Which bank is the best investment? This is a question often asked by investors. STEPHEN MUSCAT analyses the results of Malta’s two banking giants and finds out there is no straight answer.
Bank of Valletta is more profitable than HSBC before accounting for impairment provisions. The last full year results for both banks show that the profit for BOV before impairments stood at Lm38.3 million against Lm36.6 million for HSBC.
The trend has continued in the last interim figures issued by both entities. BOV’s interim results registered Lm22.7 million against the Lm20.5 million reached by HSBC.
In the absence of other information, the answers as to why this difference lie in the published figures.
The total assets at BOV stood at Lm2.2 billion, while those of HSBC reached Lm1.7 billion. BOV has two major investments that are giving it a good return: its shareholding in Middle Sea Insurance plc and its 50 per cent joint-venture in Middle Sea Valletta Life Insurance Co Ltd. HSBC has a relatively comparable minor activity through its HSBC Life Assurance entity.
BOV’s strategy to team up with another specialised company is bearing fruit. Valletta Fund Management as the BOV subsidiary for management of funds is also registering better results than HSBC fund management.
Another interesting issue is what both banks did with regards to write-backs and provisions. Whereas, HSBC took a reversal from provisions of Lm3.4 million in 2003 and Lm4 million in 2004, improving its overall profitability, BOV provided for Lm11.5 million to Lm13.5 million over the last three years and so reduced its earnings.
BOV’s last interim registered a drop of 41 per cent in impairments. If this bank continues with a trend of lowering its provisions and reversing some of the impairments on its loans then its results will continue to improve upon those registered lately.
And if this happens, will BOV’s share price outperform that of HSBC?
Currently, HSBC’s market capitalization stands at Lm639 million for 292 million shares of 12c5 each. On the other hand, BOV has a market capitalisation of Lm438 million on 111million shares of 25c each. The price earnings ratio of both banks is pretty close at 26.5 times for HSBC against BOV’s 24.5 times.
The local banks have a high price earnings ratio compared to what banks in the UK trade at. On the London Stock Exchange, HSBC trades at 13.4 times, the Royal Bank of Scotland at 10.2 times and HBOS at 11.8 times. Continental banks like BNP and Deutsche Bank trade at multiples of 17 times. This goes to show that each market has its own peculiarities. But will the forward price earnings ratio multiples change in the future?
Based on the interim results and if Bank of Valletta reduces any of its impairments, its forward price earning ratio will improve tremendously and surpass that of HSBC.
HSBC’s latest interim results showed that it succeeded to boost profits through increased income, lowering its expenditure ratio and without taking any impairment write backs. The interim results continue to show that its net interest margin stood at 60.2 per cent against BOV’s interim of 50.5 per cent.
This may be interpreted as a direct result of the loans to deposit ratio, which HSBC has at 0.76 times while BOV lags behind at 0.6 times.
Moreover, HSBC’s advances exceed Lm1.08 billion while BOV has Lm936 million. On the other hand BOV is entrusted with more customer deposits at Lm1.56 billion against the Lm1.4 billion at HSBC.
HSBC has a better profitability ratio at 20.4 per cent as annualised return on equity, while BOV has 18.2 per cent. This is also reflected in the annualised return on assets wherein HSBC registered 2.5 per cent against 1.8 per cent by BOV. On the other hand, BOV comes out as the most efficient bank with a cost to income ratio of 41.1 per cent while HSBC has a ratio of 45.5 per cent.
Why is HSBC seen as a better investment than BOV even though both have a similar yield of just below 5 per cent?
The investor is aware that HSBC has sustained a constant dividend payout of 75 per cent, while BOV is less generous at 50 per cent. Also, HSBC has paid special dividends since it had excess reserves and liquidity. In fact its capital adequacy ratio has gone down from 15 per cent to 11 per cent while BOV’s ratio still stands at 15.4 per cent.
If BOV has improved its operations and sees it appropriate to reverse some of its provisions, revise its dividend payout policy and earns more from the non traditional banking activities, we expect it to become the darling of local investors and see its share price move north. The predominantly Maltese-owned bank still has a lot of potential to unleash.
All figures quoted are from the published results. The year end of HSBC is December and that of Bank of Valletta is September.