The economic impact of the COVID-19 pandemic has been the main driver of the change in HSBC Malta’s financial performance in the first half of 2020. The resultant increase in expected credit losses, contributed to a material fall in reported profit before tax compared with the same period last year, in addition to the market turmoil that has impacted the bank’s insurance business.
Profit before tax was down €19.1m to €1.8m due to higher expected credit losses and lower revenue reflecting the impact of the pandemic. Revenue was down 16 per cent, largely driven by revaluation losses within the Life Insurance subsidiary (‘HSBC Life Assurance (Malta) Limited’) as a result of adverse market movements (equity and interest rates). Excluding the insurance subsidiary, revenue declined by one per cent.
Expected credit losses increased by €9.7m to €8.7m due to the impact of COVID-19. In 2019, HSBC Malta benefited from a number of releases in the first half of the year. Costs were five per cent below same period in 2019 reflecting strong progress on the strategy announced in 2019.
During the first six months, lending increased by €32m (one per cent) and deposits grew by €168m (three per cent). Profit attributable to shareholders of €1.2m for the six months ended June 30, 2020, resulted in earnings per share of 0.3 cents compared with 3.8 cents in the same period in 2019.
Common equity Tier 1 capital ratio of 16.6 per cent as at June 30, 2020, up from 16.4 per cent at the end of 2019, was well above regulatory requirements. Return on equity of 0.5 per cent for the six months ended June 30, 2020 compared with 5.8 per cent for the same period in 2019.
In line with the European Central Bank recommendation that Eurozone banks should not make dividend payments at this time, regardless of capital strength, no interim dividend was declared.
Profit before tax for the six months ended June 30, 2020 was €1.8m, down €19.1m from the same period in 2019. The reductions reflect the impact of the COVID-19 outbreak.
The life insurance subsidiary reported a loss of €8.9m, €11.3m below the profit reported in the first half of 2019. The loss was predominately driven by revaluation losses as a result of adverse market movements (equity and interest rates) and lower trading activities as a result of COVID-19.
Expected credit losses (‘ECL’) increased by €9.7m to €8.7m. Net interest income (‘NII’) was largely stable at €53.5m compared with €53.6m in the same period in 2019 driven by the effects of interest rate cuts made in September 2019 (EUR) and March 2020 (USD and GBP), together with a further decline in the average yield on the investment book which offset the increase in NII as a result of the growth in the retail lending book and lower interest paid on customer deposits.
Non-interest income reduced by €0.7m with strong fee performance within commercial banking as a result of new fees, offset by a reduction in fee income largely driven by a drop in activity due to COVID-19 across cards, payments, insurance and credit facilities.
The bank’s job has always been to support our communities
At the current time, the bank has seen some but not material increases in specific credit losses in retail and commercial. This reflects the benefit of support measures introduced by government, policy guidance from regulators and the bank’s conservative risk culture. However, ECL increased by €9.7m to €8.7m for the 6 months ended June 2020 compared to the same period in 2019 as we incorporated the probability weighted outcome of different forward economic scenarios at portfolio level which takes into consideration the expected impact of COVID-19. In 2019, the bank benefited from a number of releases in the first half of the year, while in 2020 it also benefited from a release due to change in methodology and a number of recoveries but these were more than offset by the COVID-19 impact.
The bank’s investment portfolio decreased by €9m to €935m and was composed of highly rated securities and continued to be conservatively positioned with the lowest investment grade of A-.
Customer accounts were €5,145m as at June 30, 2020, €168m or three per cent higher than at December 31, 2019 driven by retail deposits which offset a marginal decline in commercial banking deposits. The bank has a robust advances-to-deposits ratio of 64 per cent and its liquidity ratios were well in excess of regulatory requirements.
The bank’s common equity Tier 1 capital was 16.6 per cent as at June 30, 2020, compared to 16.4 per cent at the end of 2019 and well above regulatory requirements. Total capital ratio increased to 19.3 per cent compared to 19.0 per cent at December 31, 2019.
In line with the European Central Bank recommendation that Eurozone banks should not make dividend payments at this time, regardless of capital strength, no interim dividend is being declared.
Simon Vaughan Johnson, director and CEO of HSBC Malta, said: “The first six months of 2020 have been both challenging and transformative. Due to the COVID-19 pandemic, the economy slowed significantly and some sectors drew to a near standstill.
This meant two things for the bank. First that the financial performance of the bank inevitably suffered in line with the rest of the economy. But second, that the real measure of our performance became our success in supporting our customers, colleagues and communities during the crisis, and in laying the groundwork for the recovery to come and the future safe growth of our franchise in Malta.
“In difficult times, the bank’s job has always been to support our communities, provide stability and help rebuild economic growth. I am proud of the way our people have delivered this purpose as the pandemic has unfolded.
“We are focused on the future and on successfully executing our safe growth strategy. We will strive to achieve revenue growth as and when market conditions improve, while maintaining a strong risk management culture.”