Following the COVID-19 outbreak in Malta, the bank’s shares continued their downward trajectory during FY20. Apart from the pandemic related issues, this was also fuelled by the continued uncertainty surrounding the bank’s pending Deiulermar case, the lack of dividend distribution, the uncertainty concerning the bank’s transformation programme, and the bank’s profit warning following the announced de-risking exercise across many of the Bank’s revenue centres. Group update:
The bank’s transformation programme and de-risking exercise
Notwithstanding BOV’s recent declining market share within the local scenario, BOV has a deposit-driven business model, which in line with our discussions with the bank’s executives, is the main contributor towards BOV’s drop in net interest income over the last couple of years. More specifically, the Bank at present has approximately €8bn in deposits which are currently attracting negative interest, thus constantly hurting the Bank from a revenue generation perspective. Net interest income as per H1-20 results amounted to €72.3m, demonstrating a decline of approximately 6.8 per cent on a comparative basis.
Likewise, the de-risking exercise implemented during FY19, which appears to be still ongoing, reduced the bank’s overall volume of fees earned on various products, thus also negatively impacting the Bank’s net fee and commission income (H1-20: -13.5 per cent).
As part of the bank’s ongoing de-risking exercise, management also explained that the account closure procedure, which forms part of the Bank’s ongoing de-risking exercise, is at present fully completed.
Nevertheless, in an attempt to mitigate the aforementioned decline in revenue, as part of BOV’s transformation programme, the bank recently announced that it will be looking to rejuvenate its business model, which ideology is based on three main pillars. This strategy envisages to transform and digitalise the bank’s operating model and to also rebalance the Bank’s balance sheet. Upon concluding these two important phases, BOV envisages to be able to provide a new business banking solutions and focus specifically on customer acquisitions.
Management further stated that this digitalisation strategy will drive higher levels of productivity and will result into the automation of all current procedures which will in turn will remove all of the Bank’s paper work. In this regard, from FY23 onwards, this is expected to result in a decline in operating expenses of approximately 10 per cent on a yearly basis.
Notwithstanding the above, the bank’s income statement is currently being impacted with high levels of operating expenditure which is expected to sustain until FY23. The anticipated upsurge in expenses also includes the cost of a reskilling and culture programme, whereby BOV envisages to on-board additional staff, totalling to at least 200 new employees throughout the next three years.
Following the favourable judgement delivered by the Court of Appeal in respect of the La Vallette Multi Manager Property Fund case in December 2019, and also following BOV’s recent announcement stating that the Bank has settled the claim concerning the Falcon Funds SICAV case for €26.5m (already provided for), BOV is now principally involved in the Deiulemar case.
COVID-19 update and outlook
BOV’s latest financial results were also impacted by a net impairment loss charge of circa €7.5m, which reflect some of the implications brought about by the COVID-19 pandemic on the Bank throughout the first half of FY20.
The bank’s revenue was further characterised by a reduction in fees and commissions and trading income as a result of a drop in activity due to the outbreak across cards, payments, insurance, and credit facilities. In line with the fact that throughout H1-20 Malta has witnessed a sharp decline in incoming tourists, the bank reported that card usage throughout this period was lower in comparison to previous periods.
BOV further reported that the bank has not yet seen signs of significant business distress, while retail customer resilience remains relatively strong. This being said, the Bank still expects the overall conditions to deteriorate through a prolongation of the COVID-19 situation. The bank also explained 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 view of the fact that the pandemic situation remains relatively fluid, it is still early to estimate the pandemic’s impact on the BOV’s operational and financial performance, especially as the duration of the current situation remains unknown.
Beyond FY20, much 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. More recently, the positive news concerning the vaccine trials, has boosted consumer confidence and is expected to continue do so once we have an approved vaccine which is widely available.
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