HSBC Bank Malta p l c : Interim Financial Results

COMPANY ANNOUNCEMENT

The following is a Company Announcement by HSBC Bank Malta p.l.c. in compliance with the Capital Markets Rules issued by the Malta Financial Services Authority.

Quote:

During a meeting held on 1 August 2023, the Board of Directors of HSBC Bank Malta p.l.c. approved the attached Group and Bank interim condensed financial statements for the six-month financial period ending 30 June 2023.

1 August 2023

2023 Interim Results - Highlights

The financial performance in the first half of the year reflected the value of the bank's large and diversified customer base, rising interest rates, strong risk management and credit quality of the loan book, improved performance of the insurance subsidiary and cost discipline, while still investing in the future of the business.

In view of the strong performance in H1 2023, the directors are recommending an interim gross cash dividend of 6.0 cents per share. The proposed interim gross dividend for 2023 is higher than the full year gross dividend of 5.6 cents paid for 2022. This represents the highest interim dividend paid by HSBC Bank Malta in seven years.

On 1 January 2023, HSBC Malta adopted IFRS 17 'Insurance Contracts'. As required by the standard, the bank applied the requirements retrospectively with comparative data previously published under IFRS 4 'Insurance Contracts' restated from the 1 January 2022 transition date.

Financial performance (vs same period in 2022 restated for IFRS 17 'Insurance Contracts')

• Profit before tax increased by 238% or €41.8m to €59.3m, mainly driven by higher income on the placement of excess liquidity, lower credit recovery in view of a significant recovery reported in H1 2022, better performance reported by the insurance subsidiary and lower reported costs.
• Revenue increased by €43.5m or 69% driven by rising interest rates reflecting increased value from our large and diversified customer base and greater customer transaction volumes.
• A release of €2.6m was reported on expected credit losses ('ECL') in view of better economic projections and curing of non-performing loans on which moratoria measures were extended during the Covid period.
• Costs are €7.5m lower than the same period in 2022. This decrease was largely driven by higher regulatory fees booked in H1 2022 as a result of a change in the legislation regulating cash contributions towards the Depositor Compensation Scheme and an insurance refund received in 2023. Nevertheless, we continue to invest in the future of the business.
• During the first six months, loans to customers and deposits were largely at the same levels reported as at 31 December 2022.
• Profit attributable to shareholders of €38.5m for the six months ended 30 June 2023 resulted in earnings per share of 10.7 cents which compared favourably with 3.2 cents in the same period in 2022.
• Recommended an interim gross dividend of 6.0 cents per share.
• Return on equity of 16.2% for the six months ended 30 June 2023 compared favourably with 5.1% for the same period in 2022.
• Cost efficiency ratio ('CER') improved to 46.6% from 90.9% in the same period last year.
• The bank maintained a strong liquidity and capital position as at 30 June 2023.

	Unquote
Paula Mamo LL.D.
Company Secretary
This Company Announcement is issued by	Registered in Malta number C3177
HSBC Bank Malta p.l.c.	Registered office: 116, Archbishop, Valletta VLT 1444, Malta
Company Secretary Tel: [phone]	HSBC Bank Malta p.l.c authorised by the Malta Financial Services Authority
	to provide investment services under the Investment Services Act 1994.
	HSBC Bank Malta p.l.c. is enrolled as a tied insurance intermediary for HSBC Life
	Assurance (Malta) Ltd under the Insurance Distribution Act (Cap. 487 of the
	Laws of Malta)
	HSBC Bank Malta p.l.c. Interim Report 2023	1

Directors' Report

Financial performance

Profit before tax for the six months ended 30 June 2023 was €59.3m, an increase of €41.8m from the same period in 2022, following IFRS 17 restatements. Higher profits reflect the value of the bank's large and diversified customer base, higher interest rates, better performance by the insurance subsidiary and lower costs. These positive variances were partially offset by lower credit recoveries due to a significant recovery on a commercial non-performing loan reported in H1 2022.

Net interest income ('NII') increased by €43.4m to €89.7m compared with €46.2m in the same period in 2022. The increase in NII reported by the global businesses was due to interest rate rises. The European Central Bank increased the interest rate on their overnight deposit facility from -0.5% on 26 July 2022 rising to 3.5% as from 21 June 2023 and therefore the bank's surplus liquidity position was no longer being placed at negative rates.

