Bank of Valletta Group continued to deliver robust financial performance in the third quarter of 2023 with strong net interest income and capital generation, alongside resilient asset quality. Profit before tax for the nine months was €163.5 million compared with a loss before tax of €48.7 million, as restated, in the comparative period. The favourable performance for the first three quarters of 2023 was attributable mainly to the improvement in the Group's operating revenues totalling €315.9 million, a growth of €113.7 million or 56% compared with the same period in 2022 (9M 2022: €202.3 million).
Net Interest Income continued to be the dominant catalyst with €253.8 million (9M 2022: €137.3 million), an increase of €116.5 million or 85% compared to the same period in the prior year. This was primarily driven by strong growth in the Bank's personal and business lending business with the loan portfolio exceeding the € 6 billion mark (December 2022: €5.6 billion). In addition, improved returns from the Bank's treasury portfolio as well as the positive impact of higher rates of interest on the euro have equally contributed to the strong returns. Net Fees and Commissions, Exchange and other revenues amounted to €62.1 million, down by €2.8 million or 4% (9M 2022: €65.0 million). Net commissions declined by €0.8 million, or 2% vis-à-vis the same period last year mostly due to the removal of deposit-related fees to corporate customers and a persisting slowdown in investment-related commissions as a result of the continued volatility in the world's capital markets driven by the geopolitical tensions which is in turn dampening investor sentiment.
Operating costs in the first three quarters of the year amounted to €139.0 million (9M 2022: €132.3 million) an increase of €6.7 million or 5% compared to the same period in 2022. Net Expected Credit Losses ('ECL') for the period to September 2023 was a net charge of €13.1 million (9M 2022: €10.1 million net charge). As at 30 September 2023, the ECL coverage for credit-impaired assets stood at 53.6% (December 2022: 53.8%) while the ratio of non-performing to the total credit portfolio stood at 4.0% (December 2022: 3.5%). An allocation of an additional €6.7 million was made in the first nine months of 2023 (9M 2022: €6.6 million) for the execution of strategic actions.
The share of profit from insurance associates for the first three quarters of 2023 amounted to €6.4 million, aligned with the recently adopted IFRS 17 standard implemented by the associates (9M 2022: €1.5 million restated).
BOV Group Financial Position
The Group's Total assets reduced by €118.8 million and stood at €14.4 billion as at end of Q3 2023, lower by 1% compared to the year ended 2022 (December 2022 restated: €14.5 billion). The Group's liquidity ratio as at 9M 2023, stood at 458.5%, up from 426.3% as at December 2022, significantly above the minimum regulatory requirement. Effective management of surplus liquidity was upheld in the first nine months of the year with cash and short-term assets decreasing by 35% or €1.2 billion. Net expansion in the loan portfolio was of €401.5 million or 7%.
The treasury portfolio increased by €556.8 million (12%), with the vast majority measured at amortised cost reflecting the Bank's primary business model to hold securities until maturity with a view to collecting interest revenues over the life of the investment. Customer deposits contracted by circa 1% in the last quarter and 4% since December 2022, in line with the Bank's expectations. The increase in loans experienced both in the corporate and retail lending portfolios led to a favourable increase in the Group's net loans to deposits ratio from 46.0% in December 2022 to 49.5% as at the end of September 2023.
Total Group Equity increased to €1.2 billion, up by €108.5 million on December 2022 as restated. Group's capital ratios remained strong and above regulatory requirements, with the CET 1 and total capital ratios as at September 2023 of 22.7% (December 2022: 21.8%) and 26.1% (December 2022: 25.4%), respectively. The 2023 capital ratios are inclusive of 9M 2023 profits and proposed interim dividend for comparative purposes. The Group's net asset value as at 30 September 2023 amounted to €1.2 billion resulting in €2.1 net asset value per share (December 2022: €1.1 billion restated resulting in €1.9 net asset value per share).
Benign conditions in the Maltese economy support borrowers' repayment capabilities and maintain BOV's asset quality – Dr Gordon Cordina, Chairman
BOV Chairman Dr Gordon Cordina expressed his satisfaction on the announcement of the BOV Group performance for the first nine months of the year. "This sustained performance can be seen in light of developments in both international and local economic environments. The current international economic environment is characterised by subdued growth, dragged by the high inflationary environment and the monetary policy tightening implemented over the past months. The interest rate increases carried out by the ECB since July 2022 have pushed rates to historically high levels. There is broad consensus that rates are close, if not already, at the peak. However, ECB rates are likely to remain high for some time.
