(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
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)