The COVID-19 pandemic sparked a serious economic downturn and is increasingly posing severe stress on the banking system, also given the prolonged low yielding environment. The local banks were not spared from this unfortunate global health crisis, which has materially impacted BOV’s recent financial performances.
As per latest interim 2021 results, BOV’s net interest income amounted to €73.4m, representing an overall marginal increase of 1.5 per cent on a comparable basis (H120: €72.3m). Management reported that this improvement has been primarily initiated through a steady growth in home loans and in corporate loans issued in support of businesses under the BOV-Malta Development Bank (MDB) COVID-19 assist scheme.
Growth in deposits coupled with persistent negative interest rates continued to exert pressure on the bank’s net interest margin. The bank’s net interest revenue was also largely impacted through the redemption of securities previously generating positive returns which continued to be re-invested at lower or negative interest rates. Contrarily, the headwinds challenging BOV’s net interest income were offset by lower cost of funding as the bank’s subordinated bond matured in Q120.
Net fee and commission income and trading revenues amounting to €40.4m during H121 (H120: €35.4m) benefited from the relaxation of the pandemic related restrictions which in 2020 had severely impacted specific business lines such as cards and payments. This being said, it is imperatively important to note that economic activity during 2021 still remains below 2019 levels.
Additionally, the results for H121 included a €1.5m refund of customer fees and charges which had been introduced during 2020. Moreover, trading profits during the first half of 2021 improved by circa 55.1 per cent over the comparable period last year, namely through favourable market conditions.
Moreover, although as expected, BOV’s administrative expenses increased by 23.5 per cent to €47.6m during H1-21, employee compensation and benefits remained relatively in line with the previous year and amounted to circa €41.1m. In view of the fact that some aspects of the Bank’s de-risking programme reached completion, the bank’s latest results also reflected lower consultancy related expenses.
On a positive note, while the bank is maintaining a cautious stance mainly as the pandemic situation remains relatively fluid, credit provisions saw a net release of €3m for first half of 2021 (H120: €7.5m charge).
BOV further reported that the Deiulemar litigation situation remained relatively unchanged during the last six months. Nonetheless, the bank further maintained its position that this claim is wholly without merit. In this respect, the Bank also reiterated that it will continue to pursue its defence vigorously, including its fair hearing concerns, before the Italian courts, and if those prove unsuccessful, it will petition the ECHR again once the Italian remedies will have been fully exhausted.
As far as dividend distributions are concerned, in December 2020, the European Central Bank (ECB), lifted its ban on dividend payments for banks, whereby European banks are now able to pay modest dividends to shareholders in 2021 under strict limits outlined by ECB. More specifically, the ECB stipulated that dividend payments should amount to either 15 per cent of profit for the previous two financial years or 20 basis points the bank’s key capital ratio (Common Equity Tier 1 - CET1 ratio), whichever is lower.
For clarities sake, as at end of H1-21, BOV’s CET1 ratio stood at a significantly healthy level of 20.9 per cent, which is way above the regulatory trigger levels. Nevertheless, notwithstanding the fact that BOV might possibly hold the capacity to distribute a dividend, in view of the increased uncertainty stemming from the aforementioned litigation case and the pandemic situation in general, the bank opted not to distribute a dividend for the first half of the year.
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.