The COVID-19 pandemic has caused an unprecedented global contraction in economic activity, and has inevitably originated a significant shock to the global banking industry. Indeed, the pandemic has accelerated the risk of non-performing loans globally, forcing banks to provide for elevated levels of expected credit losses (ECLs) in their books.
Nevertheless, BOV reported an improved financial performance during H1-21, namely in terms of its interest and non-interest revenue drivers, implying a possible gradual recovery from the implications brought about by the pandemic on the bank.
More specifically, BOV’s net interest income amounted higher during H121 to €73.4m, reflecting an overall improvement in the bank’s interest income of €1.1m or 1.5 per cent on a comparative basis (H120: €72.3m), translating into an overall net interest margin of circa 1.1 per cent. Management further noted that this improvement is mainly attributable to a steady growth in home loans and in corporate loans issued in support of businesses utilising the BOV MDB COVID-19 assist scheme. Notwithstanding the aforementioned improvement, the bank still was impacted by the wavelength of challenges brought about by the pandemic, namely the prolonged current low yielding environment.
Additionally, BOV also registered an improvement in net fee and commission income during H1-21 (+8.6 per cent). Expectedly, this is reflective of the loosing and relaxation of the pandemic induced restrictions, which positively impacted BOV’s commission income, mainly through a pick-up in cards and payments throughout the first half of the year. Nevertheless, management further noted that the overall business and economic activity is still relatively lower when compared to pre-pandemic levels.
Moving to the expenditure side, the bank’s total operating expenditure (excluding depreciation and amortisation), amounted higher to €88.7m during H121, implying an overall growth of 11.4 per cent or €9.1m on a comparable basis (H120: €79.6m). Specifically, the above-mentioned increase in operating expenditure is principally attributed to higher investments implemented vis-à-vis the Bank’s Anti-Financial Crime Transformation, as well as additional investments carried out in terms of the Bank’s 2023 strategy.
Additionally, notwithstanding the fact that the pandemic situation remains relatively fluid and uncertain, BOV’s interim financial performance was also characterised by an expected credit losses (ECLs) release of €3m during H1-21 (H1-20: €7.5m charge). While the impairment charges predominantly attributed to COVIID-19 amounted lower to €5.4m (H1-20: €9.9m), BOV booked an additional impairment charge of €8.3m (H1-20: Nil) in relation to the bank’s long outstanding non-performing loans. Additionally, BOV’s increased efforts to boost recoveries from past debts, started to yield positive results during H1-21, and are expected to continue to do so for the remaining months of the year.
More constructively, in line with an expected improved business sentiment, especially throughout the second half of FY21, BOV might possibly be in a brighter position to also reverse additional portions of its ECLs booked during FY20.
Furthermore, despite a general improvement in performance and profitability, the bank, decided not to declare a dividend payment concerning its H1-21 performance, on the basis of the continued pandemic related uncertainty and more specifically given that the Deiulermar claim is still outstanding. This being said, BOV’s CET1 ratio as at June 2021 stood at a healthy level of 20.9 per cent, which is way above the regulatory trigger levels.
In conclusion, we reiterate our stance that apart from the pandemic related issues, BOV is still facing a number of challenges. We are of the view that the Bank’s significant growth in customer deposits, which continue to be negatively conditioned by the prevailing negative interest rate scenario, is one major risk going forward. In addition, the uncertainty surrounding the bank’s pending Deiulermar case, which has impacted the BOV’s dividend policy, is also another concern for the bank.
This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.