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