ECB’s interest rate cuts ‘will not dent’ BOV’s long-term profitability, says Chairman Gordon Cordina

Chairman Gordon Cordina has stated that presently, changes in revenue due to the European Central Bank’s (ECB) interest rate cuts are “easily manageable” and hence are not expected to have a significant effect on Bank of Valletta plc’s (BOV) long-term profitability.

His comments came after BOV released its interim results for the six months until 30th June 2024 (1H 2024), during which it reported a 40.9 per cent surge in profitability to €148.2 million, driven by strong growth in interest income, and to a lesser extent, from net fee and commission streams. Operating costs decreased by €2.3 million to €90.7 million, with the costs of human capital being the main driver, followed by technology-related expenses.

Its cost-to-income ratio reduced sharply from 47.9 per cent in June 2023 to 40.7 per cent in June 2024.

Cash and short-term funds decreased by €1.1 million when compared to 31st December 2023, yet investments in the treasury portfolio increased by €723.2 million. Loans and advances to customers amounted to €6.6 billion at the end of 1H 2024, resulting in a net increase of €374 million.

Dr Cordina stated that this strong financial performance is “all the more significant within the context of a weak international economic scenario clouded with uncertainty.”

In his remarks, Dr Cordina paid particular attention to the ECB’s decision in June to reduce three key interest rates by 25 basis points, noting that this was one of the highlights of the reporting period.

Last month, the Governing Council of the ECB decided to lower the interest rate on the main refinancing operations, marginal lending facility and the deposit facility to 4.25 per cent, 4.5 per cent and 3.75 per cent respectively, with effect from 12th June 2024.

This cut, the first in the main refinancing operations rate and the marginal lending rate since March 2016, and the first cut in the deposit rate since September 2019, represents a move to boost the EU’s economy which has stagnated over the last two years. This stagnation was prompted by the high cost to borrow, stifling investment.

Dr Cordina stated that this move represents the ECB’s decision to head to a different phase of its monetary policy cycle.

“BOV shares current market expectations and anticipates another one or two similar cuts by the end of 2024, and further easing during 2025. The declining path is unlikely to be linear, with periods where interest rates could stabilise before easing further,” he said.

He noted that the normalisation of interest rate conditions “is not expected to reverse in full, the rapid and vigorous tightening implemented in 2022 and 2023.”

Dr Cordina commented that in the medium term, interest rates are likely to remain higher than in pre-COVID-19 pandemic years, when they were “exceptionally low and even negative for some time, a factor which had impacted BOV rather negatively in the past.

“This interest rate outlook has shaped the baseline guiding BOV’s active balance sheet management over the past months, with the objective to render the bottom line less sensitive to falling interest rates,” he continued.

“We estimate that at present, for every 100-basis point reduction in the deposit facility rate of the ECB, BOV’s revenues could decline by €20.8 million, a figure which is easily manageable, and will thus not dent our long-term profitability,” Dr Cordina remarked.

He also pointed towards the easing of inflationary pressures in 1H 2024 as another important development, saying that this “should preserve confidence among the bank’s clients, stimulating further demand” for its products.

He added that projections indicate that the inflation shock “has practically abated, in the absence of a wage-price spiral.” “In the case of Malta, this is further conditional on unchanged stance by the Maltese Government in relation to the energy subsidies in place.”

Returning to the bank’s performance, Dr Cordina said that it reinforces BOV’s “aspirations to be leaders and innovators in the financial sector and a catalyst for positive change.”