TEXT - Fitch affirms Bank of Valletta ratings

Wed Feb 6, 2013 12:18pm EST

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(The following statement was released by the rating agency)
    Feb 6 - Fitch Ratings has affirmed Bank of Valletta's (BoV)
Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook,
Short-term IDR at 'F2', Viability Rating (VR) at 'bbb+', Support Rating at '2'
and Support Rating Floor at 'BBB'. 

RATING ACTION RATIONALE

The affirmation reflects the bank's strong domestic franchise, which has enabled
it to build up a stable and relatively cheap funding base, which in turn has 
boosted its profitability. Thanks to strong revenues, the bank was able to 
absorb higher loan impairment charges in 2012, generated by subdued credit 
conditions during the financial year. 

As loans only account for just over half of total assets, liquidity has also 
remained satisfactory, with the balance of assets largely invested in relatively
highly rated EU sovereign bonds. At end-September 2012, the bank had EUR900m of 
unencumbered securities eligible for ECB refinancing.

The ratings, however, also take into account the bank's reliance on the 
country's small and concentrated economy, which has resulted in a strong 
concentration in its loan book. Asset quality remains weak despite on-going 
improvements achieved by management but is not expected by Fitch to deteriorate 
materially further in the short to medium-term.

RATING DRIVERS AND SENSITIVITIES - IDRs, VRs and Support Rating

The bank's IDRs are driven by its intrinsic strength, or its VR. 

Fitch expects that the bank will be able to continue to report strong profits 
given its strong market shares and ability to price risk. However, Fitch notes 
that internal capital generation has been limited by a high dividend payout 
ratio, which has kept capitalisation just adequate. Although regulatory ratios 
more than meet minimum requirements, any pressure on capitalisation or 
additional concentrations would have a negative impact on the bank's VR and 
IDRs.

Asset quality deteriorated until end-September 2012, reaching a high 8.8% of 
gross loans at that date. Fitch acknowledges BoV's efforts in deleveraging its 
exposure to the real estate and construction sectors, but the bank's exposure to
these sectors remains high at nearly 14% of total lending causing half of the 
deterioration of the loan portfolio. Doubtful loans stood at a high 8.8% of 
gross loans at FY12, although Fitch understands the figure reduced slightly by 
end-Q113. Fitch positively views management's prudent provisioning policy and 
considers the loan impairment allowance coverage ratio of 42% at end-September 
2012 to be adequate. Fitch also acknowledges that high concentration in BoV's 
portfolio both by industry and by individual borrowers will remain a constant 
feature of the bank's loan book, given the small size and concentrated nature of
the Maltese economy. This is likely to act as a constraint on a future upgrade 
of the bank's VR or IDRs.

The bank's Support Rating and Support Rating Floor reflect Fitch's view that as 
the leading bank in Malta, the propensity of support by the Maltese government 
is high. The ratings are sensitive to the ability of the state to support it, as
reflected by any movement in Malta's sovereign rating ('A+'/Stable) 

The rating actions are as follows: 
Long-term foreign currency IDR: affirmed at 'BBB+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '2'

 (Caryn Trokie, New York Ratings Unit)
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