HSBC Bank Malta: ECL weighing on profits

On Tuesday, HSBC issued its annual results for the year ending December 31, 2020.

The bank‘s profit before tax for FY20 plunged by 66% or €20.3m compared to the prior year. Such drop was mainly attributable to a significant increase in expected credit losses and other credit impairment charges (“ECL”) of €25.2m.

Such performance is also deemed to be in line with an adverse financial performance registered by HSBC’s life assurance business, which reported a loss before tax of €9.1m a decrease of €12.2m from FY19.

It is interesting to note that during the latter part of 2020, a number of international banks started to reverse a portion of ECL, which previously were booked following the repercussions caused by the COVID-19 pandemic. In contrast, during the second half of FY20, HSBC Malta almost doubled its ECL compared to HI-20.

The bank noted that such increase in ECL was driven by expected rather incurred losses. It further mentioned that during the year, a number of corporate names were deemed to have suffered a significant increase in credit risk as they operate in industries heavily impacted by the COVID-19 pandemic.

As a result, the ECL for Commercial Banking amounted to €12.3m compared with a release of €0.9m in 2019. Wealth and Personal banking ECL amounted to €13.3m compared with €1.3m in 2019, with the bank attributing this to the possibility of future defaults linked to extended moratoria measures.

During the conference call, senior management noted that HSBC is taking a cautious approach and it will continue to monitor the current situation, especially when government’s COVID-19 support is further tapered down or terminated completely.

Tourism, which as things currently stand will take some time to recover, remains a strategically important industry for Malta, with a direct contribution of circa 13% to GDP.

Naturally, the vaccine rollout remains a key attribute for this economic recovery, especially for our nation given its exposure to the tourism industry. Given that the bank reported that the increase in ECL was mainly driven by an expected rather incurred losses, there is still the possibility of the bank reversing some of these provisions, but this will remain at the detriment of the current COVID-19 crisis.

On an operational level, the bank’s performance was limitedly impacted by the outbreak. In FY20, net interest income decreased by 4% to €105.9m. The European banking sector continued to experience lower average yields on debt securities and money market placements, which placed further pressure on the bank’s net interest income.

HSBC Malta was able to mitigate this effect by paying lower interest on customer deposits as a result of repricing exercises and effectively managing liquidity to limit negative return losses.

Following a reduction in activity due to the repercussions of COVID-19 across cards, payments, insurance and credit facilities, net fee income decreased by €1.8m or 8% compared to FY19.

The negative movement in HSBC’s life assurance business was attributed to a drop in financial markets and further deterioration of the yield curve negatively impacting revenues by €3m; actuarial losses of €8.4m as modelled parameters such as lapses and interest rates were worse than those estimated in 2019; and lower new business of €1m.

On a positive note, HSBC continued to drive down its operating costs, with costs reducing by €7.3m or 7% when compared to FY19 on an adjusted based (FY19 operating expenses included a one-time restructuring provision of €16m). The bank attributed this improvement to a rigorous cost management and sustainable savings from its restructuring programme announced in 2019.

From a balance sheet perspective, net loans and advances to customers increased by €7.2m to €3,265m with retail balances up 1% and commercial balances 1% lower than FY19.

The bank was able to reduce commercial non-performing loans (“NPL”) by 16%, however, retail NPL increased by 34% due to extended moratoria measures. Customer deposits grew by 6% to €5,273m driven by retail deposits with commercial balances broadly flat. The bank maintained a healthy advances to deposits ratio of 62%.

In view of the restrictions on dividend distribution during 2020, the bank capital ratios strengthened further with CET1 increasing from 16.4% to 18.0% and the total capital ratio improving from 19.0% to 20.7%.

The bank announced a final net dividend of €0.0075 per share, which is in line with the latest European Central Bank’s guidelines, to keep dividends up to September 30 below 15% of cumulated 2019-20 profits and not higher than 20bps of CET1 ratio.