Bank of Valletta p.l.c.

Annual Report & Financial Statements

2 017
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 i

Contents and General Information

CONTENTS

Board of Directors and Group Company Secretary ii

Chairman’s Statement iv
Chief Executive Officer’s Review viii
Corporate Social Responsibility xvi

FINANCIAL STATEMENTS
BOARD OF DIRECTORS
Directors’ report 1
Taddeo Scerri (Chairman) Capital & risk management report 7
John Cassar White (up to 16 December 2016) Corporate governance statement of compliance 32
Stephen Agius Remuneration report 44
Alan Attard Nominations report 47
Paul V Azzopardi Independent auditors' report - corporate governance 48
Miguel Borg Statements of profit or loss 49
James Grech Statements of profit or loss and other
Alfred Lupi comprehensive income 50
Mario Mallia Statements of financial position 51
Anita Mangion Statements of changes in equity 52
Antonio Piras Statements of cash flows 54
Joseph M Zrinzo Notes to the financial statements 55
Barbara Helga Ellul (up to 16 December 2016) Independent auditors’ report to the shareholders
Mario Grima (up to 16 December 2016) of Bank of Valletta p.l.c. 127
Gabriele Simonetti (up to 16 December 2016) The group’s five year summary 133
Group financial highlights in US dollars 136

COMPANY SECRETARY

Ruth Spiteri Longhurst

MANAGEMENT BOARD Bank of Valletta p.l.c.

BOV Centre
Mario Mallia (Chief Executive Officer) Triq il-Kanun
Ernest John Agius (Chief Operations Officer) Santa Venera SVR 9030
Joseph Agius (Chief Technology Officer) Malta
Miguel Borg (Chief Risk Officer)
Kenneth Farrugia (Chief Business Development Officer – Tel: (+356) 2275 3000
Investments) Fax: (+356) 2275 3711
Albert Frendo (Chief Business Development Officer – Credit) www.bov.com
Elvia George (Chief Finance Officer) E-mail: [email protected]

Rudolph Gatt (Secretary) Bank of Valletta p.l.c.

Registered Office:
58, Triq San Żakkarija
AUDITORS Il-Belt Valletta VLT 1130
Malta
KPMG Registration Number C 2833

Bank of Valletta p.l.c. is a public limited company licensed

LEGAL ADVISORS to conduct Investment Services business by the Malta
Financial Services Authority.
Camilleri Preziosi
Bank of Valletta p.l.c. is authorised to act as a trustee by the
Malta Financial Services Authority.
NOTICE OF MEETING
Bank of Valletta p.l.c. is an enrolled tied insurance intermediary
The Annual General Meeting of the Bank will be held at the of MAPFRE MSV Life p.l.c. (MMSV). MMSV is authorised and
Grand Master Suite, Hilton Malta, St Julians, on Thursday regulated by the Malta Financial Services Authority to carry on
10 May 2018 at 10.00 a.m. long term business under the Insurance Business Act 1998.
 Bank of Valletta p.l.c.
ii Annual Report & Financial Statements 2017

Board of Directors Paul V Azzopardi

Director
and Group Company C&CP RM NED *

Secretary Appointed to the Board in December 2016. Mr Azzopardi is currently

the Chairman of the Compliance and Crime Prevention Committee,
and Deputy Chairman of the Risk Management Committee. He set
up and managed Azzopardi Financial Services between 1989 and
2006 and subsequently worked in investments in Ontario, Canada,
as director and portfolio manager, managing private clients’ portfolios
and investment funds. Mr Azzopardi was sponsoring and corporate
Taddeo Scerri stockbroker of the Bank from its initial listing on the Malta Stock
Exchange in 1992 until 2006, and also served in the same roles
Chairman for the funds of BOV Asset Management Limited and several other
companies. Mr Azzopardi is the author of “Behavioural Technical
C NGC R NED * Analysis” and two other books on investments, and contributes
regularly to the press. He lectured at the University of Malta and the
Taddeo Scerri was appointed Chairman of the Bank in December School of Continuing Studies, University of Toronto. Mr Azzopardi
2016. Previously, he was a director of the Bank following his holds a first degree in accountancy from the University of Malta,
appointment in April 2013. Mr Scerri currently chairs the Board’s an MBA from the University of British Columbia, is a Fellow of the
Nominations and Governance Committee, the Remuneration Malta Institute of Accountants and a Certified Public Accountant.
Committee and the Credit Committee. He is a qualified Mr Azzopardi is also Director of BOV Asset Management Limited
accountant. Mr Scerri was the managing partner of RSM Malta (BOVAM) and BOV Fund Services Limited (BOVFS).
until his retirement in 2015. He was the Chairman of the local
UEFA Clubs Licencing Board and was also a member of the Malta
Football Association’s Finance Committee.
Miguel Borg
Director
Stephen Agius ED

