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EQUITY RESEARCH 20th December 2018
Bank of Valletta p.l.c.
Stock Rating Price target (1Yr)
Hold €1.21
Executive Summary: “We are issuing a Hold recommendation on the shares of BOV. Following the significant sell-off triggered by the €75 million provision for litigation and subsequent suspension of the dividend for financial year 2018, we view the shares as fairly valued based on our scenario analysis.” Company Overview: 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 intermediary of MSV Life Assurance Company Limited. The main companies forming part of the “Group” include Bank of Valletta p.l.c., BOV Asset Management Limited, BOV Fund Services Limited and BOV Investments Limited. The Group also has an associated company, Middlesea Insurance p.l.c., and a jointly controlled entity, MSV Life plc. Latest developments:
Litigation cases – The bank has been involved in at least three known litigation cases which have dominated the share price in recent months, the largest of which is the Deiulemar case, with a maximum exposure of €363 million. (further information available in dedicated section)
Unicredit S.p.A in March 2018 had announced its intention to dispose of its 10% shareholding in the bank, which eventually fell through the following November.
Country Industry Ticker Price Price Target (1 Yr) Upside/downside to PT Market Cap Shares Outstanding Free Float Net Dividend Yield Current P/E* Forward P/E NAV / Share *Based on LTM
Malta Banking & Financial Services BOV MV €1.32 €1.21 -7.6% €695m 531m 64.8% N/A 11.4x 13.4x €1.78
Price Movement 5 year Range (20 day moving average)
Exchange MSE €1.31-€2.27
Source: Bloomberg
Local Market Research
Simon Psaila Financial Analyst +356 25 688 141 [email protected]
-
0.50
1.00
1.50
2.00
2.50
3.00
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Dec-13 Aug-15 Apr-17 Dec-18
Volume Price
EQUITY RESEARCH 20th December 2018
SWOT Analysis
Investment Stance
We are issuing a Hold recommendation on the shares of BOV. Following the significant sell-off triggered by
the €75 million provision for litigation and subsequent suspension of the dividend for financial year 2018, we
view the shares as fairly valued based on our scenario analysis. We are encouraged by the bank’s improved
operating performance as well as its book value, however are cognisant of the real risk of further provisions
as well as the failure to be in a position to distribute a dividend to shareholders. This could create continued
downward pressure on the share price in the short term, as demand for the typically stable dividend paying
stock softens further.
Strengths Largest Bank in Malta in terms of deposits Systemically important bank for Maltese
economy Universal bank Proved resilient during financial crisis Strong capital adequacy ratios
Weaknesses Large regulatory burden Poor track record of innovation Highly exposed to the Maltese economy Currently has a high amount of litigation risk Currently has dividend suspended
Opportunities
o Strong, developing economy creating business o Strengthening property market is beneficial to
loan portfolio o Digitalisation of bank could increase efficiency,
attract more customers and increase return on investment
o Improved risk management could minimise one- off shocks
o International diversification could open a whole new client base and dimension for the bank
Threats ! Property market crisis ! Lack of available skilled workforce ! Litigation cases, which could result in further
provisioning totalling €438 million ! De-risking exercise could impact revenue streams
EQUITY RESEARCH 20th December 2018
Valuation
Our 1yr price target is €1.21. The price target, which is reflective of our base case scenario, is calculated using a dividend discount model with a discount rate of 10% using a scenario analysis approach given the key litigation event risk. Discount rate – The discount rate applied was arrived at by adding a 200bps premium to the average observed discount rate of the locally listed banks in Malta using the Gordon growth model. The discount rate is also in line with the observed discount rate for other European banks. Base Case
Litigation provision of €75 million in FY18, €75 million in FY19, and €69 million in FY20 reflecting a provision for litigation up to 50% of the maximum exposure in relation to the Deiulemar Group case and Falcon Funds case
Dividend pay-out ratio of 35% short term and 40% for terminal value, long term growth rate in dividends 2.75%
No dividend paid in FY18 or FY19, with first dividend to be paid in FY20.
