Consideration will be given to further expansion of the capit

petitive credit market.

Revenue from the investment portfolio, which is almost entirely composed of low-risk domestic central bank balances and government securities, fell again in 2017 under the impact of negative interest rates associated with the ECB’s accommodative monetary policy. The improvement in the net interest margin was also partly due to a further decline in the interest paid on deposits.

This was the outcome of a combination of factors: a marked shift in customer preference towards short-term deposits at the expense of interest-bearing term accounts, on the one hand, and lower average rates on the latter, on the other.

The contribution of the bank’s core deposit-taking and lending operations to income generation was supplemented by increased inflows of fee and commissionbased income generated mainly by transaction and international banking business. The recruitment of more investment services specialists during the year as part of the bank’s diversification strategy should result in more growth in this area. Together with the increase in net interest income mentioned earlier, these activities made for a higher level of total operating income, even after adjustment for the substantial onetime gain recorded in 2016.

The bank’s operating expenses rose faster than income in 2017 such that the cost-to-income ratio increased after falling the previous year, though remaining at an acceptable level. While the staff complement grew only slightly, related costs were inevitably higher as the bank sought to satisfy the need for more specialised expertise and to retain existing staff in a tight labour market. The growing regulatory and compliance obligations also called for more investment in human resources and information technology hardware and software as well as considerable payments in professional fees.

The quality of the loan portfolio registered a marked improvement in 2017, largely reflecting the success of determined efforts to reduce non-performing exposures. As a result, this year’s charge for impairment allowances was considerably lower than in the previous year.

The outcome of the year’s operations was an increase in profit before tax to €7.5m from €6.6m in 2016. The Board is again this year recommending a gross dividend payout of four cents per share.

This positive result further consolidated the bank’s capital buffers and hence its capacity to expand its lending activities and to absorb potential losses. The total capital ratio stood at 14.3% at year end, well above the regulatory minimum of 8%, while the leverage ratio was 9.8%, more than three times the required level. The liquidity ratio fell slightly but, at 65.3%, was still more than twice the statutory minimum level. At these levels the capital and liquidity ratios had already met the regulatory targets set for 2019. The bank’s financial strength is also evidenced by another addition to shareholders’ funds, which reached €96.1m in 2017.

A satisfactory performance was also recorded by the bank’s subsidiary, MaltaPost plc with an increased pre-tax profit of €3.1m, achieved in spite of a continued downward trend in Letter Mail volumes and a highly competitive environment in the area of parcel post, as well as higher staff and other fixed costs. This outcome once again validates the bank’s decision to acquire a strategic stake in MaltaPost plc in 2006. This investment has indeed created significant shareholder value, which although may not be overtly reflected in the bank’s financial statements because accounting rules require this asset to be valued differently, in this case €16m. However, if these shares were to be valued, say, at the current stock market price, then a significant potential gross gain would be reg- istered and this would be reflected in a corresponding increase in the Net Asset Value of the bank. This encourages MaltaPost to actively pursue its current initiatives, mainly in the form of new postal products and document management and financial services, while also not overlooking new opportunities for growth.

Going forward the bank is facing challenges on a number of fronts ranging from an increasingly competitive market, the prospect of continuing low interest rates and advances in technology which threaten the traditional modes of delivery of banking services, on the one hand, to ever tighter and costlier regulation and the imposition of stricter provisioning and capital requirements, on the other. The board of directors is confident, however, that the bank’s strong market presence and its robust balance sheet fundamentals represent a solid base from which to successfully pursue the objective of meeting changing customers’ needs while ensuring long-term financial sustainability.

In this regard consideration will be given to a further expansion of the capital base. This would allow the bank to continue to grow while also permitting it to meet possibly even higher minimum levels of regulatory capital in the future. The introduction of a new Interna-