equity research stock rating hold · 2019-06-18 · equity research 20th december 2018 swot...

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]

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Dec-13 Aug-15 Apr-17 Dec-18

Volume Price


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


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%


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


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.


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





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



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


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.


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.

equity research stock rating hold · 2019-06-18 · equity research 20th december 2018 swot...

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