Issue link: https://maltatoday.uberflip.com/i/1083753
11 maltatoday | WEDNESDAY • 20 FEBRUARY 2019 BUSINESS THE reported profit before tax for the year ended 31 December 2018 of HSBC Bank Malta p.l.c. amounted to €38.6m. This represents a decrease of €11.3m or 23% compared to prior year. The adjusted profit before tax was €36.5m, a decrease of €19.1m or 34% compared to 2017. The adjusted results exclude the impact of the following notable items: a collective agreement provision charge of €7.6m in 2017; and a provision release relating to the brokerage remediation of €1.8m in 2017 with an additional €2.0m release in 2018. Profit attributable to shareholders was €28.7m resulting in earnings per share of 8.0 cents compared with 8.6 cents in 2017. The year under review was character- ised by broadly stable but persistently low interest rates and excess liquidity in the market while attractive investment op- portunities continued to remain limited. Andrew Beane, Chief Executive Officer at HSBC Bank Malta p.l.c., said: "It is now clear that the new ECB requirements re- lating to the treatment of non-performing loans (NPL) mean that Malta's current framework for the recovery of security in the event of default requires reform. Banks will be required to hold additional capital against fully secured NPLs as a direct result of the long time to recover through current legal processes. For HS- BC, the expected impact relates to loans where the Bank does not expect to incur additional losses even though the recov- ery process currently takes years. Looking to the future, the Board is fo- cused on enabling the Bank to gener- ate growth for shareholders in this next phase while also ensuring full compliance with the new ECB requirements. Accord- ingly, whilst we will sustain the Bank's position as a strong dividend generating company, the Board has recommended a final dividend pay-out ratio of 30% in or- der to allocate additional capital to grow the business and meet the new ECB NPL requirements in the event that reforms to the current system are not forthcoming." Net interest income of the Bank de- creased by 10% to €108.6m compared with the prior year principally due to the reduction in the corporate loan book and margin contraction in the bonds portfo- lio. The average yield of the investment book declined further due to higher yielding bonds maturing. The European Central Bank negative deposit rate re- mained unchanged during 2018 result- ing in additional interest expense on the Bank's excess liquidity. Net non-interest income remained broadly in line with 2017 with increased commissions in Retail Banking and Wealth Management (RBWM) offset- ting reductions in Commercial Banking (CMB). Over 10% more mortgages were sanctioned in 2018 which drove the in- crease in RBWM commissions. Operating expenses were €108.4m, €5.7m or 5% lower compared with prior year. 2017 included a provision of €7.6m relating to the collective agreement, excluding this, adjusted operating ex- penses increased by €1.9m or 2% driven by continued investments in regulatory programmes, financial crime compliance and business growth. The Bank con- tinues to exercise rigorous cost control and to implement initiatives at cost base streamlining, outsourcing and process optimisation. On 1 January 2018, the Bank adopted IFRS9 'Financial Instruments'. Since adoption, the Bank registered a charge in expected credit loss of €3.5m, €4.7m higher than the €1.2m loan impairment release under IAS 39 in 2017. The year on year increase is driven by the review of the provisioning approach relating to aged defaulted mortgages which led to a recovery in 2017. There was a €2m positive movement in the provision for brokerage remediation costs in 2018. In 2016, the Bank raised a provision totalling €8m in relation to a remediation of the legacy operational failure in the Bank's brokerage busi- ness. During 2017, the remediation pro- gramme was largely completed and it was assessed that a partial reversal of the con- servatively estimated provision was war- ranted. In this regard, a reversal of €1.8m was effected in 2017. In 2018, there was an additional reversal of €2m. The effective tax rate was 26%. This translated into a tax expense of €9.9m, €9.1m lower than the €19.0m expense for 2017. During 2018, the Bank benefited from a different tax treatment applied on a specific transaction. HSBC Life Assurance (Malta) Limited reported a profit before tax of €3.7m, €3.6m lower than prior year. The decline was largely due to positive market move- ments in 2017 (+€2m) that were not re- peated in 2018 (-€0.2m). A unit linked Employee Pension