Discount rate of 10%, 200bps above market average Best Case
Litigation provision of €75 million in FY18
No dividend paid in FY18, with first dividend paid FY19. Bonus dividend of €0.05 per share paid in FY21 after successful resolution of Deiulemar litigation case
Discount rate of 9%, 100bps above market average. Worst Case
Litigation provision of €75 million in FY18 to FY22, €63 million in FY23 fully providing for the maximum exposure from the Deiulemar Group case and the Falcon Funds case.
No dividend paid until FY24.
Discount rate of 10%, 200bps above market average
Worst Case Base Case Best Case
€ € €
Current Firm Value per share 0.76 1.12 1.43
1 Year Price Target 0.84 1.21 1.54
CC Estimated Probability 20% 50% 30%
EQUITY RESEARCH 20th December 2018
Financial model extract (Forecasts are based on the base case):
Half to June Year to September Year to December
1H2017 1H2018 2015 2016 2017
(adjusted)* 2018F 2019F 2020F 2021F
€000s €000s €000s €000s €000s €000s €000s €000s €000s
Net Interest Income 72,932 78,968 144,778 148,829 146,358 157,000 162,000 167,000 172,000
Net fee and commission income
33,421 40,375 62,576 66,085 69,031 79,000 86,000 90,000 95,000
Operating Income 115,511 127,935 246,871 278,096 240,378 256,500 266,500 272,500 282,500
Net impairment losses 5,924 20,155 (32,710) (23,142) 4,982 20,000 - - -
Operating Profit before litigation provision
58,970 84,154 106,129 142,176 124,359 147,500 131,380 132,380 137,380
Litigation provision - (75,000) - - - (75,000) (75,000) (69,000) -
Operating Profit 58,970 9,154 106,129 142,176 124,359 72,500 56,380 63,380 137,380
Share of results of equity accounted investees, net of tax
8,875 4,308 11,786 3,730 15,430 8,000 8,280 8,528 8,784
Profit before tax 67,845 13,462 117,915 145,906 139,789 80,500 64,660 71,908 146,164
Income tax expense (21,084) (813) (37,971) (50,708) (44,190) (28,000) (23,000) (25,000) (51,000)
Profit for the period 46,761 12,649 79,944 95,198 95,598 52,500 41,660 46,908 95,164
Earnings per share €0.088 €0.024 €0.150 €0.178 €0.180 €0.099 €0.078 €0.088 €0.179
Book Value per Share n/a €1.78 €1.26 €1.37 €1.81 €1.86 €1.94 €2.02 €2.13
*proportional adjustment given 15-month financials as at 31st December 2017
Source: Financial Statements, CC workings
EQUITY RESEARCH 20th December 2018
Investment Thesis Variables
Overview of litigation cases affecting the bank
Deiulemar Group Case
In July 2018, BOV charged a litigation provision of €75 million in connection with its exposure to three main
cases of litigation which are currently ongoing. The largest and vast majority of the exposure is of €363 million
in connection with the trust business; a company called Deiulemar Group which went bankrupt in 2012, and
subsequent to which a lawsuit was filed in Torre Annunziata, Italy, against the Bank as trustee in 2014 by the
curators of the bankruptcy of the Deiulemar Group.
The only assets settled in trust with the Bank were shares in the ultimate holding company of the Deiulemar
Group. The Bank maintains that it has strong legal defences on the merits of the case. Nevertheless, upon
the precautionary sequestro (“seizure”) of funds equivalent to the sum being contested, and the subsequent
failure to win the appeal to remove the seizure, the bank’s Board revisited its previous stance, and it has now
resolved to recognise a provision to reflect a higher probability of an eventual outflow of funds in connection
with the case (current provision is equal to around 20% of the exposure to the Deiulemar Group).
Furthermore the bank announced that it will not be distributing a dividend in 2018.
Given that the hearing of the Deiulemar case has not yet commenced, it expected to be a drawn out process
(4-5 years) which the bank intends on pursuing up to the highest European courts. The decision taken in the
Italian court doesn’t change the likelihood of the case being won and does not change the merits of the case.
