Annual Report 2017

LOMBARD BANK LOMBARD Lombard Bank Malta p.l.c. Annual Report 2017 Lombard Bank Malta p.l.c. Head Office 67 Republic Street Valletta VLT 1117 MALTA 2017 Tel: 25581117 Fax: 25581151 e-mail: [email protected] www.lombardmalta.com ANNUAL REPORT WorldReginfo - 6bb28533-b890-414c-aca1-91a909ed391c Chairman’s Statement to the Members HEAD OFFICE 67, Republic Street, Valletta VLT 1117 MALTA. Tel: 25581117 Fax: 25581151 e-mail: [email protected] www.lombardmalta.com ANNUAL REPORT 2017 Contents Chairman’s Statement to the Members 3 Chief Executive Officer’s Review of Operations 5 Directors’ Report 9 Statement of Compliance with the Principles of Good Corporate Governance 16 Remuneration Report 24 Company Information 26 Independent Auditor’s Report to the Shareholders of Lombard Bank Malta p.l.c. 29 Financial Statements: Statements of Financial Position 40 Income Statements 42 Statements of Comprehensive Income 43 Statements of Changes in Equity 44 Statements of Cash Flows 48 Notes to the Financial Statements 49 Additional Regulatory Disclosures 144 Five Year Summaries 174 1 WorldReginfo - 6bb28533-b890-414c-aca1-91a909ed391c WorldReginfo - 6bb28533-b890-414c-aca1-91a909ed391c Chairman’s Statement to the Members During 2017 banking activity was again conditioned by a The Bank’s operating expenses rose faster than income in challenging operating environment. It is therefore encouraging 2017 such that the cost-to-income ratio increased after falling to note that the changes to our business model introduced in the previous year, though remaining at an acceptable level. previous years in response to record low interest rates and While the staff complement grew only slightly, related costs an increasingly demanding and costly regulatory regime, were inevitably higher as the Bank sought to satisfy the need together with more recent initiatives designed to further for more specialized expertise and to retain existing staff in a diversify sources of income and to increase operational cost tight labour market. The growing regulatory and compliance effectiveness, have begun to yield the desired results in support obligations also called for more investment in human of Lombard Bank Malta p.l.c.’s underlying profitability. resources and information technology hardware and software as well as considerable payments of professional fees. Despite the downward pressure exerted by persistently low-to-negative market interest rates, net interest income Since the quality of the loan portfolio registered a marked registered a further improvement. As in the previous year improvement in 2017, largely reflecting the success of the this was the combined result of an increase in interest Bank’s efforts to reduce its non-performing exposures, a received and lower interest payable. The former was entirely smaller amount was required to be set aside in the shape of attributable to substantial growth in the loan book in the impairment allowances than in 2016, such that the profit context of a rapidly expanding economy even as interest rates before tax increased to €7.5 million. The Board is again this charged to borrowers continued to drop in a competitive year recommending a gross payout of four cent per share. credit market. Revenue from the investment portfolio, which is almost entirely composed of low-risk domestic central bank This result further consolidated the Bank’s capital buffers and balances and government securities, fell again in 2017 under hence its capacity to expand its lending activities and to absorb the impact of negative interest rates associated with the ECB’s potential losses. The total capital ratio stood at 14.3% at year accommodative monetary policy. The improvement in the end, well above the regulatory minimum of 8%, while the net interest margin was also partly due to a further decline in leverage ratio was 9.8%, more than three times the required the interest paid out to depositors. This was the outcome of a level. The liquidity ratio fell slightly but, at 65.3%, was still combination of factors: a marked shift in customer preference more than twice the statutory minimum level. The Bank’s towards short-term deposits at the expense of interest-bearing financial strength is also evidenced by another addition to term accounts, on the one hand, and lower average rates on shareholders’ funds, which reached €96.1 million in 2017. the latter, on the other. A satisfactory performance was also recorded by the Bank’s The contribution of the Bank’s core deposit-taking and subsidiary, MaltaPost p.l.c., with an increased pre-tax profit lending operations to income generation was supplemented of €3.1 million, achieved in spite of a continued downward by increased inflows of fee and commission-based income trend in Letter Mail volumes and a highly competitive generated mainly by transaction and international banking environment in the area of parcel post, as well as higher staff business. The recruitment of more investment services and other fixed costs. This outcome once again validates the specialists during the year as part of the Bank’s diversification Bank’s decision to acquire a strategic stake in MaltaPost p.l.c. strategy should result in more growth in this area. Together in 2006 and encourages the Company to actively pursue its with the increase in net interest income mentioned earlier, current initiatives, mainly by way of postal products and these activities made for a higher level of total operating document management and financial services, while also not income, even after adjustment for the substantial one-time overlooking new opportunities for growth. gain recorded in 2016. 