Director Appointed to the Board in July 2017. Miguel Borg joined the Bank
in November 2007. Mr Borg was appointed Chief Risk Officer of
A NGC NED * the Group in November 2014 and is a member of the Management
Board. In his role as Chief Risk Officer, he is responsible for
Appointed to the Board in December 2016. Stephen Agius overseeing the measurement and management of the Group’s
is currently a member of the Nominations and Governance financial and non-financial risk. He is responsible for maintaining
Committee and recently he was appointed also as a member the Bank’s relationship with regulators and supervisors. Risk
of the Audit Committee. Formerly he was a member of the Risk management, compliance, anti-financial crime, legal services
Management Committee. Mr Agius works as a Chief of Information and credit risk sanctioning departments report to the Chief Risk
and Development with the national telecom regulatory authority. Officer. Mr Borg is a Director of BOVAM and chairs the Risk
For five years, Mr Agius served as member of the Board of Directors and Regulatory Committee of BOVAM. He is a member of the
of Enemalta p.l.c. and Engineering Resources Limited. Prior to his Bank’s Asset and Liability Committee and the Risk Committee of
current role, Mr Agius occupied various positions where he was MAPFRE MSV Life p.l.c. Mr Borg is also Chairman of the Central
responsible for a number of large scale projects, both locally and Co-Operative Fund. Mr Borg holds a Masters in Economics from
abroad, in areas related to enterprise resource planning, billing, the University of Malta and lectures at the University of Malta.
integration, business intelligence and data warehousing, and
process modelling. Mr Agius is also a visiting senior lecturer at
the University of Malta where he lectures ‘Big Data Analytics for
James Grech
Marketing Professionals’ and ‘Digital Marketing Strategy’. He Director
studied computer science and information systems and gained
an honours Bachelor degree from the University of Greenwich UK, C RM NED
followed by an MBA in e-Business from the University of Malta.
Mr Grech was appointed to the Board in December 2014. He is the
Executive Head of the Foreign Bank Relationships department and
Alan Attard a member of the Bank’s Asset and Liability Committee. Recently, he
was appointed as member of the Credit Committee and of the Risk
Director Management Committee. He was formerly a member of the Audit
Committee and the Compliance and Crime Prevention Committee.
C&CP RM NED He also serves as a member on the European’s Banking Federation
Correspondent banking taskforce and also as Chairman of the Board
Appointed to the Board in December 2016. Mr Attard is currently of Trustees of the BOV Employees’ Foundation. Professionally, Mr
a member of the Compliance and Crime Prevention Committee Grech’s career commenced as a management accountant with a
and he was recently also appointed as a member of the Risk local accounting firm. He then joined the Bank in 1998 and occupied
Management Committee. He was previously a member of the senior managerial positions at various branches and departments
Bank’s Anti-Financial Crime Committee. He joined the Bank in within the Bank. He was a BOV Board Director between 2004
1987. For the past thirteen years, he has held various managerial till 2008. Mr Grech is a director of other local companies and a
positions including serving as branch manager of several recognised member of the Institute of Directors – UK. Mr Grech
branches. At present, Mr Attard is the branch manager of BOV’s holds an Honours degree in Management and a Masters in
Floriana branch which is classified as one of the Bank’s premier Business Administration from Henley Management College, UK. His
branches. In July 2015, he was elected as trustee on the Board of dissertation focused on the effectiveness of Board performance and
Trustees of the BOV Employees’ Foundation and has since served Corporate Governance. He has lectured on Financial Services at the
as secretary to said Board. He is also a member of the Board of Malta College of Arts, Science and Technology, and on Corporate
Directors of the Malta Ten Pin Bowling Association. Governance at the University of Malta.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 iii

Alfred Lupi Antonio Piras

Director Director
A C C&CP NED * A R NED *

Appointed to the Board in December 2015. Mr Lupi currently chairs Appointed to the Board in December 2016. Mr Antonio Piras is
the Audit Committee and the Ethics Committee. He is also a member currently the Deputy Chairman of the Remuneration Committee and
of the Credit Committee, and the Compliance and Crime Prevention he was recently appointed as a member of the Audit Committee.
Committee. He is a professional accountant with an economics He was previously a member of the Risk Management Committee.
degree and currently engaged in management consultancy. Mr Lupi Mr Piras occupies the role of Director of the Board of Lacobucci
was Chief Financial Officer in two major companies and the Executive Aerospace HF SpA and until recently was Vice Chairman of Eurofidi
Chairman of Pavi Shopping Complex p.l.c. He was a Director of Soc. Consortile Garanzia Fidi s.c.a.r.l. (Turin). Until 2014, Antonio
the Central Bank of Malta and served as Acting Governor. Mr Lupi used to be the CEO of Equitalia Centro S.p.A (Florence) and
chaired the Accountancy Board and was a member of its Quality Chairman and CEO of other companies of Equitalia Group. In 1971
Assurance Oversight Committee. Mr Lupi has held a number of board he started his career at UniCredit Group, former Credito Italiano,
appointments mainly in the financial sector. holding various key roles in the Italian commercial network until
1997. In 1998 he was appointed as CEO of UniCredit Factoring
(Milan), Deputy General Manager of Banca dell’Umbria, Chairman
and CEO of Pekao Leasing Sp.z.o.o (Warsaw) and Leasing
Fabryczny Sp.z.o.o (Lublin), CEO of UniRiscossioni S.p.A. (Turin), all
companies held by UniCredit, and from where he ended his career
as Senior Executive Vice President in 2009.

