EQUITY RESEARCH
7th August 2017
Bank of Valletta (BOV) Stock Rating Neutral
Executive Summary: Country Malta Industry Banking & Financial Services “We are initiating coverage with a Neutral recommendation on the Ticker BOV MV shares of BOV. We view the shares as fairly valued given the current share price in relation to the outlook of the general economy, banking sector and the specific characteristics of the bank. We view the Price €2.00 company as a stable dividend paying equity which is an ideal candidate Price Target (1 Yr) €2.25 for exposure to the banking sector in Malta and the economy as a whole.” Market Cap €840m Shares Outstanding 420m Free Float 72% Group Operations: Dividend Yield (net) 4.26% Bank of Valletta (“BOV”) was formed in 1974 and in 1992 BOV P/E 8.34x became the first public company to be listed on the Malta Stock Exchange. The Government of Malta is the largest shareholder with 25.23% shareholding followed by UniCredit S.P.A. which retains a Price Movement Exchange MSE 14.45% stake in the group. 52-week Range €2.00-€2.27
The Bank's financial services are offered through a network of 44 branches and agencies in Malta and Gozo, and through a number of 2.3 subsidiaries. It has also developed a worldwide network of 2.2 correspondent banks and has opened representative offices in Australia, Belgium, Italy, and Libya. 2.1 € 2
Principal activities Price Price The Bank of Valletta Group comprises Bank of Valletta p.l.c. (“the 1.9 Bank”), BOV Asset Management Limited, BOV Fund Services Limited 1.8 and BOV Investments Limited. The Group also has an associated company, Middlesea Insurance p.l.c., and a jointly controlled entity, 1.7 MSV Life plc. 01/2015 01/2016 01/2017
The Parent Company Source: Malta Stock Exchange Bank of Valletta p.l.c. is licensed to carry out the business of banking and investment services as well to act as a tied insurance Local Market Research intermediary of MSV Life Assurance Company Limited. It offers the entire range of retail banking services as well as the sale of financial products such as collective investment schemes. The Bank also offers investment banking services, including underwriting, management of IPOs, custodianship and trustee services.
Simon Psaila The Subsidiaries Financial Analyst BOV is the sole shareholder of BOV Asset Management Limited +356 25 688 141 which is licensed by the MFSA to operate as a UCITS Manager offers [email protected] a range of investment funds spread across all major asset classes
Calamatta Cuschieri Research | Bank of Valletta plc 1
EQUITY RESEARCH
7th August 2017
and also provides fund management services to collective investment schemes. The company currently manages in excess of €800 million in funds under management.
BOV Fund Services Limited, is a fully owned subsidiary of Bank of Valletta plc and provides a comprehensive range of fund administration services to both domestic and international fund management organisations.
BOV Investments Limited acts as an investment holding company.
The Jointly Controlled Entity and Associate MSV Life p.l.c. is a joint venture between Mapfre Middlesea p.l.c. and the Bank. It operates as a life assurance company licensed under the Insurance Business Act (Cap. 403). Mapfre Middlesea p.l.c. is engaged in the business of insurance including group life assurance and of reinsurance.
SWOT Analysis
Strengths Weaknesses
Largest Bank in Malta in terms of deposits Large regulatory burden Systemically important bank for Maltese Poor track record of innovation economy Highly exposed to the Maltese economy Stable dividend history Universal bank Proved resilient during financial crisis
Opportunities Threats
o Strong, developing economy creating business ! Property market crisis o Strengthening property market is beneficial to ! Lack of available skilled workforce loan portfolio ! Litigation cases o Digitalisation of bank could increase efficiency, ! €363m civil claim attract more customers and increase return on ! A failure of take-up of the rights issue could impact investment dividends o Improved risk management could minimise one- off shocks o International diversification could open a whole new client base and dimension for the bank
Calamatta Cuschieri Research | Bank of Valletta plc 2
EQUITY RESEARCH
7th August 2017
Investment Stance
We are initiating coverage with a Neutral recommendation on the shares of BOV. We view the shares as fairly valued given the current share price in relation to the outlook of the general economy, banking sector and the specific characteristics of the bank. We view the company as a stable dividend paying equity which is an ideal candidate for exposure to the banking sector in Malta and the economy as a whole.
