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Bank of Valletta plc: An update on recent developments

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Undoubtedly, 2020 has been a very challenging year and it has negatively conditioned many industries across the globe. The banking industry is no exception. Nonetheless, the approval of various COVID-19 vaccines in late 2020, and early 2021, coupled with fiscal efforts and the prolonged easing measures taken by monetary politicians, emerged as catalysts for a brighter macroeconomic outlook in 2021.

BOV’s recent developments

Further to an announcement issued last October, whereby the bank had explained that Raiffeisen Bank International is seeking to terminate its US dollar correspondence relationship with effect from March 31, 2021, BOV recently clarified that such relationship has been extended for an additional two-month period up to 31 May 2021. More importantly, BOV further reported that it is currently considering alternative routes to diversify the available channels concerning its US dollar correspondent transactions.

Moreover, in addition to the bank’s application before the European Court of Human Rights (ECHR) in relation to the bank’s complaint that the Italian law does not provide a remedy for its fair hearing concerns in connection to the Deiulemar case, the ECHR decided that the Bank’s application is, at this stage of proceedings, inadmissible.

While the bank reiterated its position that the curators’ claim is entirely without any legal or factual basis, BOV further explained that it will continue to pursue its defence vigorously, including its fair hearing concerns, before the Italian courts, and if proven unsuccessful, it will petition the ECHR again once the Italian remedies will have been fully exhausted.

Macroeconomic outlook in 2021

As the global COVID-19 surge intensified with rising hospitalisations and deaths, major banks across the globe, adopted a prudent approach by increasing provisions to combat possible defaults in their books. Inevitably, such depressed environment was ultimately reflected in the price to book multiples, with the European average dropping to a low point of below 0.55x.

However, on a positive note, as we started seeing an improvement in business sentiment during H2’20, European banks started reversing part of their provisions.

Notwithstanding such positive development, the banking industry is still facing a number of headwinds with the low inflationary environment, namely in Europe, conditioning remarkably the forward-looking expectations for the banking industry.

Furthermore, the European banking industry is also expected to remain highly impacted given the increased debt levels undertaken by several European Governments to combat the implications brought about by the pandemic. Consequently, we believe that it will be very difficult for the ECB to increase interest rates in such an environment, especially in the short to medium term. This will in turn, is expected to continue to put pressure on the Bank’s net interest margins.

Apart from the pandemic and the current low interest rate scenario, the Bank is still facing a number of challenges, mainly stemming from a possible demand/supply imbalances in the local property market, to which BOV is highly exposed, in addition to the uncertainty brought about by the Moneyval saga.

As far as dividend distributions are concerned, last December, the European Central Bank (ECB) lifted its ban on dividend payments for banks, whereby banks in the Eurozone are now able to pay modest dividends to shareholders in 2021 under strict limits outlined by ECB. More specifically, the ECB stipulated that dividend payments should amount to either 15% of the FY19-FY20 cumulated profit or 20 basis points of the Common Equity Tier 1 (CET1) ratio, whichever is lower.

To this end, BOV might possibly hold the capacity to distribute a dividend in FY21, in line with the aforementioned guided parameters. For clarities sake, as at end of H1-20, BOV’s CET1 ratio stood at a healthy level of 19.8%, way above the regulatory trigger levels.

In reality, the COVID-19 outbreak sparked a serious economic downturn and is increasingly posing severe stress on the banking system, also given the prolonged low yielding environment. However, when considering the cohort efforts taken by both fiscal and monetary politicians 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. Moreover, other crucial developments at an industry level include the upcoming MREL and Basel IV regulations.

This article was written by Andrew Fenech, research analyst at Calamatta Cuschieri

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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