Mario Mallia
Joseph M Zrinzo
Director
Director
C ED
A NGC RM NED *
Appointed to the Board in July 2017. Mr Mallia joined the Bank in
September 1979. He was appointed as the Bank’s Chief Executive Appointed to the Board in December 2013. Mr Zrinzo currently
Officer in January 2016. In October 2014, he had been appointed chairs the Board’s Risk Management Committee and the
as the Bank’s first Chief Operations Officer. He carried out various Bank’s Property Committee. Mr Zrinzo is a member of the Audit
other roles at the Bank, the most recent being those of Chief Finance Committee and the Deputy Chairman of the Nominations and
Officer and Chief Risk Officer. Mr Mallia is Chairman of the Asset and Governance Committee. Until recently he was a member of
Liability Committee and of the Management Board, and a member the Credit Committee. Mr Zrinzo currently serves as managing
of the Credit Committee. Mr Mallia is also Director on the boards of director of a group of family companies, as board director of other
MAPFRE MSV Life p.l.c. and BOVFS. He chairs the MAPFRE MSV local companies, committee member of the Cultural Heritage
Life Risk Committee and is currently chairman of the Malta Bankers Advisory Committee and as an active member of philanthropic
Association. Mr Mallia graduated in accountancy from the University associations. Over the years, Mr Zrinzo served as director on
of Malta, holds the Certified Public Accountant warrant and is a boards of various local and international companies, as BOV
Fellow of the Malta Institute of Accountants. Board Director between 1996 and 1998, as member of Audit,
Remuneration and Compliance Committees and was founder
member of the Malta Shareholders Association. Mr Zrinzo has a
vast experience of international trade having operated businesses
with European, North African and Middle-Eastern companies.

Ruth Spiteri Longhurst

Anita Mangion
Group Company Secretary
Director
Appointed Group Company Secretary in April 2016. Previously
C&CP R NED *
she occupied the post of Executive Head of the Compliance
Unit within the Bank. Dr Spiteri Longhurst is also the Company
Appointed to the Board in December 2016. Anita Mangion is a member
Secretary of MAPFRE MSV Life p.l.c., BOVAM and BOVFS. Dr
of the Remuneration Committee and was recently appointed Deputy
Spiteri Longhurst graduated Doctor of Laws from the University
Chairperson of the Compliance and Crime Prevention Committee. She
of Malta in 2001 and obtained Master of Arts in Financial Services
was previously a member of the Audit Committee. Ms Mangion is an
in 2004. Dr Ruth Spiteri Longhurst has been employed with the
experienced Business and IT Consultant. Her area of specialisation
Bank for the past sixteen years.
is Technology Intrapreneurship wherein she utilises innovative ways
to restructure existing processes and create new business within
organisations. During the last sixteen years, she consulted to such
effect different local and international entities in various sectors, where A Audit Committee
she successfully drove critical projects to completion and implemented C&CP Compliance and Crime Prevention Committee
sustainable profitable frameworks. Ms Mangion graduated in Executive C Credit Committee
MBA (eBusiness); B.Com. Management Hons, and B.Sc. Business and NGC Nominations and Governance Committee
Computing from the University of Malta. Additionally she studied Business
R Remuneration Committee
and IT at Indiana University (USA), and Technology Entrepreneurship and
New Business Operations at the University of Malta in joint collaboration RM Risk Management Committee
with Oxford University (UK). For four years, Ms Mangion served as Board ED Executive Director
Director at Malta Industrial Parks Limited (MIP). At MIP she was also NED Non-executive Director
entrusted to oversee the Tenders Committee, was a member of the Audit * Independent
Committee and chaired the ICT Steering Committee.
 Bank of Valletta p.l.c.
iv Annual Report & Financial Statements 2017

