Fitch down­grades Bank of Val­letta’s Long Term Rat­ing to BBB due to im­paired loans

Malta Independent - - FRONT PAGE -

Fitch Rat­ings an­nounced yes­ter­day a one notch down­grade in the Long Term Is­suer De­fault Rat­ing of Bank of Val­letta. The new rat­ing is of BBB, with a sta­ble out­look.

The rat­ing agency af­firmed that BOV’s rat­ing is driven by its in­trin­sic strength, and that its prof­itabil­ity ben­e­fits from “sound core rev­enues gen­er­ated from its com­mer­cial busi­ness ac­tiv­i­ties, good op­er­at­ing ef­fi­ciency and con­tained loan im­pair­ment charges”.

The short term rat­ing, which has been con­firmed at ‘F2’, is un­der­pinned by the bank’s “ro­bust fund­ing and liq­uid­ity”, its sta­ble de­posit base and im­prov­ing loan-to-de­posits ra­tio.

Fitch ac­knowl­edges that the bank’s stock of im­paired loans is de­creas­ing, and is well cov­ered by pro­vi­sions, but com­ments that the level re­mains higher than av­er­age in sim­i­lar en­vi­ron­ments.

The agency goes on to state that the bank’s cap­i­tal lev­els have to be viewed in a con­text of in­creas­ing reg­u­la­tory re­quire­ments and the ex­pected neg­a­tive impact of the new fi­nan­cial re­port­ing stan­dard IFRS 9. The agency also opines that the bank’s use of the stan­dard­ised ap­proach to de­ter­min­ing risk weights may lead to the un­der­es­ti­ma­tion of cer­tain risks, such as op­er­a­tional and mar­ket risk.

Bank CEO Mario Mal­lia ex­plained that the down­grade in the long term rat­ing is driven by Fitch’s view that the bank needs to in­crease its cap­i­tal lev­els, in an en­vi­ron­ment of ris­ing reg­u­la­tory re­quire­ments. The bank has, in fact, al­ready made pub­lic its in­ten­tion to strengthen its cap­i­tal buf­fers, through a com­bi­na­tion of fresh cap­i­tal is­sues, re­strained div­i­dend pay­outs and the re­view of the busi­ness model.

The CEO con­cluded by reaf­firm­ing the bank’s commitment to­wards strength­en­ing its lev­els of cap­i­tal, as well as its risk man­age­ment frame­work. “We have started by beef­ing up our sub­or­di­nated debt cap­i­tal, and are now ad­dress­ing core eq­uity. We are also putting into place a ro­bust Risk Appetite Frame­work, and build­ing up from scratch a strong and well-re­sourced An­tiFi­nan­cial Crime func­tion.

“At the same time, we are with­draw­ing from tra­di­tional busi­nesses which lie out­side our cur­rent risk appetite. We are also ad­dress­ing legacy is­sues that in­volved the bank in un­due le­gal and rep­u­ta­tion risk. These are the mea­sures we are tak­ing to­day to en­sure the future of BOV as a strong, sta­ble and well­cap­i­talised in­sti­tu­tion.”

In a state­ment is­sued yes­ter­day even­ing, the gov­ern­ment said that while re­view­ing its rat­ing on BOV, Fitch Rat­ings chose the high­est of the two lev­els of BBB. Fitch in fact states that “BOV’s short term rat­ing, which has been as­signed at the higher of the two op­tions avail­able for banks rated BBB, con­tin­ues to re­flect its ro­bust fund­ing and liq­uid­ity.”

Fitch Rat­ings noted that BOV’s as­sets grew by 8% in the first half of the year. Be­sides, the Fitch ex­perts stated that “BOV’s prof­itabil­ity ben­e­fits from sound core rev­enues gen­er­ated from its com­mer­cial busi­ness ac­tiv­i­ties, good op­er­at­ing ef­fi­ciency and con­tained loan im­pair­ment charges.”

This means, the gov­ern­ment con­tin­ued, that in no way are the Fitch ex­perts cast­ing any doubt on the bank’s sta­bil­ity or its prof­itabil­ity. In fact, al­though it had been down­graded in 2011, in re­cent years BOV con­tin­ued to grow and earn more.

On the other hand, the changes in the reg­u­la­tory frame­work is forc­ing im­por­tant banks such as BOV to be asked to have a higher cap­i­tal base, espe­cially in the form of new shares. This is mostly be­cause of EU rules that have come in in re­cent years. These rules led Fitch Rat­ings to down­grade one third of Euro­pean banks a year ago.

One must also note that in the first six months of this year, Fitch has changed the rat­ings of 65 banks around the world, and the Fitch Man­ag­ing Di­rec­tor re­spon­si­ble for bank rat­ings had told the Fi­nan­cial Times at the end of Au­gust that this pe­riod has been “one of the most volatile six-month pe­ri­ods in re­cent years.” This is af­fect­ing many big banks.

Fitch also noted that the bank’s man­age­ment will be tak­ing steps to strengthen its cap­i­tal base and to con­tinue to im­prove the bank’s op­er­a­tions. It was noted, among other things, that the bank is re­duc­ing the con­cen­tra­tion of gov­ern­ment bond pur­chases and also that the qual­ity of loans has im­proved.

Be­sides, one must also note that the model adopted by Fitch in its rat­ing of com­mer­cial banks depends on the gov­ern­ment’s rat­ing. In the case of Malta, Fitch Rat­ings is con­tin­u­ing to re­view up­wards its fore­casts. This should be of help for the future of BOV, the gov­ern­ment said.

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