In my previous post, I mentioned how Bank of Valletta has had its market capitalization decimated by more than half since 2017. Indeed, the banking sector has faced massive headwinds due to the low-interest-rate environment and increasing competition from challenger banks and other innovative fintech companies. In addition, many European banks never recovered fully to their pre-2008 level while BOV avoided a lot of financial haemorrhage in 2008 given it was not exposed to mortgage-backed securities. Therefore, BOV can defend itself by claiming that since 2008 the bank has actually outperformed the European Bank Index. The reality is more complex. BOV had quickly regained all its value lost after the 2008 crisis in contrast to many European banks which lagged behind. BOV’s problems seem to have unfolded in 2017 and are probably a long-time coming, and this is evident in the charts and the numbers.
Let’s do some analysis, and bring up BOV’s price chart.
Now, clearly, the price has gone down, but the problem with the price chart is that BOV made some stock splits along the way. So we need a market capitalization chart to get an accurate picture.
Clearly, this gives us a better picture of what happened. As we can see, BOV crashed in 2008 and then slowly recovered its market capitalization by 2017 when in September of that year started going down again.
As we can see with simple price comparison, BOV has outperformed the European Bank index by more than 20% since 2008. But if we make the same comparison with the last five years, then we start seeing a different picture with the European Bank index outperforming BOV.
Looking at the bank’s numbers there is also a clear break in 2018. But the numbers also show another problem. As the bank’s book equity value is growing, profits are not increasing. This means that despite the growth in bank assets, profitability is decreasing.
According to data sourced from Rizzo and Farrugia, the bank’s share price is trading at 50% below its net book value. This can mean that theoretically, saving for some accounting provisions, BOV’s stock price should be at around €1.92 if the bank is liquidated. Therefore, this means that shareholders are better off if the bank is liquidated.
Today’s BOV stock price rally may have given some relief to battered shareholders, and it may also be a sign that its legal disputes were weighing its stock price down. These legacy issues which have brewed prior to 2017 when the financial statements looked far rosier, serve as a painful reminder that the economic reality and what is put down in the financial statements can diverge in the short and medium timeframe. Bank of Valletta had three major legal issues which have all been settled: the La Vallette Multi-Manager Property Fund saga, the Falcon Fund fiasco and the costly €182.5 million settlement of the Deiulemar case. Still, given the bank’s declining performance, one would assume that the bank’s board is taking several measures to turn the bank to further profitability. BOV’s operating profit last year is around €66 million on equity of 1.126 billion, while its operating profit in 2019 was around €98 million despite mitigating measures by the Maltese government which supported the bank’s profits such as the government’s guarantees of emergency loans to Maltese businesses via the bank.
Clearly, BOV keeps hoarding shareholder capital and generating diminishing returns on such capital. Perhaps this is why, despite the strong performance, and trading at a discount of practically 50% to net book value, BOV’s CEO Rick Hunkin together with the majority of the board, has not decided to invest and put his money where his mouth is. And in fact, the CEO and some other fellow board members have been heavily compensated for work (or lack of it) despite the fact that very few of them have any skin in the game. Board member Miguel Borg who owns a miserable of 7635 shares of the bank, is paid €228,000 a year while the CEO is paid more than €400,000 a year. Hunkin has also paid €5 million to foreign consultants to upgrade the bank’s IT systems, which was perceived by shareholders and other board members as an extravagance.
From Malta’s largest financial institution one would hope that the senior management and shareholders’ interests are aligned together. The bank’s corporate governance leaves much to be desired. Maybe one good solution to prop up the bank’s profits and the stock price is to force directors, chairman and CEO to be paid in long-term stock options.