Investment Thesis Variables
Net Interest Income – We expect NII to decline on the back of the low interest rate environment in Europe impacting Net Interest Margins negatively, as well as higher competition from other local banks squeezing margins further. Net fee and commission income – we expect a similar increase to the previous financial year, on the back of a similar increase from H1 results, the current corporate strategy, and the favourable economic back- drop. Operating Income- We expect operating income to reduce to €240m from €278m in 2016 as result of weaker NII, trading profits and gain on investment securities; despite the expected increase in fee income. Operating Profit – We expect operating profit to reduce to €118m for 2017 vs €142m in 2016 as result of lower operating income and an uptick in employee compensation and general administrative expenses related to the announced corporate strategy to improve the risk controls and IT infrastructure. Abnormal gains/loss – we are not considering any abnormal gains in our valuation. EPS – we are forecasting an EPS figure of €0.202 in 2017 compared to €0.243 in 2016. Rights issue – the dilutive effect of the rights issue was not considered in the current estimates of EPS or target price. We expect a proportional adjustment for the new number of shares issued once the process is concluded. €363 million Italian court case - The chairman of board insists that “there is no basis at law for the claim being made before the Italian Court and that the bank should reject the claim against it as completely unfounded.” The recent downward price movement has largely been on the back of this concern; hence we feel the probability of this event is already “priced-in”. Tier 1 Capital Ratio – as at 31st March 2017 CET1 ratio stood at 13.1%. Post rights issue this is expected to increase to around 16.5%; which is comparable to the average of 17% of other major European banks (UBS, HSBC, BNP, Credit Suisse, Barclays and Deutsche Bank).
Upside Risk: Better than expected return on interest bearing investments Better than expected profits from trading activities Improved employee efficiency / cost cutting
Downside Risk: Sharp increase in regulatory and compliance costs Cost over-runs in IT infrastructure upgrade Negative outcome of pending litigation proceedings
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EQUITY RESEARCH
7th August 2017
Valuation
Our 1yr price target is €2.25. The price target is calculated using a combination of a Price-to-Earnings and Price-to-book Model with a discount rate of 8%.
Income Statement 2017F 2016 2015 2014 €000s €000s €000s €000s Interest and similar income: on loans and advances, balances with CBM and - 160,195 158,180 153,430 Tbills on debt and other fixed income instruments - 54,063 57,432 59,466 Interest expense - (65,429) (70,834) (86,893) Net Interest Income 143,620 148,829 144,778 126,003
Fee and commission income - 75,021 70,922 64,112 Fee and commission expense - (8,936) (8,346) (8,150) Net fee and commission income 70,050 66,085 62,576 55,962
Dividend Income 2,000 1,901 2,352 1,372 Trading Profits 19,007 24,724 34,067 25,654 Net gain on investment securities and hedging 5,000 9,046 3,098 814 instruments - 27,511 Operating Income 239,677 278,096 246,871 209,805
Employee compensation and benefits (66,735) (64,168) (61,700) (57,537) General administrative expenses (46,118) (40,103) (38,651) (28,644) Amortisation of intangible assets (3,500) (3,539) (2,574) (2,202) Depreciation (5,000) (4,968) (5,107) (5,116) Net Impairment losses - (23,142) (32,710) (19,431)
Operating Profit 118,324 142,176 106,129 96,875
