The Bank of Valletta Group has recorded a net profit before taxation of €25.0 million for the six months which ended on 31 March 2008. This compares with a profit of ? 56.6 million for the equivalent period ended 31 March 2007.

Addressing a news conference at the Bank’s Registered Office at 58, Zachary Street, Valletta, soon after the Board of Directors approved the Group’s half yearly accounts, BOV Chairman, Roderick Chalmers, said that after three years of impressive double digit growth in profits, it was disappointing, if not unexpected, to have to report a decline in profits for this half year. He explained that the results were influenced by a number of factors, and particularly by the impact of markdowns in the value of the Bank’s Financial Markets and Investments (FM+I) portfolio as a result of the extended disruption in the global financial markets since July 2007.

Such markdowns, however, are expected to be largely temporary in nature, and the Board of Directors expects a significant proportion of the markdown amount to be clawed back over time, as the investments are held through to redemption and the fair value adjustment unwinds. In this regard, Mr Chalmers announced that, given the exceptional nature of the markdowns affecting the results for the half year, the Board has resolved to maintain the interim dividend at the same level as declared in 2007. “Accordingly, an interim dividend of €0.1350 per share, gross of tax, has been declared by the Board in respect of the six months ended 31 March 2008. This compares with last year’s interim dividend (as restated) of €0.1307 per share, effectively resulting in an increase of 3.3%”.

Review of Operations Mr Chalmers said that the BOV Group had registered an increase in net interest income of €0.8 million, which was driven in the main by satisfactory growth in the loan book, countered by the impact of an increase in interest payable, arising from the deferred re-pricing of customer deposits in a falling interest rate environment. This in contrast with the favourable rising interest rate scenario experienced in 2007.

In terms of the BOV Group’s core retail and corporate banking operations, Mr Chalmers said that, notwithstanding keener competition on the domestic scene, profits therefrom are much in line with expectations. Advances, net of impairment allowances, stood at €2.8 billion, an increase of €186 million, or 7%, since 30 September 2007. Growth in lending has come from sustained demand from home loans and from a cross section of the business sector. Customer deposits reached the €4.5 billion level, an increase of €214 million (5%) over the six months. The Group’s loan to deposit ratio remains at a prudent 62% (September 2007: 61%), whilst capital adequacy under the revised Basel II regime remains strong at 12%, as does the liquidity ratio at 52%.

The results include a modest impairment charge for the period of €1.5 million (March 2007: €1.8 million), resulting from the sustained improvement in credit quality and certain recoveries of sums previously provided. Non Performing Loans as a percentage of the total loan book continued to improve, and stood at 4.3% as at 31 March 2008 (March 2007: 5.9 %).

The Group continued to exercise effective cost control, with overall increases in costs being contained at 2.6%, after allowing for specific euro adoption related costs.

The half yearly results also feature a reduction of €1.7 million in the contribution from associates and jointly controlled companies, which are engaged in the business of general insurance and life assurance. This reduction is attributable to the impact of taxation and the financial markets conditions on the investment performance of these companies.

Financial Markets Mr. Chalmers explained in detail how the severe credit crunch that accompanied the disruption in the global financial markets has impacted the liquidity of the bond markets and caused a marked widening of credit spreads, and a consequent reduction in the quoted market value of the Bank’s Financial Markets and Investments portfolio. “Given that a major part of this portfolio (designated as Fair Value through Profit or Loss) is marked to market in accordance with the requirements of the accounting policies adopted by the Bank, the effects of the market turmoil have resulted in a mark to market write down for the period of €26 million before taxation,” said Mr. Chalmers.

“This notwithstanding, given the high quality of the Bank’s portfolio, the Board of Directors expects the markdowns to be largely temporary in nature, with a significant proportion of the amount being clawed back over time as the investments are held through to redemption”, explained Mr. Chalmers. He added that the Bank had registered a gain during the period of €7.4 million (pre tax) on the part of its portfolio that is designated ‘Available for Sale’, with this gain being taken directly to reserves.

The Chairman said that the disruption in the financial markets, and the consequent weak performance of most equity and bond instruments and exchanges, has also had an adverse effect on the stockbroking and asset management businesses of the Group, as volumes reduced and investors moved to adopt more cautious investment positions.

Mr Chalmers said that it is thanks to the defensive nature of the Bank’s investment strategy, the quality of the portfolio and the conservative liquidity policy adopted, that the overall post tax impact on the Group of this disruption in the global financial markets has been contained at just €12.2 million on a portfolio of over €2 billion. “This is because the Bank has no holdings whatsoever of US sub prime mortgages, complex debt instruments or leveraged debt positions – the asset classes most adversely affected by the downturn,” highlighted Mr. Chalmers. “Indeed, the Board had noted that since the onset of the credit crisis in July 2007, not one single investment holding within the Bank’s portfolio has defaulted on interest payment or on maturity,” he added.

Mr Chalmers said that the markets seem to have calmed somewhat since mid March, and the general consensus is that this particular credit crunch is nearer its end than its beginning, with the focus increasingly turning to capital rebuilding and to the wider consequential fallout in terms of global economic growth. However, he noted that market sentiment remains fragile, and that bouts of volatility would likely emerge from time to time as the process of de-leveraging continues and liquidity remains tight. “The strong liquidity position of the Bank is such that we are able to hold the securities through to redemption – and in fact, usually do. We therefore expect to recoup much of the mark to market write downs over time, as the markets stabilise and the quality holdings are redeemed on maturity,” said Mr Chalmers.

Euro Changeover

BOV has played a leading role in the euro changeover process and this was a major highlight of the first six months of the current financial year. “The Board wishes to congratulate and thank all Group employees for their hard work and dedication, especially through the very challenging euro changeover period. As has been readily acknowledged by the authorities, BOV played a leading role in securing Malta’s smooth and successful changeover to the euro,” said Mr. Chalmers who announced that BOV had handled 52% of all the changeover business transacted in the country, both in terms of ATMs and over the counter business.

The Chairman said that, in terms of income, euro adoption has had a multi-faceted impact as from January 2008. This has resulted in a decrease in foreign exchange earnings on Lm – euro transactions for the period estimated at close to €3 million. Concurrently, costs directly related to the euro adoption changeover period are estimated at €0.8 million.
Furthermore, a slowdown in revenue related activities at branches was registered during the very busy transition period of December 2007 and January 2008.

The BOV Brand in the Market

Mr. Chalmers said that the Board is grateful to all BOV’s many customers who do business with the Group. “Our employees are focused on putting into practice our brand promise centred on providing a consistent and differentiated customer experience based on the principles of supportiveness and mutuality,” said Mr. Chalmers. “We have further strengthened our position as the bank of first choice in Malta for customer deposits, offering a number of attractive products, and we wish to reiterate the Group’s continued commitment to providing top quality service and innovative financial products,” he added.

Concluding his address, Mr. Chalmers referred to important achievements during the period under review. He said that the strength of the BOV brand in the market was acknowledged, for the third consecutive year, by Global Finance when it voted BOV as the Best Bank in Malta for 2008. The Financial Times Group, through its monthly banking publication, The Banker, had also confirmed BOV as the Bank of the Year for Malta for the third year running. Moreover, Fitch and, more recently, Moody’s had re-affirmed all BOV’s ratings together with its stable outlook.