HSBC Bank Malta p.l.c. (the ‘bank’) delivered a profit before tax of €52m for the year ended 31 December 2014. This was a decline of €38m or 42% on the prior year.

Net operating profits before loan impairment provisions and excluding significant notable items (available-for-sale investment sales, ECB Comprehensive Assessment costs and lower insurance technical provision releases) were 12% down on the prior year.

The key contributors to the decline in profitability were a €19m increase in loan impairment charges resulting principally from lower valuations on legacy commercial properties, a €14m decrease in income associated with the challenging operating environment and lower non-recurring revenue items, and a €5m rise in costs primarily due to regulatory fees and additional compliance investment.

All three main business lines, Retail Banking and Wealth Management, Commercial Banking and Global Banking and Markets, were profitable during the year under review.

Mark Watkinson, Director and Chief Executive Officer at HSBC Bank Malta p.l.c., said: “2014 was a year of material challenges on a number of fronts. Operating conditions and a changing regulatory environment have each had their own significant impact. Nevertheless the underlying performance of the key business lines has shown resilience and I am confident that the prudent approach that we have taken will serve us well. HSBC has an excellent franchise in Malta and the hard work and dedication of the bank’s team during the past year needs to be recognised. Despite the difficult operating conditions, we continue to invest in the bank and to build a long-term sustainable business that will serve the best interest of our customers, our staff, our shareholders and the community in which we work.”

Net interest income reduced by 4% to €120m compared with €125m in 2013. The fall in interest income was mainly impacted by: the impact of a tightening in interest margin earned on the loan portfolio; lower average lending balances associated with muted loan growth and higher loan repayments; and a decline in interest earned on investments as the proceeds of higher yielding maturing bonds were reinvested at lower rates. This was partially mitigated by a fall in the cost of funds as customers moved to shorter-dated deposits and deposit rates declined.

Net fee and commission income of €28m was broadly in line with 2013. The fee and commission income performance was generally positive but the overall result was impacted by the winding down of the fund administration and custody businesses in early 2014.

HSBC Life Assurance (Malta) Limited reported a profit before tax of €9m compared with €13m in 2013. While new insurance business was 10% higher than the prior year, the result in 2014 was negatively impacted by downward yield curve movements and lower technical reserve releases.

A net gain of €2m was reported as a result of a repositioning of the investment portfolio compared to €4m in 2013.

Operating expenses of €98m were €5m or 6% higher compared with the previous year. 2014 expenses were impacted by additional compliance and regulatory costs of €5m associated with the build-up of the Compliance function, the ECB Comprehensive Assessment, higher regulatory fees and an increase of €1m in early voluntary retirement costs. Excluding these incremental costs, expenses were held flat to 2013 despite annual increase in staff salaries and the impact of inflation. Continued investment to improve technology was funded by savings from simplification and re-engineering of processes.

The cost efficiency ratio, that compares operating expenses to net operating income, was 57% compared with 50% in 2013.

Loan impairment charges were €23m compared with €3m in 2013. In the current challenging environment the Board adopted a cautious approach to existing legacy non-performing commercial loans. This was particularly the case where lower valuations were received during the year. Overall, however, asset quality remains good with a high percentage of tangible security held against the bank’s loan portfolio.

Gross new lending to customers increased by 19% to €710m. However, net loans and advances to customers of €3,273m were in line with 2013. In the current low interest rate environment there has been a heightened tendency for customers, both commercial and retail, to use excess funds to repay loans early. The mortgage book, the bank’s largest lending portfolio, continued to show positive net growth.

Deposits were up to €4,867m, an increase of 8% from 31 December 2013 despite continued competitive pressures.

The bank’s available-for-sale investment portfolio remains well diversified and conservatively positioned. All investments are rated BBB+ or better.

The bank’s liquidity position is strong with an advances-to-deposit ratio of 67% compared with 73% at 31 December 2013.

During 2014, the bank continued to increase its tier 1 capital ratio to 10.6% on a CRDIV basis, up from 9.9% (Basel 2.5 basis previously reported: 9.4%).

In December 2013, the Malta Financial Services Authority’s (‘MFSA’) revised Banking Rule 09 (BR09), with the ultimate aim of increasing the level of bank reserves. BR09 obliges all banks in Malta to hold a Reserve for General Banking Risk, calculated as a percentage of non-performing loans net of individual impairment provisions. This reserve is required to be funded from planned dividends. Under the three year transitory rules, the bank has set aside €7m in 2013-2014 (85% of the currently estimated reserve). The remaining 15% will be set aside in 2015. 

During 2014, the bank participated in the European Central Bank (‘ECB’) Comprehensive Assessment that included an Asset Quality Review (‘AQR’) and a stress test. These were undertaken by ECB in cooperation with MFSA. The AQR was carried out first, followed by the stress test. For the AQR the minimum capital benchmark was set at 8% common equity tier 1 capital (‘CET1’). The stress test was based on the adjusted capital base post-AQR at 31 December 2013 and the stress test benchmark was set at a CET1 of 5.5%. The bank successfully passed the Comprehensive Assessment and its capital ratios were well in excess of the ECB required thresholds.

The Board is recommending for the approval of the Annual General Meeting a final gross dividend of 2.6 cents per share (1.7 cents net of tax). This will be paid on 24 April 2015 to shareholders who are on the bank’s register of shareholders on 23 March 2015. The Board is also recommending a bonus issue of one share for every nine shares held by shareholders on the bank’s share register at the close of business on 29 April 2015 and shares will be available for trading on 30 April 2015. As a result of the bonus issue, reserves of €11m will be capitalised and share capital will increase from €97m to €108m.