Non-funds income (fees and commissions and trading income) decreased by €2.3m. This was largely driven by the removal of the high balance fee in July 2022, which was a customer-driven decision taken by the bank in view of the rising interest rate environment. On an underlying basis the bank sustained good progress in the generation of fee as well as foreign exchange income by utilising its customer service transactional capability.

Operating expenses decreased by €7.5m to €49.5m, compared with €57.1m in the same period in 2022. This was mainly due to higher regulatory fees reported in H1 2022 as a change in the Depositor Compensation Scheme legislation was enacted requiring banks to anticipate the cash contributions payable in 2023 and 2024. In 2023, we also received a refund from insurance in relation to operational losses reported in prior years. On an underlying basis, expenses remained relatively flat as cost saving initiatives and cost discipline mitigated increased investment and inflation.

During the six months, we reported a release of expected credit losses ('ECL') of €2.6m, compared to a release of €11.8m reported in the same period last year. The release in 2023 considered more favourable economic projections while 2022 projections reflected economic uncertainty mainly due to the Russia - Ukraine war and inflationary pressures. In 2023 we also experienced the curing of non- performing loans on which moratoria measures were extended during the Covid period to help customers navigate through such difficult times. In H1 2022, the bank had reported a significant recovery on a commercial non-performing loan which was largely provided for in prior years.

The effective tax rate was 35% in H1 2023 compared to 34% in 2022. This translated into an interim tax expense of €20.8m.

HSBC Life Assurance (Malta) Ltd reported a profit of €1.6m compared to a loss of €3.2m reported in the same period last year, as restated in accordance with IFRS 17. In H1 2023, we have seen lower volatility in the market compared to the same period last year. The volatility in market prices negatively impacted the insurance subsidiary results in 2022.

Financial Position and Capital

Net loans and advances to customers amounted to €3,147m, a marginal decrease of €28m or 0.9% when compared to 31 December 2022. The bank continued to improve asset quality by reducing non- performing loans by 10%. It also retained a prudent credit policy to ensure long term sustainability of its service proposition while also delivering value for its shareholders.

The bank's investment portfolio increased by €97m to €1,101m and was composed of highly rated securities and continued to be conservatively positioned with the lowest investment grade of A-.

Customer accounts were €5,930m as at 30 June 2023, a marginal decrease of €41m or 0.7% compared to 31 December 2022. The bank had a satisfactory advances-to-deposits ratio of 53%, and its liquidity ratios were well in excess of regulatory requirements.

The bank's common equity tier 1 capital was 17.8% as at 30 June 2023, compared to 18.5% at the end of 2022. The total capital ratio decreased to 20.6% compared to 21.3% at 31 December 2022. The deterioration in the capital ratios was driven by the build-up of the capital requirements for non-performing loans. The regulations require us to build-up capital reserves for long outstanding non-performing exposures over the years. It is to be noted that the June 2023 ratios exclude the unverified profits for the period under review. The bank maintained a strong capital base and is fully compliant with the regulatory capital requirements.

The bank is determined to maintain a strong capital base, at the same time recognising the importance of dividends to its shareholders. The Board has thus recommended an interim gross dividend of 6.0 cents per share which amounts to an interim gross dividend of €21.6m. The interim dividend will be paid on 15 September 2023 to shareholders who are on the bank's register of shareholders on 14 August 2023.

Geoffrey Fichte, the new Chief Executive Officer of HSBC Malta, said:

"The turnaround strategy of HSBC Malta is off to a strong start with first half results showing higher profits before tax as a result of an increase in revenue, improved credit quality and effective cost management. This positive performance was achieved thanks to the support of our customers and colleagues, while we continue to invest in our business to meet the dynamic and evolving needs of customers.

By generating greater value for shareholders, we are recommending an interim gross dividend of 6.0 cents per share which is higher than the full dividend paid in 2022 and represents our highest interim dividend in seven years.

We are confident in the local economy, and continue to focus on growing our business, while investing in the future. Our main priority is improving customer services through better digital channels for customers while not losing the personalised service of our team. We leverage on our global strength being the leading international banking brand in Malta.

Our major investment in a new headquarters for Malta is now over 60% complete, representing a €30m investment. We are excited to move into this state-of-the-art green building in the near future. The HSBC Hub is purposely built for the long-term success of our customers and colleagues. Other major investments in the future of our business include upgrading and replacing 100% of our ATM fleet, green loans, digital and future skills training.