3 WorldReginfo - 6bb28533-b890-414c-aca1-91a909ed391c Chairman’s Statement to the Members Going forward the Bank is facing challenges on a number by small shareholders in the Bank’s capital, thus ensuring that of fronts ranging from an increasingly competitive market, no single shareholder would be in a position to influence the the prospect of continuing low interest rates and advances in direction of the Bank to his own advantage. Furthermore, it technology which threaten the traditional modes of delivery would have also opened up the possibility for the Board to of banking services, on the one hand, to ever tighter and reactivate its beneficial staff share ownership scheme. In the costlier regulation and the imposition of stricter provisioning circumstances, the failure of the CPB Special Administrator and capital requirements, on the other. The Board of to find a suitable investor was prolonged even further. Directors is confident, however, that the Bank’s strong market presence and its robust balance sheet fundamentals represent The Bank achieved satisfactory financial results in 2017, a solid base from which to successfully pursue the objective of in spite of the difficult operating environment and the fact meeting changing customer needs while ensuring long-term that it cannot benefit from the economies of scale available financial sustainability. to larger institutions. The year’s positive outcome would not have been possible without the professional competence, In this regard consideration will be given to a further commitment and integrity of the staff and the management expansion of the Bank’s capital base and to this end the Board team ably led by the Chief Executive Officer, Joseph Said. is examining the possibility of an increase in Tier 1 capital by On behalf of the Board I would like to thank them, as well means of a rights issue. This would allow the Bank to continue as you the Bank’s shareholders for your support and all our to grow while also permitting it to meet possibly even higher customers for their continued loyalty, and to assure you all of minimum levels of regulatory capital. The introduction of the Board’s firm commitment to good corporate governance. a new international accounting standard in 2018 requiring higher levels of provisioning will represent another claim on available resources. At the same time the Board will continue to implement the growth strategy already in place, with a particular focus on new products and services such as home loans and investment funds, to create a broader income base needed to meet higher operating costs and to add shareholder value. This will be accompanied by more investment in systems and human resources to deal with the challenge posed by the rapid pace of change in financial technology. Emphasis will also continue Michael C. Bonello to be placed on the Bank’s plan to reduce non-performing Chairman loans, which is well on track to achieve the set targets. During the past year the Board made repeated efforts to resolve the issue surrounding the 49.01% shareholding owned by Cyprus Popular Bank Public Co Ltd (CPB). These included our offer to buy back these shares, which initiative, however, was not supported by CPB itself at the last Annual General Meeting. This would have resulted in a greater participation 4 WorldReginfo - 6bb28533-b890-414c-aca1-91a909ed391c Chief Executive Officer’s Review of Operations The results of the Group for the financial year ended 31 Overall therefore the underlying business performance was December 2017 combine the financial performance of encouraging. We continued to invest in development along Lombard Bank Malta p.l.c. and Redbox Limited, which is three main lines: commercial lending, retail and transaction the company holding the Bank’s shares in MaltaPost p.l.c. banking, and investment services. In commercial lending we remained focused on establishing SUMMARY OVERVIEW long-term relationships. In retail banking, particularly home loans and cards, we invested in systems and processes, as well During the year under review the eurozone experienced a as planned the launch of new product packages. Transaction healthy economic expansion. Although at the start of 2018 banking, particularly that relating to our International there was a softening of eurozone economic sentiment, Business Banking activity, remained a significant source of fee resulting mainly from a markedly lower confidence in services income as did earnings from foreign exchange transactions.

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