Share of results of equity accounted investees, 12,000 3,730 11,786 7,227 net of tax Profit before tax 130,324 145,906 117,915 104,102 Income tax expense (45,613) (50,708) (37,971) (34,718) Profit for the period 84,711 95,198 79,944 69,384 Earnings per share 0.202 0.243 0.204 0.192
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EQUITY RESEARCH
7th August 2017
Comparative Analysis
Name Current Price/ Price/Book Dividend P/E Tier 1 ROE NPL/Tot. Net Fixed Asset Adj. Mkt Tangible Yield (Net) Capital Ratio Loans Interest Growth YoY Cap Book Margin (Mln) x x % x x % x % % HSBC BANK MALTA PLC 739 1.81 1.56 6.92 18.35 13.20 8.61 6.40 1.85 100% FIMBANK PLC 203 1.65 1.53 N/A 46.36 9.70 3.28 1.90 1.87 -1625% LOMBARD BANK (MALTA) PLC 104 1.14 1.11 1.10 22.12 16.20 5.16 13.88 2.35 1213% SKANDIABANKEN ASA 999 1.95 1.94 1.73 11.46 18.00 17.55 0.45 1.70 6521% PERMANENT TSB GROUP 1126 0.54 0.54 N/A -11.88 18.90 -11.83 27.38 1.38 870% HOLDINGS AKTIA BANK OYJ 676 1.13 1.00 5.54 12.37 19.50 8.10 0.59 1.13 -1173% VIRGIN MONEY HOLDINGS UK 1538 0.85 0.81 2.29 10.42 20.20 8.64 0.39 1.76 375% TCS GROUP HOLDING -REG S 1967 4.24 4.00 2.74 10.40 14.81 43.56 10.24 24.92 12695% BANCA IFIS SPA 2002 1.62 1.60 2.20 2.83 14.97 77.46 8.46 4.81 11154% CYBG PLC 2752 0.82 0.75 N/A 16.81 15.00 -6.78 0.73 2.46 -917% KBC ANCORA 3421 1.62 1.62 4.88 60.18 17.80 17.03 4.10 1.46 7% BANK OF VALLETTA PLC 907 1.24 1.20 3.94 8.34 12.82 13.83 7.27 1.43 -25% Median 1062 1.43 1.37 2.74 11.91 15.60 8.62 5.25 1.81 238%
Source: Bloomberg, Company financial statements
Note: Comparables were selected based on market capitalisation.
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EQUITY RESEARCH
7th August 2017
Historical 1 Year Price Target
Reference Date Price Price Target Analyst Recommendation BOV MV 26.07.2016 €2.00 €2.25 Simon Psaila Neutral
2.4
2.2
2
€ 1.8
PRICE 1.6
1.4 BOV Maltex
1.2
1 06/07/2012 06/07/2013 06/07/2014 06/07/2015 06/07/2016 06/07/2017 DATE
Positioning
The equity would be appropriate for an investor willing to take a position in the Maltese banking industry and the broader economy. We would suggest that the equity forms part of a well-diversified portfolio and recommend investors align the weighting of the stock in line with the Neutral position. Investors should be aware that in order to avoid dilution of their shareholding, and subsequent loss of value, they will need to participate in any future capital raising activities that were recently approved at the Extraordinary General Meeting.
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EQUITY RESEARCH
7th August 2017
Explanation of Equity Research Ratings Overweight Valuable long term holdings. Buy on dips, add during rallies. Hold for the long term
Neutral Limited growth potential. Add for diversification, reduce at peaks
Underweight Concerns on growth potential. Reduce Cautiously
Sell Fundamental weakness in outlook. Sell is recommended.
Disclaimer
This document is being issued by Calamatta Cuschieri Investment Services Ltd (“CC”) of 5th Floor, Valletta Buildings, South Street, Valletta VLT1103, Malta and bearing company registration number C13729. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax, legal or any other ancillary regulatory advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice. CC has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this document. CC does not accept liability for actions, proceedings, costs, demands, expenses, damages and losses suffered by persons as a result of information, views or opinions appearing on this document. No person should act upon any opinion and/or information in this document without first obtaining professional advice.
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