The initial judgement is not expected to be delivered before another one and a half to two years.
The key variable in the case is the value that is being contested. The bank is arguing that the €363m being
claimed is “fictitious” in that it represents the value of the ships which were the assets held in the Deiulemar
Group. The bank held under trust the shares of Deiulemar which had an equity value which is much lower
when taking into consideration all liabilities, in fact it is our understanding that it is reportedly close to
nothing. Theoretically therefore the bank’s exposure should be minimal.
Despite this, given that the case is being initially heard in a small provincial town which itself has a number
of affected creditors, there is a real risk of the case being found against them, at least initially, and the bank
subsequently being forced into providing for the losses. The consequence of this is the bank’s income
statement being affected, hindering the bank’s ability to distribute dividends.
Other cases
The Group is involved in another two litigation cases, one involving La Valette Multi Manager Property Fund,
which according to the interim financial statements for 2018 has been provided for, and the other being
related to the custody business in the case involving Falcon Funds SICAV. The Swedish Pension Agency is
claiming damages of €75 million with respect to its investment in Falcon Funds SICAV, which the Bank
reportedly was providing custody services to. It is our understanding that no provisions have been made in
this respect and that the case remain under review.
EQUITY RESEARCH 20th December 2018
Financial Variables1
Net Interest Income (NII) – We expect NII to
experience a YoY improvement of 7.5% for
FY18, in line with the first six months of FY18, on
the back of the reported contraction in
customer deposits which eased pressure on
margins resulting from high levels of liquidity on
which the bank incurs negative interest rates.
The steady growth in lending is also expected to
lend support, however the low interest rate
environment as well as higher competition from
other local banks is a downside risk.
Consequently we are forecasting NII to grow at
lower rates in the projected periods.
Net fee and commission income – in the FY18
interim results the bank reported extraordinary
growth from commission income, with the main
drivers being fees on credit card issuing and
acquiring, fees related to the provision of credit,
and investment services which was partially
offset by lower income from forex. We expect
this trend to have continued throughout the
rest of the year, albeit we are taking a more
prudent approach in the forecasted periods
given the increased competition in this sector
from the Fintech sector.
Operating Income- We expect operating income to increase to around €257m in FY18, compared with
€240m in FY17 on an adjusted basis. The increase is expected from a stronger performance in NII and
commission income, with trading profits and gain on investment securities expected to be in line with
previous years.
1 Reference to FY 2015 and 2016 are as at 30th September of the given year, and Adjusted FY17 is a proportional adjustment given the 15-month period due to the change in year-end.
144.8
148.8146.4
157.0
14.9%
2.8%
-1.7%
7.3%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
135.0
140.0
145.0
150.0
155.0
160.0
2015 2016 2017Adj 2018F
€'m
illio
n
Financial Year
NII Growth
62.6 66.1 69.079.0
11.8%
5.6% 4.5%
14.4%
0.0%
5.0%
10.0%
15.0%
20.0%
0.0
20.0
40.0
60.0
80.0
100.0
2015 2016 2017Adj 2018F
€'m
illio
n
Financial Year
NFI Growth
Source: Financial Statements, CC workings
Source: Financial Statements, CC workings
EQUITY RESEARCH 20th December 2018
Source: Financial Statements, CC workings
Operating Profit before litigation provision –
Operating profit before the litigation provision
is expected to increase to €148m for FY18 vs
€124m in FY17 on an adjusted basis, as result of
higher operating income and a controlled
increase in operating expenses, which are
mainly IT and regulatory compliance related
expenses. We are forecasting a €20m net
impairment gain in FY18, in line with the
reported interim results, albeit we have limited
visibility into future levels of impairment
beyond the current forecasted year and have
assumed it to be flat over future business cycles.
Operating Profit – The bank recognised a €75m provision for litigation in FY18, significantly affecting the
bank’s level of operating profit, resulting in a decline to €73m from €124m in FY17 on an adjusted basis.