Chairman’s Statement
Taddeo Scerri
On the first anniversary of my appointment as Chairman of the value movements and the share of profits from associates reached
Bank of Valletta Group I have the privilege to present to you the €149.9 million. The results demonstrate the financial strength and
Group’s annual report for the fifteen months ending 31 December strong market position of the Bank.
2017. The period has now been changed to cover a calendar year
ending on the 31 December. The increase in profitability was also driven by an increase
in non-interest income as the Bank’s strategy to tap diverse
During the period under review, the Board of Directors have also income sources continued to bear fruit. The increase in
seen material changes in its composition with five new non- commissions (4.5% annualised) balanced the impact of
executive directors assuming the responsibility and two new narrower interest margins, high levels of liquidity and negative
executive directors joining the Board in line with the amendments interest rates on deposits held with the ECB. Operating
in the Memorandum and Articles of Association as approved in expenses also increased. Major increases were in the cost of
the Extraordinary General Meeting held last July. While welcoming IT, heavy investment in HR and the strengthening of the Bank’s
the new directors, I thank the departing ones and my predecessor control functions. The results translate into a Return on Equity
John Cassar White for their legacy. (ROE) ratio of 16.5% (December ’17), slightly down from 16.9%
(September 16) last year, as adjusted for the one off gain on
FINANCIAL PERFORMANCE the VISA transaction.
2017 was a year of change with multiple initiatives taking place
across the Bank. While the Maltese economy continued to grow The annualised growth in Customer deposits was 8%. Deposits
at consistent pace, uncertainties driven by restrained economic amounted to €10.1 billion at the reporting date, mainly driven by
growth on the Continent, Brexit and a low interest rate scenario an increase in short-term retail deposits. This was the principal
provided a challenging environment. Our financial performance driver behind an increase in total assets reaching the figure
was strong with non-interest income taking a centre stage in the of €11.8 billion. The loan book grew by €160 million propelled
implementation of our Vision 2020 strategy. by a 4% annualised increase in home loans. Total loans as at
December 2017 stood at €4.5 billion. Loan to deposit ratio
The BOV Group recorded a profit before tax of €174.7 million for the continued to decrease, at 44.3% reflecting the Bank’s highly
15 month period to 31 December 2017. Core profit excluding fair liquid position.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 v

2017 was a year of change with multiple initiatives

taking place across the Bank
SOLID CAPITAL BASE MEASURED BUSINESS GROWTH
In November 2014 Bank of Valletta became a systemically important As I highlighted in last year’s Extraordinary General Meeting, the
bank falling under the direct supervision of the Joint Supervisory Bank has to be on a constant lookout to engage in business and
Team made up of representatives from the European Central Bank generate sustainable profits to support growth in the loan book
as well as from the Malta Financial Services Authority. This has as well as non-interest income. As interest income continues to
had a substantial impact on the Bank, its conduct, operations and dwindle we must explore new sources of income in the form of
ultimately its capital base. fees and commissions.

During the last quarter of 2016 we had acknowledged that To this end four Strategic Teams were set-up to define the
in order to sustain a growth strategy and harness market Bank’s medium to long-term strategy with respect to Capital
potential we had to strengthen the Bank’s capital base. With Management, Asset and Wealth Management, Consumer Finance
this in mind, we launched a rights issue that increased capital and Digitalisation. The input of external specialists complimented
by €150 million. While fully cognisant that this may result in the contribution of internal expertise within the teams. The Board
value dilution for our shareholders, the Board was of the solid of Directors approved these plans as part of the Group’s Vision
conviction that the strengthening of the capital base was in the 2020. Subsequently, the CEO and Management Board drafted the
long-term interest of shareholders and other stakeholders as it operational plans.
would sustain further business growth. The Issue’s resounding
success with an over subscription of nearly €50 million, was a Over the period under review we have embarked on different
clear sign of support from existing and new shareholders. As initiatives to enhance our investment services across the whole
a result the Group’s core capital position improved materially. customer spectrum. Our strategy to develop Investment Centres of
The Common Equity Tier 1 (CET 1) capital ratio has gone up excellence has continued to produce encouraging results. We have
from 12.8% (2016) to 16.1% as at December 2017, providing also upgraded Gzira Investment Centre which is now housed in our
substantial capital buffers to sustain business growth in line new Gzira Banking Centre. Developments in this area continue and
with the Bank’s strategy. Q2 2018 will also see the opening of our new Premium Centre in
Santa Venera which will service wealth management and corporate
STRATEGIC FOCUS finance customers. This new venue will enable us to deliver a whole
Our Vision 2020 strategy ensures that we maintain long-term new experience for our high-end customers seeking personal
stability and business sustainability for the generations to come. investment advice or finance for their businesses.
Solid Corporate Governance, an evolving Business Model and
Operational Transformation through substantial investment in As the Maltese social and economic realities continue to evolve at a
Human Resources, IT and process reviews remain at the core quick pace, we see that the demand for personal finance is growing,
of our strategy. so is competition, with retailers making quick inroads in this market.
 Bank of Valletta p.l.c.
vi Annual Report & Financial Statements 2017

Bank of Valletta is today we continued with winding down of the trust business. We undertook
a programme where we rationalised our international corporate
customer base, while strengthening our controls in a number of areas
the largest bank in Malta including the custody business. In the process we also revisited our
fee structure to ensure an adequate risk-adjusted return.

