Financial analysis: It’s all about the banks

The interim reporting season is now in full swing with the publication of results by Mapfre Middlesea plc, APS Bank plc and Bank of Valletta last week, followed by HSBC Bank Malta plc and also of Malta International Airport plc earlier this week.

In view of the change in the interest rate environment in recent months, which is a clear tailwind for the banking sector as evidenced in the banks’ key financials for the first quarter, the banks’ announcements were bound to be among the investing public’s main focal points during this interim reporting season.

Given BOV’s dominant market share and the high levels of liquidity in their financial statements, the high interest rate environment had a major positive impact on the bank. In fact, BOV reported a pre-tax profit of €105 million in the first half of 2023. While the results last year are not a useful comparison due to the large settlement of the Italian litigation, the extent of the level of profits generated in the past six months should be analysed in the context of the performance in the second half of 2022, and in prior years, also excluding any major one-off impairments or extraordinary items that had a material impact on its performance. As such, the €105 million in pre-tax profits in the first half (H1) of 2023 compares very favourably to the level of €62 million in H2, 2022, excluding the sizeable impairment reversals and the €68 million in H1, 2017.

The rising interest rate environment across the eurozone has translated into elevated profits for the banking sector, which is reassuring for the Maltese investing public given the wide share ownership across the various banks

The main driver of the strong performance in H1, 2023, is the interest rate environment, with net interest income contributing 80% of total operating income. BOV also strengthened its margins despite the interest expense related to the MREL issue, at 10% per annum. While this performance may have been predicted by financial analysts and market participants who know the structure of BOV’s balance sheet and the bank’s performance drivers, the main focal point was whether it is in a position to start distributing a regular dividend.

It is disappointing that the company announcement made no mention of the rationale for not declaring a dividend and the process being undertaken by the bank in this respect. As expected, this was one of the main topics discussed at an analyst meeting held a few hours after the financial statements were published.

BOV chairman Gordon Cordina argued that an interim dividend is not ruled out; otherwise, this would have been stated in the announcement. He referred analysts to the press release that the bank issued shortly after the company announcement which stated that further discussions are necessary for the bank to consider the payment of a dividend from profits realised in H1, 2023. Given the Tier 1 capital ratio of 23% (well above many eurozone banks, including all other banks in Malta) and the strong probability of a continued high level of profitability in the next six months, and also in 2024 in the light of the European Central Bank’s interest rate policy, it is clear that a cash dividend could be declared very shortly.

Although last week I wrote that a cash dividend is among the most important considerations for BOV shareholders, one could also argue that given the present interest rate environment and the good returns being generated by the bank (an annualised return on equity above 11%), shareholders need not be solely focused on an actual cash dividend, since in the meantime the retained earnings are boosting the bank’s net asset value (which has since risen to above €2 per share). In essence, possibly very few shareholders will be in a position to generate such positive returns of above 11% in their personal capacity from any cash distributions made by BOV.

APS also had a record performance in the first half of the year, with group pre-tax profits amounting to €16.8 million. In view of the lower levels of liquidity represented by the high loan-to-deposit ratio of 87% as APS successfully increased its market share remarkably over the years, the bank was required to offer attractive rates to increase its deposit base in recent months. This is reflected in the higher cost of funding, with the interest expense totalling €12.5 million in H1, 2023, compared to €7.9 million in the prior six months, and €6.9 million in H1, 2022.

APS maintained its semi-annual scrip dividend policy and declared a dividend of €2.1 million last week. Should the large majority of shareholders continue to opt for new shares as opposed to cash, this would imply that only a fractional amount of profits will be distributed. This is important in the context of the bank’s growth trajectory and continued need for additional capital. In fact, last week, APS confirmed it is finalising the documentation with respect to an issuance of debt securities and, upon regulatory approval, it aims to proceed with a public offer of fixed-income instruments by the end of this year.

HSBC Bank Malta plc also reported a record financial performance for H1, 2023, with pre-tax profits surging to €59.3 million. This was also primarily driven by the elevated interest rate environment, resulting in an annualised return on equity rising to 16%. It is worth highlighting that HSBC Malta’s interest expense in H1, 2023, was only €7.8 million, which is far below that of APS at €12.5 million, notwithstanding the fact that HSBC has more than double the amount of deposits. HSBC declared a cash dividend of €0.06 per share gross of tax (€0.039 per share net of tax) which equates to a dividend payout ratio of 36% of the first-half profits. In the company announcement, of particular relevance is the HSBC Malta CEO’s statement that the bank “is positive on Malta and we have identified many opportunities to grow our business here”.

The rising interest rate environment across the eurozone has translated into elevated profits for the banking sector, which is reassuring for the Maltese investing public given the wide share ownership across the various banks. There are clear indications that the ECB intends to proceed with a further rate hike by the end of the year, taking the deposit rate to 4%. This should continue to boost the banks’ profitability levels in the months ahead, which is positive given the prolonged period of subdued returns by the banks in recent years as a result of the negative interest rate environment.

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