BOV posts €22 million profit in first quarter, anticipates geopolitical instability risks

Bank of Valletta's risk exposure to Russia and Ukraine is low but the bank says it is closely reviewing the possible effects of the conflict on supply chains

BOV Group generated a €22 million profit before tax during the first quarter of 2022, but warns that geopolitical instability could impact the domestic economy and the bank’s business.

The bank said it is on the road to recovery after the pandemic, but warned of the risks from geopolitical instability, the interim directors' statement released on Thursday says

“Against these developments, the group retains a cautions outlook especially in respect of its stance towards credit provisioning, with first quarter performance not necessarily representative of 2022 full year results,” the statement reads.

BOV’s revenues stood at €58.4 million in the first quarter, up by 5% over the same period in 2021. The group owes this to consistent growth in lending, particularly through home loans and increased revenues from payments and card business.

However, operating costs were up by 3% compared to the first quarter in 2021. The bank said this is attributable to higher employee compensation costs driven by an increase in headcount, as well as the group’s contribution to the Deposit Guarantee Scheme, linked to higher customer deposit levels.

A reversal of €7 million in net Expected Credit Losses helped contribute to the group’s profitability in the the first quarter of 2022. According to the bank, this reflected more favourable economic circumstances positively affecting the expected performance of specific sectors.

Moreover, a €4.8 mmillion charge was taken in the quarter with respect to long outstanding non-performing loans.

“The share of results from insurance associates decreased materially when compared to the same period in 2021, largely driven by a more cautious future outlook impacting the outcome of actuarial models,” the bank said.

Net loans and advances to customers increased by 2% during the first quarter of 2022, with growth reported in both businesses and home loans. However, home loans were the biggest driver. Customer deposits increased by 1% over the period, predominantly in shorter term deposits.

The bank said it plans to continue strengthening its Minimum Requirement for Own Funds and Eligible Liabilities position throughout the second quarter of 2022, in line with ongoing regulatory requirements.  To meet this target, the bank intends to issue a senior preferred bond on the international market.

The Russia-Ukraine conflict

BOV said that it is not significantly exposed to Russia or Russian nationals within its loan book. Additionally, exposures stemming from Ukraine and bordering countries are also low and insignificant when compared to the bank’s total lending portfolio.

However, the bank said it is still closely reviewing the possible economic and business effects of the conflict since both Russia and Ukraine are major exporters of key global inputs, such as energy, metals and crops.

“Malta’s direct trade links with both countries are small and concentrated in specific products. However, the indirect effects, stemming from the price dynamics of products traded in international markets, as well Malta’s other trading partners’ economic dependence on Russia and Ukraine, make this adverse supply shock of direct relevance to businesses and households in Malta.”

The bank carried out an impact assessment to understand how different sectors could be affected by the conflict due to supply chain bottlenecks for different resources or materials.  It simulated three different severity scenarios.

According to BOV, the bank would be able to absorb the adverse impact even under the most stressful scenario.

“The situation will continue to be monitored, given the possibility that the fluid situation could potentially deteriorate.”