This article throws some light on the major changes between 2015 and 2019 in some of the more important figures as reported in the audited accounts of Bank of Valletta and HSBC Bank Malta that together held some €15 billion of customers’ funds at the end of 2019. The table summarises the relevant figures, followed by some comments thereon.
Balance sheet and net interest income changes
It is evident that HSBC’s policy has been to discourage an increase in customers’ funds, which at nearly €5 billion have been static over the five-year period. Conversely, in the case of BOV the figure rose significantly by 24.18 per cent to €10.6 billion.
The effect of this is that BOV is paying a heavy price by having excessively large balances with the Central Bank of Malta at negative interest rates, non-yielding cash and Treasury Bills at insignificant interest rates. Nonetheless, BOV managed to raise the amount of net interest by 5.52 per cent while HSBC’s figure fell by 13.31 per cent. This could well be an indication of a relatively higher incidence of non-performing advances at HSBC.
In the case of loans to customers, HSBC’s figures showed little change while BOV’s rose by no less than 11.1 per cent. This is indicative of a policy by HSBC to keep their total loan book within a predetermined level, while BOV are evidently more inclined to meet demands for bank finance.
Indeed, it is significant that BOV’s total balance sheet footings rose by over €2.4 billion (+24.53 per cent) in five years while HSBC’s figure fell by €0.74 billion (-10.27 per cent). Both banks reduced somewhat their lendings to other banks.
Profitability
With regard to profitability there are contrasting differences between profits before tax (PBT) and post-tax profits (PTP). In the case of PBT, BOV fared far better than HSBC notwithstanding the fact that the former was constrained to create special provisions of no less than €100 million to cater for the potential settlement of two major litigation cases. It is significant that BOV increased their PBT by €28.7 million (+32.17 per cent) while HSBC’s fell by €16.1m (-34. per cent).
However, post-tax profits (PTP) fell drastically in both cases, by €16.4 million (-20.53 per cent) in the case of BOV and by €9.3m (-31.53 per cent) for HSBC.
Apart from the fact that the annual taxation charge is dependent on various elements, the reason for BOV’s lower tax charge is likely to have been influenced by the above-mentioned special provisions the real cost of which has yet to be crystallised.
Over the five-year period under review, BOV’s PBT totalled €328.1 million (an annual average of €65.6m); this is double HSBC’s annual average of €32.5m. Of course, this is reflected in the amount of tax paid by each of these two banks to the local exchequer.
Key accounting ratios
The substantial special provisions for two mayor litigation cases negatively affected BOV’s ratio of PBT to equity, which fell from 18.4 per cent to 8.7 per cent. In HSBC’s case, the fall was less pronounced , namely from 10.1 per cent to 6.5 per cent.
In both cases, the main reasons for these severe reductions are attributable to the reduction in the net interest margin (accentuated by negative interest rates applicable to the banks’ surplus funds with the CBM) as well as to the ever-increasing incidence of compliance costs.
In the case of HSBC there was also an element of one-time HR costs resulting from various early retirement schemes.
The financial strength of both banks remains solid
With regard to the ratio of operating expenses to total assets, BOV’s figures were consistently better than those of HSBC, although the latter’s ratio diminished over five years, presumably due to a reduction in personnel costs following various early retirement schemes.
Nonetheless, it is reasonable to conclude that HSBC’s HR costs are burdened by a higher level of expatriate staff (seven out of 15 members of the executive committee are non-Maltese) whereas BOV have only one expatriate senior executive, their CEO, who was appointed early in 2020.
Conclusion
In conclusion, the financial strength of both banks remains solid, with a capital base well above the minimum stipulated by the regulatory authorities.
However, having said that, bank customers find themselves increasingly being deprived of the efficient and speedy banking service to which they have been accustomed over the years. This is especially noticeable in the case of HSBC, which has been pursuing a policy of branch closures, especially in hitherto strategic locations (such as Balzan, Ħamrun and St Julian’s). One of these bank-owned premises (Ħamrun) is already being advertised for sale.
One can only assume that these premises will be sold at well above the book value prevailing when HSBC bought out Mid-Med Bank in 1999. Thus, HSBC is well placed to make significant capital gains when these former bank premises are sold, with the bulk of these extraordinary gains going to the majority foreign shareholder, holding nearly 70 per cent of the equity.
Impact of COVID-19 – half-yearly figures as at June 30, 2020
While finalising this article, both banks announced their interim 2020 results.
Not surprisingly, the impact of the pandemic was such that in both cases, profitability suffered a severe knock, resulting from lower operating income and a substantial rise in net expected credit losses (BOV €7.5 million; HSBC €8.7 million).
Earnings per share of 0.3c for HSBC and 1.7c for BOV give an indication of the wide variance between the profitability of the two banks.
The shareholders will not be alone in having to put up with the prospects of lower dividends (if and when paid) as government’s coffers will also see a sharp reduction in income tax payable by both banks.
The total for the first half of 2020 is €4.3 million compared with €23.4m in H1 2019, a reduction of €19.1m (-81.7 per cent). Compared with the figures as at December 31, 2019, customers’ deposits showed a further rise, more markedly in the case of BOV.
Between the two banks the total rose from €15 to €16.3 billion, resulting in balances with the CBM; TB and cash rose to a total of €4.6 from €4.2 billion, thus increasing the impact of negative interest on balances with the CBM.
This was accentuated by the fact that the total amount of loans to customers rose only slightly from €7.7 to €7.8 billion, an indication that both banks are hard put to employ profitably increases in customers’ deposits.
Anthony Curmi, former bank executive