Bank of Valletta is today the largest bank in Malta. The Bank is

classified as a systemically important institution and together with
another 117 banks falls within the regulatory framework of the Single
Supervisory Mechanism (SSM). Notwithstanding its small size
Our Consumer Finance Division has embarked on various initiatives when compared to its European counterparts, BOV has to abide
to be in a better position to service customer needs as market for by the same harmonised regulations as other larger EU banks. This
motor loans, pleasure crafts and home improvements continues to has provided us with a greater impetus to strengthen our Corporate
grow. We aim to continue to deliver further innovation in the field of Governance framework. This period has seen an extensive review
personal lending, increase market share and consequently increase of the terms of reference of the Board Committees, the amended
interest and fee income from this sector. Memorandum and Articles of Association, the introduction of
various policies, and a more robust internal controls mechanism
Today’s financial services environment can be described as highly within the revised Risk Appetite Framework. We enhanced the
competitive, complex and dominated by customer expectations Group’s compliance, risk management and anti-financial crime
and demand. The digital revolution is leading to the disruption capabilities. These departments are now housed under one roof in
and eventual transformation of the industry with new entrants the recently inaugurated Risk Management Centre in Santa Venera.
challenging the norm and leading with customer-centric innovation. Substantial human and IT resources are also being directed in this
Following closely on the work of the respective Strategic Teams, area including enterprise-wide risk training.
the Board has identified the need to rapidly embrace the disruptive
nature of Fintechs by seeking ways to forge partnerships that will DIVIDEND POLICY
enable it to provide innovative services by sharpening operational The Board is committed to maintain a strong capital base that
efficiency and focus on customer centricity. A Fintech Initiation meets current regulatory requirements and supports the Group’s
Plan has been put into action with two operational streams. The strategic and operational goals. The Group registered a Common
first stream will tie up with the Core Banking Transformation plans Equity Tier 1 CET1 capital ratio of 16.1% as at December 2017,
currently in place to ensure that Bank of Valletta has the right an increase of 330 bps when compared to September 2016. This
resources in place to meet the evolving needs of customers in a significant increase was the result of the successful rights issue and
digitised world. The second stream will be scanning the market the retained profit for this financial period. BOV aims to maintain a
with the assistance of industry experts with the ultimate aim Group CET1 capital ratio that satisfies the fully-loaded minimum
of identifying Fintech start-ups that can provide synergies and requirement plus a comfortable management buffer.
potential for partnerships or buy-outs.
In recommending the dividend distribution to the Annual General
RISK AND REGULATION Meeting, the Board was guided by the recently approved Dividend
The Bank continued with the consolidation of its business model in Policy. This policy aims to achieve a balance between the long-
order to ensure that all business lines are aligned with our revised risk term sustainability of the Group, the regulatory requirements and
appetite. This will create a safer and stronger Bank. During this period the interest of the shareholders.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 vii

The Board of Directors is recommending a gross final dividend of 8 develop or enhance their talents on their own. The Foundation
cents per share resulting in a gross total dividend of 11.6 cents per currently has some twenty students under its stewardship.
share (as adjusted for Rights Issue) as compared to the adjusted
gross total dividend of 9.2 cents per share declared for the last Sports remain close at heart and BOV is proud to continue with the
financial year (as adjusted for the bonus issue and Rights Issue). sponsorship of the major football, water polo and basketball leagues.

The Board is also recommending an optional scrip dividend While the 2017 BOV Retrospective Arts Exhibition has
programme. Shareholders have the option to receive new commemorated its twenty fifth anniversary with a number of
ordinary shares instead of cash dividends. This provides student workshops run by the artist Anthony Calleja himself,
our existing shareholders the opportunity to increase their the Bank continues to support the local art scene. The Malta
shareholding without incurring trading costs. The decision Philharmonic Orchestra and the Joseph Calleja Concert remain
was taken following the oversubscription by our shareholders high on our agenda. We are also proud to have partnered the
of the rights issue. We want to give an opportunity to our Valletta 2018 Foundation as a Preferred Partner and being named
shareholders to subscribe to more shares at a preferential price the Bank of the European Capital of Culture.
without incurring trading costs. This is an optional programme.
Shareholders will receive their dividend in cash unless they opt THE FUTURE
for the scrip dividend programme. The progress we made over the past years has been remarkable.
Faced by the challenges of a more demanding and sophisticated
CORPORATE SOCIAL RESPONSIBILITY (CSR) customer base, tighter regulation and controls, plus stiffer
In line with our obligations as the largest company listed on the competition coming from both traditional and non-conventional
Malta Stock Exchange we continue to invest substantial resources players, we continue to strive towards the goal of building a better
to ensure a fair balance between economic performance, and more accessible Bank that is both agile and resilient at the
environmental responsibility and a social conscience as a corporate same time. A Bank that actively participates in the economic
citizen. This is done both directly as a Bank and indirectly through development of the country, that is socially conscious in serving
our two foundations the Marigold Foundation and the Joseph society, caring towards its employees and customers and ultimately
Calleja Foundation. delivering sustainable shareholder value for the years to come.