Sustainability represents the biggest transformation in the banking sector. We are already taking action to reduce our carbon footprint but recognise that our biggest impact comes from working with customers to help them transition to a net zero economy and become more sustainable through our green loan offers.

I would like to take this opportunity to thank our customers and colleagues for their support. HSBC is positive on Malta and we have identified many opportunities to grow our business here."

• HSBC Bank Malta p.l.c. Interim Report 2023

Financial summary

Income Statements

		Group		Bank
			Half-year to1
		30 Jun	30 Jun	30 Jun	30 Jun
		2023	2022	2023	2022
		€000	€000	€000	€000
Interest and similar income
-	on loans and advances to banks and customers and other financial assets	90,598	50,266	90,598	50,266
-	on debt and other fixed income instruments	6,856	1,003	6,856	1,003
Interest expense	(7,777)	(5,031)	(7,777)	(5,031)
Net interest income	89,677	46,238	89,677	46,238
Fee income	12,045	14,302	10,053	12,166
Fee expense	(1,305)	(1,607)	(1,122)	(1,325)
Net fee income	10,740	12,695	8,931	10,841
Net trading income	3,453	3,757	3,453	3,757
Net income/(expense) from financial instruments of insurance operations measured at fair value through profit	15,868	(64,070)	-	-
or loss
Dividend income from subsidiaries	-	-	769	1,308
Insurance finance (expense)/income	(15,300)	60,020	-	-
Insurance service result	2,048	2,870	-	-
- insurance revenue	11,688	8,974	-	-
-	insurance service expense	(9,640)	(6,104)	-	-
Other operating (expense)/income	(216)	1,247	(151)	1,246
Total operating income	106,270	62,757	102,679	63,390
Net operating income before change in expected credit losses and other credit impairment charges	106,270	62,757	102,679	63,390
Change in expected credit losses and other credit impairment charges	2,554	11,833	2,554	11,833
Net operating income	108,824	74,590	105,233	75,223
Employee compensation and benefits	(19,118)	(19,421)	(18,569)	(18,440)
General and administrative expenses	(26,723)	(33,039)	(25,073)	(30,799)
Depreciation of property, plant and equipment and right-of-use assets	(1,298)	(2,295)	(1,298)	(2,294)
Amortisation and impairment of intangible assets	(2,409)	(2,310)	(2,377)	(2,284)
Total operating expenses	(49,548)	(57,065)	(47,317)	(53,817)
Profit before tax	59,276	17,525	57,916	21,406
Tax charge	(20,752)	(5,918)	(20,280)	(7,296)
Profit for the period	38,524	11,607	37,636	14,110
Earnings per share	€0.11	€0.03

• From 1 January 2023, the local group adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Statements of comprehensive income

		Group		Bank
				Half-year to1
		30 Jun	30 Jun	30 Jun	30 Jun
		2023		2022	2023		2022
		€000	€000	€000	€000
Profit for the period	38,524		11,607	37,636		14,110
Other comprehensive income
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments measured at fair value through other comprehensive income:	3,565		(20,593)	3,565		(20,593)
-	fair value gains/(losses)	5,484		(31,682)	5,484		(31,682)
- income taxes	(1,919)		11,089	(1,919)		11,089
Items that will not be reclassified subsequently to profit or loss:
Equity instruments designated at fair value through other comprehensive income:	4		2	4		2
-	fair value gains	6		3	6		3
-	income taxes	(2)		(1)	(2)		(1)
Other comprehensive income for the period, net of tax	3,569		(20,591)	3,569		(20,591)
Total comprehensive income for the period	42,093		(8,984)	41,205		(6,481)

• From 1 January 2023, the local group adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