Plan was successfully launched to all HSBC Bank Malta p.l.c. employees in December 2018. Financial position and capital Net loans and advances to customers decreased by 1% to €3,110m. The decline was driven by the corporate loan book due to both risk management actions and a reduction in non-performing loans. The retail loan book grew by 2% compared with the prior year partially offsetting the reduction in corporate lending. The Bank continued to improve the asset quality by managing down non-performing ex- posures by over 19% versus 31 December 2017. Customer deposits grew by 3% to €4,887m with a 4% increase in retail de- posits more than offsetting the 3% reduc- tion in commercial deposits. The Bank maintained a healthy advances-to-de- posits ratio of 64% and its liquidity ratios were well in excess of regulatory require- ments. The financial investments portfolio de- creased by 2% to €905m. The Bank's risk appetite for investment quality remained unchanged - this portfolio is managed as a high-quality liquidity buffer and con- sists entirely of securities of sovereign and supranational issuers rated A- (S&P) or better. While the Bank partially re- placed maturing bonds during the year, attractive investment opportunities in an environment of record low interest rates in Europe were extremely limited. The Bank's capital ratios continued to improve with common equity tier 1 in- creasing from 13.9% to 14.6% and the to- tal capital ratio improving from 14.4% to 17.0%. The additional subordinated loan issued in December was the main driver for the increase in the total capital ratio. The Bank continued to have a strong cap- ital base and is fully compliant with the regulatory capital requirements. The European Central Bank recently introduced new requirements which re- quire the Bank to hold additional capital for any unsecured non-performing loans aged over two years and secured non- performing loans aged over seven years that are not 100% provided for through IFRS 9 ECL, regardless of security held. To ensure that the Bank holds sufficient capital to support future growth as well as meeting these new requirements, the Board has recommended a final dividend pay-out ratio of 30% of net profit. This will bring the full year 2018 divi- dend pay-out ratio to 47%. The final gross dividend will be 1.8 cent per share (1.2 cent per share net of tax) which brings the total dividend for 2018 to 5.8 cents (3.8 cents net of tax). The final dividend will be paid on 25 April 2019 to shareholders who are on the Bank's register of share- holders at 18 March 2019. Strategy Execution • Transformation to achieve highest global standards of financial crime compliance is now complete. • Lower profitability in 2018 the Bank completed the final phase of our de-risking strategy and managed the ongoing impact of negative interest rates. • HSBC Malta has commenced transition to a new phase focused on growth and value creation. The Bank is targeting to grow revenue faster than costs and increase return on equity over time. • Increased focus on customer service and growth is a priority in 2019. • Retail Banking and Wealth Management business volumes continue to increase, supported by increased sales capacity and new digital innovations. • Strong capital position enabling 47% dividend payment ratio for the full year with a final dividend of 30%. Financial Performance • Reported profit before tax of €38.6m for the year ended 31 December 2018, a decrease of €11.3m or 23% compared with prior year. • Adjusted profit before tax, which excludes the effect of notable items, was €36.5m, a decrease of €19.1m or 34%. • Recommend gross final dividend of 1.8 cents per share (1.2 cents per share net of tax) resulting in a full year dividend of 5.8 cents per share (3.8 cents per share net of tax). • Strong capital base with an increase in common equity tier 1 ratio to 14.6% from 13.9% as at 31 December 2017. Total capital ratio was 17.0% compared with 14.4% at 31 December 2017. • Adjusted cost efficiency ratio of 73% compared with 66% in 2017. • Earnings per share of 8.0 cents compared with 8.6 cents in 2017. • Return on equity of 6.1% for the year ended 31 December 2018, compared with 6.5% in 2017. • The advances to deposits ratio was marginally lower at 64%. • Net loans and advances to customers were €3,110m, down 1% compared with 31 December 2017. • Customer deposits increased by 3% to €4,887m as at 31 December 2018. HSBC completes risk management, shifts focus to measured growth HSBC's final gross dividend for 2018 will be 1.8 cent per share (1.2 cent per share net of tax) with a 2018 total dividend of 5.8 cents