The social pillar of BOV’s CSR programme is largely entrusted

to the Marigold Foundation. This NGO provides assistance
to a number of both large and small entities which operate in
multiple spheres including special needs, mental health, rare
diseases, drug rehabilitation and cancer support.

Education is another of our CSR pillars. Our Education Programme

is very well received by the general public and has surpassed its
tenth year since it was first launched. We continue to support
high-performing University of Malta students with various awards Taddeo Scerri
throughout the year. The Joseph Calleja Foundation also provides
scholarships for talented students with innovative, distinctive or Chairman
unique artistic or musical talents who are in any way unable to 23 March 2018
 Bank of Valletta p.l.c.
viii Annual Report & Financial Statements 2017

Chief Executive
Officer's Review

Mario Mallia

FINANCIAL YEAR 2017 – A PERIOD OF TRANSFORMATION

The financial period which we have just concluded was a

period of transformation in many ways. Perhaps the most
evident change occurred in the Group’s reporting date, which
was switched from 30 September to 31 December, in order to
achieve alignment with the vast majority of banks across Europe.
This will facilitate more meaningful benchmarking of the Group’s
performance and financial situation with that of its peers, both
local and international. As a result of the change, the financial
statements for the financial period 2017 exceptionally cover a
period of fifteen months, from October 2016 to December 2017.

There were, however, a number of more significant changes

which were executed during this period, all of which were in
furtherance of the Group's strategic vision.

My brief for the financial period ‘17 remained the same as

the one I had received from the Board of Directors on my
appointment in January 2016, namely to implement the Bank’s
strategic plan in accordance with approved budgets and
timelines. The Bank’s strategy has one overarching vision – to
ensure the stability and sustainability of BOV in the long term,
while protecting depositors and ensuring a fair and equitable
return to shareholders. This vision, internally branded as VISION
2020, is in turn articulated in four strategic goals: the long-term
financial sustainability of the Group; the strengthening of the
governance framework; the revision of the business model; and
the implementation of the Core Banking Transformation (CBT)
programme which comprises the change of the core IT system
and the re-engineering of associated processes.

I am pleased to report that progress was achieved in all four

areas over the period.

The first objective – long-term financial sustainability – was partly

addressed through a rights issue of €150 million, which occurred
between November and December. This was by far the largest
public offering ever launched in Malta, and it was oversubscribed
by almost €50 million. It was, however, only one of the building
blocks of our capital management plan – over the coming years
the Bank will continue to build up strong capital buffers through
other initiatives.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 ix
 Bank of Valletta p.l.c.
x Annual Report & Financial Statements 2017

The economic environment

which characterised the
financial period ’17 was
benign but challenging
Major steps were taken towards achieving the second objective,
being the strengthening of corporate governance. The
shareholders met in an Extraordinary General Meeting in July
2017 and approved changes to the Articles of Association aimed
at enhancing the effectiveness and accountability of the Board
of Directors. Concurrently, the Group focused on strengthening
its Anti-Money Laundering and Countering of Financing of
Terrorism defences, as well as the implementation of a Risk
Appetite Framework and a complementary Risk Register.

The Group business model was kept under constant review

during the period, with steps being taken to de-risk certain
business lines and to diversify the Group’s revenue sources. We
are now in the final stages of exiting from the Trusts business,
and have re-dimensioned other business areas, including
international corporate and personal accounts, custody and
safekeeping services, where the risk to the Bank is perceived to
be high and not adequately compensated by return. The model
applied to international accounts and custody services is one
of controlled growth, whereby new business will continue to be
accepted under more stringent criteria and subject to limits on
volumes. Concurrently the Group is taking steps to diversify its
income streams, by upgrading its product offering in the areas
of wealth management, investment services, savings plans and
consumer finance.

