Lombard: Dealing with the repercussions of the pandemic

The rapid spread of COVID-19 has been a major shock globally, resulting in an unprecedented health crisis. The truth is that this pandemic has forced governments across the globe to introduce aggressive and severe emergency measures and restrictions in a robust attempt to contain the virus spread. As a result, the pandemic has been a particular threat to, the transport and aviation, hotel and catering industries, as well as the banking industry.

While Lombard Bank had a good start to 2020 with growth in line with expectations, the latest financial data available as at Q3-2020, as in the case of other local peers, indicates that the ongoing COVID-19 pandemic continued to negatively impact the bank’s revenue streams also during the third quarter of 2020.

As per latest announcements, the bank recently reported that increased pressure on interest rates, including negative interest on prime quality assets, is expected to result into a smaller interest margin for FY20 and possibly beyond. Commission income, too, was negatively impacted by reduced volumes as business sentiment and activity continued to be affected by the economic slowdown. Consequently, the Bank further reported that profit before tax for Q3-2020 was lower when compared to the same period last year.

This being said, management explained that Lombard’s overall financial position remains strong and there is no indication of significant deterioration in the bank’s assets, primarily as the majority of the lending exposures are well secured by high quality collaterals.

It is also worth mentioning that despite the current distressed economic environment, Lombard’s Total Capital Ratio as at June 2020, remained relatively unchanged and stood at 15.9% (FY19: 16%).

Management also clarified that regular reviews concerning credit loss provisions and developing strategies to support customers who start experiencing material difficulties are also being implemented by the Bank on a regular basis.

In this regard, the bank further anticipates that worsening economic conditions may result into an increase in Expected Credit Losses (ECL’s) allowances until the COVID-19 situation stabilises. As a result, Lombard’s net impairment losses as at H1-20 stood at approximately €1.1m.

In terms of Lombard’s main subsidiary, MaltaPost plc, management reported that after significant logistical difficulties experienced during Q2-2020 due to unavailability of international transport facilities, delivery of postal items, although not at full capacity, reached an acceptable level during Q3-2020.

Furthermore, the bank recently resolved not to declare an interim dividend for H1-20. The bank stopped paying a dividend after the reporting of FY2019 results. Whether dividend payments will be reinstated in 2021 and beyond will depend on how fast the local economy recovers as the authorities do their best to control the pandemic.

Additionally, in an attempt to assist its customers survive the COVID-19 pandemic, Lombard has participated in the COVID-19 Guarantee Scheme introduced by the Malta Development Bank.

In view of the fact that the pandemic situation remains relatively fluid, it is still early to estimate the pandemic’s impact on the Lombard’s operational and financial performance, especially as the duration of the current situation remains unknown.

Nonetheless, the local economy is expected to start recovering as from the second quarter of 2021. This recovery is supported by the Government’s continued monetary and fiscal support, which has also been implemented throughout Europe. The recent breakthrough on the COVID-19 vaccines and the subsequent global distribution, are critical to this recovery.

Additionally, in December 2020, the European Central Bank (ECB) lifted its request made in March 2020 for EU banks to suspend capital returns. Even though the ECB still calls on banks to refrain or limit dividends until September 30, 2021, this development represents a major positive step towards normalisation.

Therefore the bank’s success in 2021 will depend on both the duration of this crisis and the extent of the impact on the local economy as well as, the scale and effectiveness of mitigating measures provided by the local and EU authorities.

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