OREANDA-NEWS. Fitch Ratings has affirmed Bank of Valletta's (BoV) Long-term Issuer Default Rating (IDR) at 'BBB+', Viability Rating (VR) at 'bbb+', Short-term IDR at 'F2', Support Rating (SR) at '5' and Support Rating Floor (SRF) at 'No Floor'. The Outlook on the Long-term IDR is Stable.

KEY RATING DRIVERS
IDRS and VR
BoV's IDRs are driven by the bank's standalone credit profile as reflected by its VR. The latter reflects its robust customer funding and liquidity, originating from its leading domestic franchise, and healthy operating profitability, which allows internal capital generation to maintain sound capitalisation. The VR also reflects the high level of concentration in the loan book by single name and sector, particularly through exposure to the Maltese government through securities and related entities.

BoV's deposit base further increased in FY15 improving the group's loan/deposit ratio to a very comfortable 50%, while unencumbered liquid assets grew to a high 17% of total assets. The bank invested this ample liquidity to sustain the growth of the loan book and to enlarge its securities portfolio by diversifying into investment-grade EU bank securities, thus moderately reducing portfolio concentration towards Maltese government bonds.

Despite a stable impaired loans ratio and sound coverage levels, Fitch views the bank's asset quality vulnerable to concentration risk, with the 10 largest counterparties accounting for a high 200% of Fitch Core Capital, half of which is towards government related-entities. Impaired loans accounted for a moderate 6.7% of gross loans at end-FY15 and the coverage against impaired loans was adequate at 84%, which compares well with other rated banks in southern European countries.

Capitalisation is sound with a Fitch Core Capital ratio of 12.4% at end-FY15, and capital encumbrance is low with unreserved impaired loans accounting for a modest 8% of Fitch Core Capital. In late 2015, BoV issued EUR75m of subordinated instruments for the purpose of creating secondary capital buffers.

BoV's profitability benefits from strong core revenues generated from its commercial business activities, good operating efficiency, and contained loan impairment charges.

SUPPORT RATING AND SUPPORT RATING FLOOR
BoV's SR of '5' and SRF of 'No Floor' reflect Fitch's view that senior creditors of the bank can no longer rely on receiving full extraordinary support from the sovereign in the event that the bank becomes non-viable.

In Fitch view, the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. BRRD has been effective in EU member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016. BRRD was transposed into Maltese legislation in July 2015, with full implementation from 1 January 2016.

RATING SENSITIVITIES
IDRS and VR
BoV's IDRs are sensitive to changes in its VR. Upside VR potential is limited due to the structurally significant concentration risk in the loan book, which Fitch does not expect to decrease materially.

The VR could be downgraded if asset quality significantly deteriorated, for example from material a weakening of the sectors or counterparties to which BoV is highly exposed, potentially putting capital at risk. The VR could also be downgraded if the bank reported losses that materially affected capitalisation, which is not Fitch's expectation.