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The COVID-19 pandemic has created significant instability within the global banking industry. Apart from the pandemic related challenges, the prolonged low yielding environment has hindered the traditional banking business model and has indeed reduced the core banking profitability globally, namely in Europe, given the differential in interest rates, geographically.
Indeed, BOV’s financial performance was mainly characterised by an elevated negative Expected Credit Losses (ECLs) movement of circa €65.1m, which resulted into lower profitability for the Bank on a comparative basis.
Moreover, the Bank’s net interest income generated during FY20 amounted to €146.8m, illustrating a decrease of approximately 4% when compared to the prior year. Management reported that this decline is mainly attributable to growth in deposits and the simultaneous persistent negative interest rates which have continued to impact BOV’s net interest margin.
The Bank’s revenue was further characterised by a reduction in fees and commissions income which was down by 8.9% when compared to FY19. This decline in commission income was mainly a result of a drop in card business, where substantially lower card usage was recorded, and in the payments business, as economic activity slowed significantly, especially during the initial lock-down period.
A slower trend was similarly noted in the foreign exchange business due to reduced foreign trade and travel, and to a smaller degree through the reduction of the Bank’s appetite for higher risk business, in line with the ongoing de-risking exercise.
Moreover, although as expected, BOV’s employee compensation and benefits increased by +11.4% over FY19, the Bank’s administrative expenses dropped by 9.1% during FY20. As per discussions with the Bank’s executive management, BOV is currently in its final stages concerning its ongoing de-risking exercise and as such we expect BOV’s administrative expenses to stabilise moving forward.
In view of the significant expected credit losses booked during FY20, in addition to the fact that the Deiulermar claim is still outstanding, the Bank decided not to declare any dividend for FY20. This being said, BOV’s CET1 ratio as at December 2020 stood at a healthy level of 20.9%, which is way above the regulatory trigger levels.
In terms of forward-looking expectations, the recent positive news coming from the vaccine front, and more importantly, progress in terms of the ongoing vaccination roll-out programme, augurs well for the Bank’s net fee and commission income as we expect an increase in volume of transactions as restrictive measures are expected to loosen.
Additionally, we reiterate our stance that apart from the pandemic related issues, BOV is still facing several challenges. We are of the view that the uncertainty surrounding the Bank’s pending Deiulermar case, which also impacted the bank’s dividend policy, in addition to the Bank’s weakening trend in net interest income, are key risks going forward. Furthermore, we believe that the Bank’s transformation programme, and the current de-risking exercise are realistic threats for the Bank’s profitability in the short-to-medium term.
On a positive note, management recently reported that positive progress has been made in terms of the Bank’s ability to maintain a US dollar correspondence relationship. In view of this, management noted that BOV is currently working on developing supplemental avenues to ensure that the Bank has the sufficient contingency measures in place to safeguard its US dollar capabilities.
Moreover, when considering the recent cohort efforts taken by both politicians and central banks through fiscal and monetary measures in combating the pandemic, we believe that 2021 should be a year of normalisation. Nevertheless, moving forward, close monitoring is imperative, namely in relation to specific pandemic related events.
The possible roll-out vaccine disruptions, and possibly the unprecedented new COVID-19 variants, might continue to condition the economic recovery path, and ultimately hinder the banking industry’s outlook. Other crucial developments at an industry level include the upcoming MREL and Basel IV regulations.
Disclaimer: 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.
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