HSBC Bank Malta p.l.c. Interim Report 2023

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Financial summary

Statements of Financial Position

		At1
	Group		Bank
	30 Jun	31 Dec	30 Jun	31 Dec
	2023	2022	2023	2022
	€000	€000	€000	€000
Assets
Balances with Central Bank of Malta, Treasury Bills and cash	1,565,609	1,584,861	1,565,609	1,584,861
Items in the course of collection from other banks	7,991	6,921	7,991	6,921
Financial assets mandatorily measured at fair value through profit or loss	683,938	660,282	-	-
Derivatives	24,889	25,745	24,889	25,745
Loans and advances to banks	698,509	732,493	696,664	726,217
Loans and advances to customers	3,147,133	3,175,167	3,147,133	3,175,167
Financial investments	1,101,387	1,004,770	1,101,385	1,004,768
Prepayments and accrued income	24,143	20,126	20,969	17,535
Current tax assets	2,207	3,496	-	1,363
Reinsurance assets	15,386	12,488	-	-
Other non-current assets held for sale	4,723	5,173	4,723	5,173
Investment in subsidiaries	-	-	30,859	30,859
Right-of-use assets	2,182	2,459	2,182	2,459
Property, plant and equipment	45,201	44,627	45,198	44,623
Intangible assets	20,037	19,169	19,532	18,604
Deferred tax assets	36,283	38,555	33,145	35,620
Other assets	10,741	10,523	12,201	9,965
Total assets	7,390,359	7,346,855	6,712,480	6,689,880
Liabilities
Deposits by banks	6,317	2,861	6,317	2,861
Customer accounts	5,930,117	5,970,958	5,958,069	6,010,392
Items in the course of transmission to other banks	19,890	27,397	19,890	27,397
Derivatives	8,419	10,252	8,419	10,252
Accruals and deferred income	30,700	27,300	26,424	22,279
Current tax liabilities	19,732	2,104	19,732	2,104
Liabilities under investment contracts	156,662	162,676	-	-
Liabilities under insurance contracts	514,806	518,433	-	-
Provisions	19,169	20,080	18,039	18,830
Deferred tax liabilities	4,126	3,529	3,557	3,569
Borrowings from a group undertaking	90,000	60,000	90,000	60,000
Subordinated liabilities	62,000	62,000	62,000	62,000
Other liabilities	35,910	15,642	12,904	11,067
Total liabilities	6,897,848	6,883,232	6,225,351	6,230,751
Equity
Called up share capital	108,092	108,092	108,092	108,092
Revaluation reserve	3,633	64	3,633	64
Retained earnings	380,786	355,467	375,404	350,973
Total equity	492,511	463,623	487,129	459,129
Total liabilities and equity	7,390,359	7,346,855	6,712,480	6,689,880
Memorandum items
Contingent liabilities	137,669	134,126	137,619	134,126
Commitments	925,477	877,820	925,477	877,820

• From 1 January 2023, the local group adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

The financial statements were approved and authorised for issue by the Board of Directors on 1 August 2023 and signed on its behalf by:

John Bonello	Geoffrey Fichte
Chairman	Chief Executive Officer

• HSBC Bank Malta p.l.c. Interim Report 2023

Statements of changes in equity

		Group
	Share	Revaluation	Retained	Total
	capital	reserve	earnings	equity
	€000	€000	€000	€000
At 1 Jan 2023	108,092	64	355,467	463,623
Profit for the period	-	-	38,524	38,524
Other comprehensive income (net of tax)
Financial investments measured at fair value through other comprehensive income:
- fair value gains	-	3,569	-	3,569
Total other comprehensive income	-	3,569	-	3,569
Total comprehensive income for the period	-	3,569	38,524	42,093
Transactions with owners, recognised directly in equity (net of tax)
Contributions by and distributions to owners:
- share-based payment arrangements	-	-	(66)	(66)
- dividends	-	-	(13,139)	(13,139)
Total contributions by and distributions to owners	-	-	(13,205)	(13,205)
At 30 Jun 2023	108,092	3,633	380,786	492,511
At 31 Dec 2021 (IFRS4)	108,092	24,330	357,315	489,737
Impact on transition to IFRS17	-	-	(26,648)	(26,648)
At 1 Jan 2022	108,092	24,330	330,667	463,089
Profit for the period	-	-	11,607	11,607
Other comprehensive income (net of tax)
Financial investments measured at fair value through other comprehensive income:
- fair value losses	-	(20,591)	-	(20,591)
Total other comprehensive income	-	(20,591)	-	(20,591)
Total comprehensive income for the period	-	(20,591)	11,607	(8,984)
Other movements (net of tax)
Properties:
- transfer of revaluation surplus on disposal of property to retained earnings	-	(1,256)	1,256	-
Transactions with owners, recognised directly in equity
Contributions by and distributions to owners:
- share-based payment arrangements	-	-	(8)	(8)
- dividends	-	-	(8,010)	(8,010)
Total contributions by and distributions to owners	-	-	(8,018)	(8,018)
At 30 Jun 2022	108,092	2,483	335,512	446,087

HSBC Bank Malta p.l.c. Interim Report 2023

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