Work also continued on the fourth area of strategic focus – the or which are based more on market exuberance than on solid
CBT programme. The scope of the original programme has been economic grounds. While we do not see signs of any developing
widened to embrace further IT and process changes, and has “asset bubbles”, we will continue to exercise all professional
now been structured as a holistic Transformation Programme, diligence in the provision of credit, to ensure that we will always
branded as “Changing BOV Together”. This programme, have a well-diversified and good quality loan book at the heart
which will extend up to the end of 2019, is centred around the of our balance sheet.
implementation of an Oracle Flexcube core banking system
which will take BOV into the 2020s and beyond. The system will The state of the economy, and of the financial environment
also provide the technological foundations for the Bank’s future around us, has also brought its fair share of challenges. We are
digital channels and products. facing two main challenges, which, although distinct, are closely
related. The first is the “low-for-long” interest rate situation,
THE ECONOMIC CONTEXT where benchmark rates continue to hover close to zero or
have entered negative territory. Low rates put pressure on
The economic environment which characterised the financial banks’ profitability, particularly on banks which are very reliant
period ‘17 was benign but challenging. The state of the Maltese on net interest income. The second challenge is the high level
economy, which continued to grow at a rate well above the of liquidity in the economy, which, in the current interest rate
average for the Euro area, offered quite a few opportunities scenario, places a burden on the banking sector. The strategic
for growth in both the business and the personal sectors. revision of the Group’s business model, whereby the focus is
The demand for home loans continued to increase, as did the being shifted towards the generation of non-interest income, is a
demand for wealth management, savings plans and investment direct response to these twin challenges.
services. The situation of a vibrant economy with practically
full employment was also reflected in the improving quality of A third challenge comes from the internationalisation of the local
the loan book; non-performing exposures decreased, both in economy, which has led to demographic changes arising from
absolute terms and as a proportion of total lending. the presence of a growing international workforce. This has
necessitated the change and upgrading of KYC (Know Your
A booming economy has its opportunities, but also its perils. It is Customer) and due diligence systems and procedures. The
the role of the banking sector to provide credit in a responsible Group is committed to ensuring that all customers onboarded
and sustainable manner, and to avoid channelling capital to are reputable and bona fide persons, and that only legitimate
projects that are overly speculative, which are under-capitalised, business enters the banking system.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 xi

PERFORMANCE FOR THE FINANCIAL PERIOD 20171 Fee income amounted to €86.3 million, up from €66.1 million in
2016, with most of the increase arising on investment services
Despite the strain on resources which a transformation and credit card fees. These results were in accordance with
programme inevitably entails, the Group turned in a strong expectations, and are the result of the strategic shift towards
performance for the financial period 2017, reporting a pre- diversified non-interest earnings. Income from the Group's
tax profit of €174.7 million, compared to €145.9 million for FY insurance companies increased quite significantly, with profit
16 or €118.4 million as adjusted for the one-off gain on the recognised for 2017 amounting to €19.3 million, compared
VISA transaction. Users of these financial statements are here to €3.7 million for 2016. This sharp improvement arose on a
reminded that the financial period 2017 consisted of fifteen number of factors, including a stronger performance in both life
months, while FY 16 comprised twelve months. These results and non-life business, as well as the consolidation of eighteen
represent an annualised return on equity (ROE) of 16.5% months' profit (instead of the usual twelve) in order to align the
pre-tax (FY 16: 16.9%) or 11.3% p.a. post-tax (FY 16: 13.6% reporting dates of the various companies.
inclusive of the one-off VISA gain). Such a performance
compares very well with ROE ratios of banks across the The results for 2017 include a net impairment reversal of €6.2
European Union. Data released by the European Banking million, compared to a charge of €23.1 million for 2016. This
Federation shows an average post-tax ROE of 3.5% across reversal reflects the ongoing focus on debt recovery and the
EU banks for 2016.2 management of non-performing loans (NPL), which remain
central to Group strategy. In fact, the stock of NPLs continued to
The Group recorded an operating income of €300.5 million for decrease throughout the period. For the first time, the Group has
the financial period 2017, compared to a total of €278.1 million for adopted an NPL strategy with the aim of articulating a clear and
FY16 (which, however, included a windfall gain of €27.5 million). detailed long-term plan of action in this regard.
Operating income comprises interest margin of €183 million, fee
income of €86 million, trading income of €22 million and other Overhead costs rose to €151.3 million, compared to €112.8
income of €9 million. million for the prior year. The main increases were registered
on HR costs, IT maintenance and regulatory expenditures. The
Interest rates receivable on treasury and liquid assets main cost drivers were the Group's strategy to strengthen its
continued to fall throughout the financial period 2017, while anti-money laundering and anti-financial crime defences, and
those on loans and advances remained stable. The overall the Core Banking Transformation programme. Both entailed
euro-denominated marginal interest rate dropped, but the considerable recruitment of personnel and the procurement of
impact on profit was offset by higher asset volumes. consultancy services. The Group's Change Programme is, as
1
All percentages quoted in this review are on an annualised basis so as to facilitate comparability.
2
European Banking Federation, Banking Sector Performance (https://www.ebf.eu/banking-sector-performance/),
accessed 1 March 2018.
 Bank of Valletta p.l.c.
xii Annual Report & Financial Statements 2017