The Maltese economy has so far been mostly shielded from the interest rate shock, as the pass-through has been mostly channelled to the bond market via higher yields, and in those cases where interest rates are directly linked to foreign rates. BOV's large deposit base allows it to benefit from the ECB's attractive returns on the deposit facility and achieve higher yields from its bond portfolio, thus supporting the Bank's net interest income. The structure of BOV's balance sheet allows the Bank to continue offering mortgages and most business loans at attractive rates, while obtaining higher returns from loans linked to foreign rates. BOV believes that the decision to limit the pass-through of interest rates to the domestic economy remains adequate, as demonstrated by the Bank's profitability and balance sheet dynamics."
BOV's focused strategy and commitment to operational excellence, customer satisfaction, and responsible banking will steer us towards sustained growth and success – Kenneth Farrugia, CEO
Speaking about the positive results obtained by the BOV Group as at end September 2023, Kenneth Farrugia, Bank of Valletta CEO stated, "The performance we are announcing today is the result of a number of factors. We have seen an improvement in the Group's operating revenues, strong net interest income and capital generation, growth in customer lending and proprietary investment portfolios, alongside resilient asset quality. The upward repricing of interest rates, a larger investment book coupled with positive returns on liquid assets invested short-term continue to substantially benefit the interest income revenues.
Whilst we have registered a marginally lower level in customer deposits, our strong liquidity position is enabling the Bank to continue supporting growth in the loan book and optimize returns through investment in treasury securities. During the period to September 2023, the Bank assisted both business and personal clients with their funding requirements, leading to the net expansion in our loan portfolio to a record level of €6 billion shared equally across corporate and personal loans.
The Bank's focus on customer service experience remains unwavering. We are continually working on enhancing our service delivery, with a keen emphasis on personalisation, responsiveness, and convenience. We are also making significant improvements to our branch experience, which remains the strongest in Malta and Gozo, enhancing service delivery and offering a seamless banking experience. We have equally continued to invest in the training of our human resources which remain at the core of the Bank's value proposition.
The Bank's focused strategy and commitment to achieve operational excellence, meet and exceed customer expectations, and responsible banking will steer us towards sustained growth and success going forward. These results are overall attributed to the commitment of our valued employees and equally the loyalty of our strong personal and business customer base."
Strategy 2023 Update
During the last quarter, the Bank worked diligently to further enhance its banking services and increase operational efficiency. The strategy remains firmly anchored on business process re-engineering, a critical move designed to enhance operational efficiency, improve customer services, reduce costs, and strengthen the Bank's financial performance. Employees are the backbone of the organisation, and their welfare is paramount to the Bank's success. The Bank has already undertaken several initiatives to enhance employee satisfaction and productivity, including training, wellness programs, flexible work arrangements, competitive compensation packages and a more inclusive and diverse work environment and is planning to sustain this through a program of upskilling initiatives.
The Bank also continues to make significant investment in ensuring full compliance with its regulatory obligations. The Bank's ability to secure the correspondent banking services of Citi, one of the world's leading banks and financial service providers, with banking relationships in 160 countries and jurisdictions, is testimony to the strong compliance and anti-financial crime standards that the Bank continues to invest in. The Bank has worked closely with national regulatory bodies and established robust systems and processes to meet its compliance requirements.
Environmental, Social and Governance (ESG) Update
The Bank continues to target its efforts towards conducting sustainable and diligent banking. This is in line with the growing appetite from customers and investors alike who seek sustainable financing and investing solutions. At the start of the third quarter of 2023, the Bank launched Climate & Environmental (C&E) questionnaires aimed at corporate clients, to allow the Bank to align its product offerings to better satisfy clients' evolving needs to adjust towards a more sustainable business model. During 3Q 2023, through a Remuneration Policy Working Group, BOV intensified the process of actively integrating Contributions & Expenses targets into the variable component of remuneration for top management personnel. Moreover, the Bank continuously strives to address social risk matters by providing support to vulnerable members of society.
The Bank remains committed to its Environmental, Social and Governance ESG goals, consciously integrating ESG considerations into its business decisions and is working towards creating a more sustainable, inclusive, and responsible banking model.
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