For the first six months of 2020, the Bank of Valletta Group has repor­ted a pre-tax profit of €13.8 million (2019 ‒ €54.3m) representing an annualised return on equity (pre-tax) of 2.6 per cent. The fall in profit is a result of the COVID-19 pandemic, which has impacted all the bank’s business lines, as well as with the de-risking initiatives which intensified over the past months.

The results for the period under review also include impacts from a number of other areas, including increased depreciation on new IT investments, staff costs as the bank invested more in risk and compliance resources, and expected reduction in foreign exchange and commission income resulting from the de-risking initiatives that have been carried out over the last 12 months.

Net interest income, which remains the main revenue driver for the group, amounted to €72.3 million, €5.3m less than the income registered for the same period in 2019. The persistently low to negative interest rate environment, coupled with a conservative risk appetite, li­mi­ted investment opportunities and increased levels of liquidity which attract negative interest, resulted in lower earnings on the bank’s investment portfolio.

Demand for credit was primarily related to liquidity shortages brought about by the COVID-19 pandemic. During the period, the demand for home loans was subdued when compared to previous years, and this is mostly attributed to changed consumer behaviour influenced by the pandemic situation.

Commission and trading pro­fits was €37.0 million, 19 per cent lower than the first six months of 2019. The economic slowdown caused by COVID-19 had an adverse effect on commissions earned, especially those relating to the card and payment business and investment related products. Income from foreign exchange transactions was also negatively impacted.

The de-risking programme and its execution is proceeding at an accelerated pace, and while the bank is registering lower revenues, within the expected parameters, as some customers and business lines which fall outside the bank’s risk appetite are exited, it is nonetheless improving the bank’s risk position and long-term sustainability.

Total costs for the first half of the year increased by €8.2 million to €89.5m. The increase is attributed to IT costs related to the new core banking system that went live at the start of the year, increasing staff costs mainly in recruitment in the risk and compliance areas, and professional fees engaged in the implementation of the transformation programme with ongoing initiatives geared towards lowering the risk profile of the bank.

The de-risking is proceeding at an accelerated pace

In assessing the impairment charge for the six months under review, due consideration was given to the expected impact related to COVID-19, especially in the formulation of forward-looking scenarios and expected credit losses relating to exposures in highly impacted sectors.

Expected credit losses are very sensitive to judgements and assumptions and, as with any economic forecast, are subject to a degree of inherent uncertainty that has been augmented in the current cir­cumstances that remain fluid and undefined.

The net impairment charge of €7.5 million includes about €10m which is predominantly attributed to COVID-19. This figure has been offset by strong recove­ries of past debts previously provided for.

The group remains highly liquid, with cash and short-term funds increasing by €178.3 million (4.3 per cent) during the six months. Customer deposits increased by over €500 million since the start of the financial year and reached €11.1 billion at the end of June 2020.

Net loans and advances increased by €91 million since December 2019, an annualised growth of 4 per cent, and stand at €4.7 billion at June 30, 2020.

From the very onset of the pandemic, the bank focused on protecting and supporting its staff and customers in dealing with the various challenges brought about by the pandemic on multiple fronts, including the set-up of a multi-disciplinary incident management tea, launching the COVID-19 assist scheme, and granting loan moratoria to more than 2,900 customers, 70 per cent of whom being retail customers.

Commenting on the results, BOV CEO Rick Hunkin said: “In line with the rest of the world, these are trying times for Malta and for Bank of Valletta, and we are rising to the occasion by supporting businesses, customers and the wider community.

“As COVID-19 affected all the local economic sectors, the impact on the BOV Group was inevitable. However, we will come out of this together and as Malta’s leading bank we are committed to continue giving our full support to help the economy recover and thrive once again.”

The board of directors and the executive team have been fully engaged in establishing a new strategic approach for the BOV Group, which will result in a more efficient, more digitally focused and more customer-oriented bank. This process spanned many months of background work from the executive team led by Hunkin.

Interim chairman Alfred Lupi commented: “Over the past few years, the banking industry has been going through dramatic shifts. Three critical factors which are shaping the new opera­tional models of banks are: the wave of regulatory changes impacting every aspect of our operations; record low interest rates with increased cost of deposits; and increased

customer expectations from digi­tal channels.

“We carried out a very thorough analysis of our business

environment and we have con­sidered the dramatic shifts in customer behaviours and their expectations from financial ser­vices providers.

“I am confident the revised BOV strategy will not only deliver marked improvements in customer and employee satisfaction, but it will also lead to improved financial performance, continuing to build upon a stronger risk and governance position. Post-COVID, we also expect to be able to demonstrate a more positive and stable return for our shareholders.”

Hunkin added: “The implementation of the BOV strategy has been set in motion and we are very excited to be driving a programme of initiatives that will be unveiled in due course, as we transform Bank of Valletta into a more efficient, more digital and more customer-oriented bank.”

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