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

Mon Jan 20, 2014 9:54am EST

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(The following statement was released by the rating agency) MILAN/LONDON, January 20 (Fitch) 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 (SR) at '2' and Support Rating Floor (SRF) at 'BBB-'. KEY RATING DRIVERS – IDRS and VR BoV’s IDRs are driven by its VR, which reflects its standalone strength. The VR reflects the bank's leading domestic franchise, strong funding base, and satisfactory liquidity. Fitch views positively BOV’s ability to generate internal capital through higher than average profitability. However, the ratings also reflect high industry and single-borrower credit concentrations deriving from the small size and undiversified nature of the Maltese economy as well as the bank’s exposure towards the local government through its investments in Maltese Government Securities (MGS) and government-related entities. BoV’s relatively strong revenues, generated from the commercial business, have continued to sustain operating profitability and enabled it to comfortably cater for increasing loan impairment charges in FY13 and FY12. Underlying revenues have remained strong despite low interest rates, lower volumes of business, and despite having been enhanced during FYE13 from securities gains, largely in the form of unrealised valuation gains. The bank’s asset quality has deteriorated, with doubtful loans accounting for a relatively high 8.9% of gross loans at FY13. The deterioration has been caused primarily by exposure to the construction and real estate sectors. However, doubtful loans appear to have stabilised and are beginning to benefit from an improved provisioning policy implemented by BoV over the past two years. BoV’s deposits far exceed its loans (loan/deposit ratio at 59% at end-FYE13) and provide it with ample liquidity. Its customer deposit base is stable and there is no significant dependence on the wholesale market. In early-2013, the bank repaid EUR170m of LTROs received from the ECB in 2011. RATING SENSITIVITIES – IDRS and VR In Fitch’s opinion, upside potential for the VR is limited by the small size of the Maltese economy, which results in credit concentrations for the bank. Downside risk to the bank’s VR would arise from further significant asset quality deterioration, for example due to a weakening in one of the domestic industries to which the bank is most exposed, as well as pressure on profitability. Fitch also notes the inherent risks in the strong links between a country’s sovereign and its banks, particularly in small countries. More specifically, downside pressure to the bank’s VR could come from the impact that severe austerity measures, imposed by the European Commission to the Maltese government in response to its excessive deficit, could have on the domestic economy and ultimately on the bank, in terms of asset quality and profitability. KEY RATING DRIVERS – SR and SRF BoV's SR of '2' reflects the high likelihood of state support given the bank's size and systemic importance, with a deposit market share of over 46%. At four notches below Malta's sovereign Long-term IDR (A/Stable), the bank’s SRF reflects Fitch's view of the authorities' ability to support BOV, in case of need, as the bank’s assets represent such a large portion of domestic GDP. RATING SENSITIVITIES – SR and SRF The SRF and SR are sensitive to changes in Fitch's view of support propensity and/or ability of the government to provide support. The government’s ability to provide support is indicated by its sovereign rating and a downgrade of Malta's sovereign rating would likely result in a downward revision of BoV’s SRF. In terms of propensity and the evolving support dynamics for banks worldwide, Fitch has outlined its approach in "Fitch Outlines Approach for Addressing Support in Bank Ratings", “Bank Support: Likely Rating Paths� and “Fitch Updates on Bank Support Paths and Timing� (at www.fitchratings.com). BoV's SRF and SR would come under downward pressure if Fitch concluded that support had weakened. Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 879087 225 Fitch Italia S.p.A. Vicolo Santa Maria alla Porta, 1 Milan 20123 Secondary Analyst Manuela Banfi Associate Director +39 02 879087 202 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, ‘Global Financial Institutions Rating Criteria’, dated 15 August 2012 and ‘Evaluating Corporate Governance' dated 12 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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