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Fitch Affirms Bank of Valletta at 'BBB'; Outlook Stable
November 20, 2017 / 5:20 PM / a month ago

Fitch Affirms Bank of Valletta at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, November 20 (Fitch) Fitch Ratings has affirmed Bank of Valletta's (BoV) Long-Term Issuer Default Rating (IDR) at 'BBB' and Viability Rating (VR) at 'bbb'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND VR The IDRs and VR reflect BoV's healthy fundamentals, backed by a track record of stable and resilient financial metrics through the cycle. The bank has healthy prospects for ongoing viability, due to its stable business model and leading domestic franchise, which have helped sustain its firm profitability and generate capital internally through low-interest rate cycles. Asset quality continues to improve, benefiting from a tighter risk framework and sound GDP growth. Funding and liquidity are relative strengths, supported by large and rising customer deposits. BoV has a leading franchise in key domestic market segments, where it benefits from established client relationships. However, BoV is the largest domestic bank in a small economy, which acts as a limit, in our view, on the benefits it can achieve from its competitive position. Its domestic focus also heightens single name and industry concentration risks. Despite improvements in BoV's risk appetite framework, it remains affected by the bank's purely domestic focus, and risk controls in non-credit-risk division are gradually getting in line with BoV's business growth. Fitch views positively the bank's progress in closing down accounts held by certain international corporate customers, as this should reduce exposure to reputational and conduct risks. The bank has been implementing the requirements of increasingly stricter financial crime legislation, but we believe it will take time to fully embed these changes throughout the bank. At end-September 2017, BoV's transitional CET1 and total capital ratios of 14.1% and 17.6% reflected satisfactory buffers over regulatory requirements. These ratios, however, do not fully address the large concentration risk in the bank's portfolio, as well as the high inter-connectedness with the economic environment against the small absolute size of the bank's capital. These risks should partly be addressed by a planned EUR150 million capital increase, which the bank has set down as one of its objectives for this year. Revenue generation has been strong despite the low interest rate environment, due to volume growth, exposure to non-loan assets and the contribution of healthy commission income. The cost income ratio rose slightly to 49% at end-September 2017 from 45% at end-September 2016, which still compares well both domestically and relative to international peers. We believe that BoV's ability to keep costs under control will help maintaining satisfactory operating efficiency. Profitability has been supported by the strong performance of the bank's assets, which has resulted in net loan write-backs as of end-September 2017 that, however, are unsustainable in the future, in our opinion. The stock of impaired loans decreased over 9% yoy at end-September 2017, reflecting more aggressive write-offs and more effective recovery strategies. The impaired loans ratio fell to 4.5% at the same date (from 5.1% a year ago), a figure which is in line with the industry average in similar operating environments. Coverage remains satisfactory at around 85% and comparatively better than international peers'. Concentrations are also being reduced, particularly towards the Maltese government and real estate and construction sectors but remain high. BoV's funding is dominated by customer deposits, which have proved resilient through the cycle. The loans-to-deposit ratio decreased to below 45% at end-September 2017 (46% a year ago), reflecting faster deposit growth from residents amid a growing domestic economy. BoV's access to other funding sources has been limited so far, although the bank benefits from funding flexibility arising from unused ECB facilities to which the bank would have access in case of need. Liquidity coverage and net stable funding ratios are maintained above 100%. Overall liquidity has been strong and stable and is backed by an ample liquidity pool. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) The SR and SRF reflect Fitch's view that if the bank becomes non-viable, full support for senior creditors from the Maltese authorities is possible but cannot be relied upon. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES IDRS AND VR BoV's ratings are sensitive to deterioration in the operating environment in Malta, particularly through impact on earnings and capitalisation. A sharp increase in impaired loans or failure to demonstrate continued progress in reducing concentration risks relative to its capital could also put pressure on the bank's ratings. Progress on improving capitalisation and asset quality could over time result in the ratings being upgraded while a sound track record of strengthened risk framework will also be positive for the ratings. However, given the small economy in which the bank operates, the potential for upgrades would be limited. SR AND SRF An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support BoV. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Bank of Valletta Long-Term IDR affirmed at 'BBB'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analyst Gianluca Romeo Director +39 02 879087 201 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Valeria Pasto Associate Director +39 02 879087 298 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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