The financial services industry is an important backbone to our local economy, contributing 5.4% to Malta’s GDP in 2018. This industry supports many other industries, including the construction industry, retail industry and the professional/support services industry.
The financial services industry is undergoing a major overhaul mainly driven by the growth in technology. This is clearly seen in successful start-up FinTech companies, such as Revolut, Adyen, amongst others. The operating models of these relatively new companies differ significantly to that of traditional financial institutions and this is presenting new pressures to the latter, which previously benefited from a low threat of competition.
Financial institutions, especially those in developed countries, are facing added pressures to increase their capital and enhance their compliance procedures. This is forcing financial institutions to increase their costs and investments, which when added to the current low interest rate environment, is negatively impacting profit margins. Nevertheless, financial institutions which have invested in new technology, lowered their cost-to-income ratio and adapted to new market conditions, thereby benefitting from the growth of this digital age.
Insight on local financial institutions covered by Calamatta Cuschieri
Bank of Valletta plc
BOV has recently suffered a number of events which negatively impacted the Bank, including uncertainty surrounding the litigation cases, the lack of dividend distribution, uncertainty concerning the Bank’s transformation programme and the Bank’s profit warning following the announced de-risking exercises across many of the bank’s revenue centres. These events lowered investors’ confidence with the Bank currently trading near all-time low, at 60% of its book value based on interim results of 2019.
The Bank’s outlook remains uncertain, with the process of issuing a €150 million AT1 debt instrument by end of 2019 still pending to date. Nonetheless, we do believe that at the current price levels the market has factored in all the known headwinds faced by BOV.
HSBC Bank Malta plc
During 2019, HSBC embarked on a restructuring exercise at a cost of circa €16 million which resulted in a reduction in headcount of 180 and the closure of eight branches. The Bank announced its intention to focus more on digital banking services and to modernise its branch network. This will see HSBC open a new flagship branch within its principal office in Qormi and four new wealth management centres.
Last year, the Bank announced that it has completed its de-risking exercise and it will now focus on sustainable growth. This has been confirmed by the Bank’s latest results for FY 2019 which have outperformed expectations, with an improvement in the Bank’s top line and a decrease in its cost base (excluding the one-off restructuring provision). This resulted in adjusted profit before tax to improve by 24% compared with prior year.
The Bank has strengthened its capital base and we are of the opinion that HSBC is well positioned for the transformation imposed on the banking industry due to the current market conditions, being negative interest rates and tighter regulatory controls. However, we believe that the clear direction by the Bank on its expansion strategy will continue to boost investors’ confidence.
Lombard Bank Malta plc
Despite the current low interest rate environment, Lombard has recently registered an improvement in profitability, primarily emanating from an increase in its loan book, both from a retail and commercial perspective. As a result of the improvement recorded in terms of both interest and commission income, Lombard registered a constant uplift in operating profit over recent financial periods, also reflecting the undertaking of low credit impairment losses charge.
Nonetheless, the broader context of the Banking industry in Malta, as well as internationally, remains relatively unattractive, with larger capital requirements as a consequence of more stringent regulations, increased costs mainly related to risk management, compliance, employee compensation and ICT; coupled with a backdrop of punishingly low interest rates which are affecting interest margins across the board.
We expect the Bank to continue building on its growth trajectory. We are also of the opinion that investor sentiment might strengthen once the Bank provides more clarity on the required funding for the Bank’s investment projects, together with updates regarding the future regulatory capital requirements.
As per latest audited financial results (FY 2018), the Bank registered an improvement in net interest income generation on the back of higher asset levels as well as improved margins. The achievement of higher asset levels was possible following the successful undertaking of the rights issue which unlocked room for further growth. Further improvements were also achieved in terms of the Bank’s operating expenses, whereas the Group is keeping all costs under continuous oversight to ensure the right balance between revenue generation and costs.
However, the Bank currently has accumulated losses amounting to $39.6 million at bank level, resulting in the Bank being in a difficult position to distribute dividends in the foreseeable future. Before this situation is reversed, and the Bank is in a position to distribute earnings, we cannot see the case for meaningful and sustained buying interest, commensurate with the necessary momentum to drive the share price higher.
Mapfre Middlesea plc
The gross premiums written from both the general business and long term business of Mapfre has continuously grown during recent years, except for a reported drop in the long term business during H1 2019. Despite this, we expect the demand for the Group’s investment services to remain resilient in view of Malta’s high savings ratio as stated by management.
Malta has in recent years experienced an increase in road accidents and extreme events. Despite this, Mapfre’s combined ratio stood at a healthy level of 93% in FY 2018. The Group also has a strong solvency ratio when compared to its peers, nevertheless we remain cautious that a dividend pay-out ratio equal to or exceeding the profitability level is not sustainable in the long-term.
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