Issue link: https://maltatoday.uberflip.com/i/1150355
01.08.19 3 FROM PAGE 1 "We are resourcing for 2020 and be- yond. However, the anti-money laun- dering skills do not match the current demand, so the prices for these skills are constantly increasing as well," Mallia said. Profits in the first half of 2019 were of €54.3 million before tax. In 2018, this profit during the same period was at €13.5 due to litigation expenses that amounted to €75 million. Operating profit amounts to €45.1 million, compared to €84.2 million for corresponding period last year. Net interest income at €77.6 million accounted for more than 60% of op- erating revenue and is marginally be- low last year. e persistently low to negative interest rate environment, coupled with a capital optimisation programme undertaken by the Bank in respect of its proprietary portfolio, and higher levels of liquidity, resulted in a decrease in interest earned on the treasury assets. While competitive forces in the lend- ing space continue to put pressure on the credit margin, this was offset by the healthy increase in the loan book. Net advances at amortised cost were up by €126 million since December 2018 and stand at €4.5 billion at 30 June 2019. Demand for new loans was experi- enced in mortgages, business lending and personal finance. Interest expense was marginally below the comparative period, mostly due to lower cost of wholesale funding. Total costs for the six months to June 2019 amount to €81 million, an increase of 27% over the comparative period. Downgraded credit rating Quoting the Standard & Poor's downgrading of BOV, its second downgrading of BOV in two years, Mallia argued that the rating of BBB- /A-3 meant that though the bank had been downgraded it was also stamped with a stable outlook. "is means that the credit agency is not seeing any risks that might con- tribute to even further downgrading. is wasn't an unexpected downgrade either. S&P had previously given a negative basic anchor rating to gener- al banks and had placed us on a neg- ative watch," Mallia said, adding that though the February cyberattack had contributed to this downgrade, the bank had not lost any data in the pro- cess. Still, this was a cause for enhance- ment as he said that BOV was in the process of changing its main IT core system, a 20-year-old structure, and transforming it into IT infrastructure which was used internationally. With regards to the three major liti- gation cases, for the €363 million Dei- ulemar case BOV have said that at the Tribunal of Torre Annunziata it does not have a guarantee of a fair hear- ing, so the bank filed a case with the European Court of Human Rights, its next hearing being the 10 September; with the Falcon Funds case, BOV filed several judicial letters holding 158 in- dividuals responsible for any damag- es; and the Property Fund case had its next hearing on the 12 November as the court heard all submissions. Mallia also announced that BOV had reopened US dollar accounts with Raiffeisen Bank in Austria, adding that this was not a solution but simply the first step going forward. BOV chairman Deo Scerri said the bank was currently implementing a two-year programme to deal with its two most pressing challenges. "We are currently changing all our IT systems and attempting to intro- duce them to our staff in the shortest time possible. Our other challenge is a transformation programme the bank is willingly going through where we are attempting to strengthen the bank's governance, increasing our staff and control functions," Scerri said. He said that the bank was also con- ducting a Know Your Customer (KYC) exercise where management was meeting with all clients, corporate or otherwise, to make sure that they are not involved in financial crime. BOV registers €54.3m profit in first six months of the year STANDARD & Poors has downgraded Bank of Vallet- ta's credit rating to BBB-/A-3 from BBB/A-2, due to reg- ulatory observations and a cyber-attack which increased doubts regarding the robust- ness of BOV's operational risk management. ese events added to ma- terial litigation risks to which the bank is exposed in the Deiulemar, Swedish pensions agency, and La Valette prop- erty fund cases. "All these events lead to uncertainty regarding the effectiveness of BOV's risk oversight and management's ability to control the complex- ities of the bank's business model, which we consider rel- atively higher than similarly sized banks," S&P said. S&P said the European Cen- tral Bank and Malta Financial Service Authority (MFSA) had encouraged the bank to take some actions to strength- en its internal controls and risk oversight, notably re- garding the due diligence and onboarding processes of new clients. In February, BOV suffered from a cyber-attack that forced it to shut down its in- ternet access, as well as its branches and cashpoints, for several hours. "e cyber-attack brings into question whether the effectiveness of the bank's IT and compliance monitoring tools is in line with best prac- tices," S&P said. Following the regulators' recommendations, BOV said it is striving to strengthen its internal control procedures and adapt its business model to focus more on its domes- tic operations and traditional business activities. ere remains a significant downside risk to S&P's pro- jection from ongoing litiga- tion exposure. Specifically, BOV allocated €75 million to precautionary litigation provisions in the first half of 2018. e main litigation began in April 2015. is regarded shares held in a trust at BOV by owners of the collapsed shipping company Deiulemar, which entered bankruptcy in 2012. In 2018, the Italian court requested that BOV seize a precautionary warrant €363 million. is is substantial relative to BOV's total equity of €994 million. BOV is now planning to is- sue a €150 million Additional Tier 1 instrument in the sec- ond half of 2019, targeting institutional investors. is could cushion the potential burden on the bank's capitali- zation that the litigation cases and other challenges might generate. However, bank has already delayed its issuance. S&P however said it sees no immediate deterioration of the bank's franchise follow- ing the court's precautionary warrant, the cyber-attack, and regulatory reports. "BOV's dominant market position, with a market share of 46% in loans and deposits, and sound retail franchise continue to support the rat- ings on the bank, in our view. In addition, the 25.23% own- ership by the Maltese govern- ment should enhance depos- itors' confidence in BOV and contribute to its stability." S&P said the possibility of an upgrade was unlikely at this stage because it will take time for the bank's remedial actions on its internal con- trols and operational risk management to prove their effectiveness. e lawsuits on the pending litigation cases could also last several years before conclud- ing. S&P lowers BOV's ratings over cyberattack and litigation