Share of results of equity accounted investees – This relates to the bank’s shareholding in the insurance
industry, namely MAPFRE Middlesea p.l.c. and MAPFRE MSV Life p.l.c.. For FY18, we are forecasting a
contribution of €8m from equity accounted investees, and are assuming a similar contribution in the
forecasted periods, in line with the more challenging outlook for the insurance industry.
Net Profit and EPS – We are forecasting a net
profit of €53m in FY18 compared with €96m in
FY17 on an adjusted basis, which translates to an
EPS figure of €0.099 in FY18 compared to €0.180
in FY17, which is 45.1% lower when compared
year-on-year.
Balance Sheet overview – Customer deposits are expected to be marginally lower in line with the bank’s
current trend of higher retail customer deposits counter-balanced by lower international corporate
deposits which is in line with the bank’s current de-risking exercise. The bank’s capital ratios remain
satisfactory, with a CET 1 ratio of 16.8% in 1H18, up from 16.1% as at FY17 and which also compares
favourably with other local peers.
2 Ratio as per 2017 Annual Report
Reported CET 1 ratios as per published interim results for 1H2018 %
Bank of Valletta plc 16.8
HSBC Bank (Malta) plc 14.0
Lombard Bank plc2 13.6
APS Bank Ltd 14.4
MDB Group Limited 16.6
106.1
142.2
124.4
147.5
9.6%
34.0%
-12.5%
18.6%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
2015 2016 2017Adj 2018F
€'m
illio
n
Financial Year
Operating Profit* Growth
0.150.18 0.18
0.10
15.1%
19.4%
0.9%
-45.1%-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
0.00
0.05
0.10
0.15
0.20
2015 2016 2017Adj 2018F
€
Financial Year
EPS Growth
Source: Financial Statements, CC workings
EQUITY RESEARCH 20th December 2018
Historical 1 Year Price Target
Explanation of Equity Research Ratings
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Current shareholders should consider buying on dips and selling on peaks. Newly issued research recommendations and target prices supersede previously published research.
1.25
1.75
2.25
2.75
3.25
3.75
Nov 13 Mar 14 Jul 14 Nov 14 Mar 15 Jul 15 Nov 15 Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 Jul 18 Nov 18
Pri
ce €
BOV Maltex Rebased
Reference Date Price Price Target Analyst Recommendation
BOV MV 26.07.2016 €2.00 €2.25 Simon Psaila Neutral
BOV MV 08.11.2017 €1.82 €2.09 Simon Psaila Neutral
BOV MV 19.12.2018 €1.32 €1.22 Simon Psaila Hold
Source: Bloomberg
EQUITY RESEARCH 20th December 2018
Disclaimer
This document is being issued by Calamatta Cuschieri Investment Services Ltd (“CC”) of Ewropa Business Centre, Triq Dun
Karm, Birkirkara, BKR9034, 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.
EQUITY RESEARCH 20th December 2018
Glossary
Income Statement
Net Interest Income Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying its liabilities.
Net fee and commission income
Fee income is the revenue taken in by financial institutions from account-related charges to customers. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, account research fees and more.
Operating Profit (EBIT) EBIT is an abbreviation for earnings before interest and tax.
Profitability Ratios
Earnings per Share (EPS)
Earnings per share (EPS) is the amount of earnings per outstanding share of a Group’s/Company’s share capital. It is computed by dividing net income by total shares outstanding as at statement of financial position date.
Growth in EPS (YoY) This represents the growth in Earnings per Share (EPS) when compared with previous financial year.
Dividends Ratios
Dividend Pay-out ratio The proportion of earnings that a company generates which are distributed via dividends to shareholders.
Financial Strength Ratios
CET 1 Ratio
Common Equity Tier 1 (CET1) consists mostly of common stock held by a bank or other financial institution. CET1 ratio is a measure of a bank’s capital against its assets. Because not all assets have the same risk, the assets acquired by a bank are weighted based on the credit risk and market risk that each asset presents. t is expected that all banks should meet the minimum required CET1 ratio of 4.50% by 2019.