations has reduced materially as there was a major shift in assets to longer-term interest-earning instruments. The bank reported that a one percentage point movement in the deposit facility by the ECB would result in only a €20.8m movement in interest income, significantly lower than the €52.4m movement based on the 2012 balance sheet composition.
In the first six months of 2024, cash and short-term funds further decreased by €1.1bn (now at €1.2bn from over €5.2bn in 2021) and these were redeployed in longer-term interest-earning assets. The bank’s proprietary treasury portfolio increased by a further €723.2m to €6.1bn, with loans and advances to customers increasing by €371m to €6.6bn.
The rise in net interest income in the first half of the year mainly came about from the treasury portfolio, with income from this segment rising by €29.8m. Meanwhile, interest income from the loan book grew by €12.5m.
The substantial growth in the treasury portfolio in recent years is a key strategic initiative that will enable the bank to sustain annual pre-tax profits of well-over €200m in the coming years. By shifting a large component of assets that reprice in the short-term to longer-term assets (investment grade bonds and customer loans), the bank locks in returns over a longer-period of time, achieving greater stability over the interest rate cycle.
BOV CFO Kevin Cardona highlighted that the income from the treasury portfolio is currently averaging circa €30m per quarter, with an effective interest rate of 2.1%. In essence, this implies that the treasury portfolio will be generating annual income of €120m compared to much lower levels in the region of just over €20m annually between 2020 and 2022. This will provide less sensitivity to interest rate fluctuations by the ECB. This major achievement is probably overlooked by the investor community and will become more evident in future.
Following the surge in profits, the main key performance metrics remained very strong. The net interest margin (NIM), which is the difference between the rate charged on loans and that paid on deposits, expressed as a percentage of interest-earning assets, stabilised at a healthy 2.7%. The post-tax return on average equity of 15.5% increased from 12% in the first half of 2023. Likewise, the loan-to-deposit ratio improved to 53.4%, and the cost-to-income ratio also strengthened meaningfully to 40.7%.
Following the publication of BOV’s financial statements earlier this week, the bank’s share price surged 6.8% to a six-year-high of €1.58. BOV’s market capitalisation has now surpassed €920m, placing the bank firmly as the largest company whose equity is listed on the MSE.
BOV’s share price has been trading below its book value ever since 2017. Despite the bank’s recent strong share price performance, it is still 31% below its NAV (net asset value) of €2.289 per share as at June 2024. Essentially, the +11% jump in the share price this year was largely mirroring the growth in the net asset value as a result of the strong profitability levels.
BOV did not declare a dividend to shareholders. BOV reiterated that “it will be undertaking a study to assess the feasibility of initiatives intended to optimise shareholder value”, which will be concluded by the end of October. The announcement highlighted that the possibility of a share buyback programme will be apart from the “the imperative to sustain a healthy cash dividend”.
During the meeting with analysts, BOV chairman Gordon Cordina indicated that a similar procedure to last year will be adopted, which would pave the way for BOV to have a semi-annual dividend in place, with the interim dividend in Q4 of the financial year and the final dividend in May after shareholders’ approval at the AGM.
Possibly, the major surprise from the announcement earlier this week was the upcoming launch of a Medium-Term Note Programme of up to €250m. BOV’s strong growth trajectory requires a constant need for capital in line with regulatory requirements.
A number of interesting developments will be taking placing concurrently in the final quarter of the year, with these new fixed-income instruments being launched coinciding with the completion of the study on optimising shareholder value, as well as the confirmation of an interim dividend.
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