LOMBARD BANK Lombard Bank Malta p.l.c. Annual Report 2012 Lombard Bank Malta p.l.c. Head Office 67 Republic Street Valletta VLT 1117 MALTA 2012 Tel: 25581117 Fax: 25581151 e-mail: [email protected] www.lombardmalta.com ANNUAL REPOR T HEAD OFFICE 67, Republic Street, Valletta VLT 1117 MALTA. Tel: 25581117 Fax: 25581151 e-mail: [email protected] www.lombardmalta.com ANNUAL REPORT 2012 Contents Chairman’s Statement to the Members 3 Chief Executive Officer’s Review of Operations 5 Directors’ Report 8 Statement of Compliance with the Principles of Good Corporate Governance 12 Remuneration report 19 Company Information 21 Independent Auditor’s Report to the Members of Lombard Bank Malta p.l.c. 24 Financial Statements: Statements of Financial Position 28 Income Statements 30 Statements of Comprehensive Income 31 Statements of Changes in Equity 32 Statements of Cash Flows 36 Notes to the Financial Statements 37 Additional Regulatory Disclosures in terms of Appendix 2 of Banking Rule BR/07 121 Five Year Summaries 149 Chairman’s Statement to the Members Notwithstanding the signs of an easing of the European the interest income we receive on our excess liquidity is only debt crisis, the past year remained a challenging one very marginal. Another principle we rigorously follow is that, which Lombard Bank Malta p.l.c. (the “Bank”) closed in as part of our Treasury operations, we employ our excess a fundamentally strong position. The result registered is funds only with first class counterparties even though these considered by the Board of Directors to be very satisfactory – pay very low rates of interest. Furthermore we still adopt even more so when bearing in mind that the Bank continued a policy of not holding any exposure to countries that are to pursue its strategy of maintaining a strong capital base affected by the debt crisis. and a high level of liquidity. When in mid-2012 the European Central Bank made it clear The Bank’s profit for the year dropped by circa 8% to €5.6 that the euro was here to stay and that the ECB would do all million. A one-off gain of €1.9 million registered in 2011, it could to defend it, the situation somewhat improved and was not repeated. With the present level of impairment the structural changes introduced by a number of countries, allowances in respect of its lending portfolio, the Bank has together with greater financial discipline under the financial realistically taken into account the present economic climate. compact, should help the situation considerably and in fact there are first signs that the competitiveness of some On a Group level (principally the Bank and MaltaPost countries is improving. We do not want to suggest at this p.l.c) the consolidated profit after tax declined by circa 15% stage that the end of the crisis is in sight but the Eurozone to €6.1 million reflecting the reduced level of profits at could well emerge from the crisis structurally stronger than Lombard Bank as well as a decline by 31% of the net profit it was at its outbreak. Economic activity in most European at MaltaPost. countries will be subdued this year and we expect any improvements only to appear in the second half of 2013. Our primary objective remains that of steering the Bank Despite the considerable liquidity supplied by the European through the continuing European debt crises. Since the Central Bank there are so far no signs of inflation and Lehman failure in September 2008, the ensuing world keeping inflation in check remains the ECB’s main objective. recession and the subsequent focus on the high level of sovereign debt in Europe, the banking industry has been Taking into account the stability of the Bank’s performance in a very testing position and the effects on banks around and a slightly more positive macro-economic outlook, the the globe have been diverse. We at Lombard Bank have Board of Directors is recommending a Gross Dividend put prudence and the application of what we believe to be of €0.12 per share – an increase by just over 4% over the sound business principles in the forefront of our strategy. As dividends paid for 2011 and 2010. The Board appreciates mentioned already last year the Bank has maintained a very that this might be viewed as a modest increase but it solid capital base throughout the past decade or so. This is symbolises the confidence with which we look to the future. also thanks to you, as the Bank’s shareholders, who have Furthermore the Board of Directors believes that it is chosen for a number of years to receive dividends in the form appropriate to convert part of the profit carried forward into of scrip. As a result, Shareholders’ Funds now stand at €77.5 paid-up share capital and it is therefore recommending the million and the Bank’s Capital Adequacy ratio is calculated at issue of one bonus share for each ten shares held on 27 May 19% compared to a required minimum of 8%. Furthermore, 2013. The increased number of shares will result in higher we have at all times maintained a high level of liquidity. Of total dividend pay-outs in the years to come. However, the the deposits we hold only about 70% are lent to customers. pay-out ratio is expected to remain a prudent one which will We are fully aware that this strong level of liquidity translates still enable the Bank to increase its capital base further. into pressure on our interest income – this even more so as 3 Chairman’s Statement to the Members As mentioned in previous years we consider ourselves to on whom we frequently receive positive feedback from be an independent Maltese credit institution with strong customers. To them I express the appreciation and thanks on roots in this country and, consequently, our business is behalf of the Board of Directors. almost exclusively Maltese. We also believe that our various initiatives underline our commitment to this country. The past few years have been very challenging and the Bank’s Chief Executive Officer, along with his management team, We had informed you of the restoration of the south wing have ensured that, through sheer hard work, clear vision and of Palazzo Spinola in St. Frederick Street. Another milestone determination, the Bank has stayed on course and remained has been the restoration of the building at 225 Tower sound and solid, enabling it to look to the future with Road in Sliema, which will serve as a branch of our Bank. increased confidence. On behalf of the Board I would like to Furthermore, during the year the Bank donated to the express my sincere appreciation and thanks for this. nation a statue of Grand Master Jean de Valette. My and the Board’s thanks for these considerable achievements go to the Last but not least, sincere thanks go also to you as Lombard’s Chief Executive Officer, Joseph Said and his team without shareholders. Your continued support and interest is a great whom these projects would never have been started – let motivation for the Board, the Management and the staff to alone successfully concluded. continue with their efforts to maintain the high standing and reputation that Lombard Bank enjoys in the Maltese Financial strength and solidity have been extremely financial services market. important in coping with the various challenges with which the financial industry in general has been faced. It has been equally important for us to have loyal customers to whom we are grateful for having shown their confidence in and support of our organisation. Another pillar of strength that our Bank can pride itself of is the continued commitment Christian Lemmerich and hard work of our dedicated and well-trained staff Chairman 4 Chief Executive Officer's Review of Operations The results for 2012 of the Lombard Bank Group combine REVIEW OF FINANCIAL PERFORMANCE the financial performance of Lombard Bank Malta p.l.c. and Redbox Limited (the company holding the Bank’s shares in The Group made a Profit Before Taxation of €9.4 million MaltaPost p.l.c.). for the 2012 financial year. This 17% decrease over the previous year was mainly attributable to the effect of one- In summary, and within the context of negative economic off transactions in 2011 (disposal of securities), which were sentiment throughout the global financial markets, the not repeated in 2012, and also the adverse movements in Group still delivered a solid performance during the year international postal tariffs. During the previous financial under review. year, the Group took a view based on financial market sentiment at the time and decided to shed certain investment It remained guided by cautious investment strategies aimed portfolio assets thus crystallising profits. Consequently lower at consolidating the stability of its assets. This resulted in a income was generated in 2012 resulting in a decrease in both steady performance at a challenging time when euro zone Net Interest Income (NII) as well as in net gains on disposal unemployment remained at a record high and the single of non-trading financial instruments. However, the effect currency area was divided on measures how to resolve a of increased demand for shorter term maturity products banking crisis brought on by the 2008/2009 global financial bearing lower interest costs helped to contain the decrease situation. Although the economic scene in Malta continued in NII to 3%. Net revenue from postal sales remained under to be relatively stable, fresh business opportunities were pressure in terms of both letter-mail volumes and direct modest.