The SME segment remains a main pillar

of the Bank’s customer base
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 xiii

anticipated, impacting costs significantly in the short term, with The net increase of €60 million registered in the business segment
the relative benefits expected to materialise in the medium-to- is primarily the result of high sanctioning activity, where more than
longer term. €550 million were advanced to around 1,200 customers, spread
along a number of different business lines. The Bank continued
Customer deposits increased by €916 million over September with its strategy of diversifying into new emerging sectors in line
2016 to reach €10.1 billion, and now finance 85% of the with the macro economic trends whilst renewing its support to
balance sheet. Concurrently, net lending rose by €160 million the traditional industries.
to €4.2 billion, representing 36% of Group assets. Securities
and equity holdings decreased by €428 million and stand at The SME segment remains a main pillar of the Bank’s
€3.7 billion, while short term funds increased by €1.3 billion to customer base. The support to this segment is reflected in
reach €3.6 billion. the flow of initiatives and products that the Bank continued
to offer during the financial period under review. The BOV
The shift towards bank balances led to a higher mismatch JAIME (Joint Assistance Initiative for Maltese Enterprises)
between assets and liabilities with a remaining maturity of one instrument proved to be another success story with nearly all
month or less. This would make margin income more sensitive the pot of €50 million being allocated within the initial months
to interest rate changes in the short term. However, we do not, at of the scheme's operations. Through this scheme, SMEs
the moment, foresee any significant change in benchmark euro were provided with enhanced access to finance opportunities
rates over the coming year. through low pricing and collateral requirements. As at the
end of the financial period 2017 more than €43 million
Shareholders’ funds have increased by €233 million over the worth of funds were distributed among 400 customers,
financial period, and now amount to €962 million. which represents around 86% of the total pot. Micro entities
and start-up companies operating in a variety of sectors
BUSINESS REVIEW including the technological and services industries were
key beneficiaries of such funds ensuring the best possible
Gross Loans and Advances to customers increased by nearly outreach and optimal allocation. A sub-segment where the
4% during the financial period 2017 to reach €4.47 billion. This Bank placed specific focus during the period was family run
affirms the Bank’s ongoing commitment to sustain the country’s businesses. A number of information sessions were held with
economic development through the supply of good quality a view to support and provide customised financing solutions
credit for both business and consumer finance segments, in for their specific needs.
a backdrop of a highly regulated environment and competitive
market pressures. During the period under consideration both The consumer finance arm also produced positive results with a
segments of the Bank performed satisfactorily with net growth net growth exceeding the €100 million mark. The Bank advanced
in balances of circa 2.7% and 5.1% respectively. around €440 million over a 12-month period. Despite the highly
 Bank of Valletta p.l.c.
xiv Annual Report & Financial Statements 2017

competitive landscape, the Bank was in a position to retain its in the process to ensure it meets the growing exigencies of this
leading market share position in the Home Loans market. This particular market segment. In the process of conducting its review
was possible by keeping abreast of market realities and by to this Centre, the Bank held discussions with the various corporate
launching a set of innovative and attractive products tailor-made service providers in Malta where the account opening process was
for different segments of society. The Bank was also very much reviewed to ensure a much more streamlined account opening
active on the personal financing side where different products service. On the other hand, all non-EU/EEA clients were centralised
were launched to address different customer needs in line with at the Bank’s International Personal Banking Centre, which has
the country’s demographic changes. been resourced with the relevant professional and skilled resources
to service the requirements of this market segment. The remaining
Asset quality on the credit portfolio remained of good standard with customers are serviced through the Bank’s strong branch network
no major deteriorations being registered during the period. It is the in Malta and Gozo.
Bank’s strategy to continue to solidify its market positioning and
to keep credit flowing in the coming years in a sustainable and On the digital front, the Bank took forward a number of changes
managed manner to support added value propositions, economic to its Internet Banking platform which will extend significant user
growth and the evolving consumers’ requirements and demand. experience improvements to its strong internet banking customer
base. The new platform is planned to be launched during quarter
INVESTMENT SERVICES AND eBANKING two next year.

During the course of this financial period, the Bank embarked On the international front, the Bank also initiated the process to
on a number of initiatives to further strengthen its touchpoints strengthen its network of international representative offices. In
ensuring that these meet the exigencies of its client base. fact, following careful strategic evaluation in this regard, the Bank
decided to proceed with the necessary requirements to open a
Insofar as its servicing channels are concerned, the Bank has three Representative Office in the City of London, United Kingdom. The
key physical service touchpoints. The Bank’s international corporate office is planned to be operational by the end of March 2018.
clients that are based in Malta and conducting international
business are today serviced through a dedicated centre in Valletta A number of initiatives were also undertaken on the product
– the International Corporate Centre. This Centre was reorganised development side to ensure that the Bank’s product suite
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 xv

organised various initiatives aimed at supporting its existing

suite of products and services with its clients.

Over the course of this period, the Bank also entered into various
support agreements with business-led organisations with the
view to strengthen its presence and visibility within carefully
selected sectors of the economy.

Apart from extending its support to these industry sectors, the

Bank, in collaboration with these organisations, held a number
of initiatives where it presented its various product and service
solutions to their members covering amongst others, banking,
investments and payment services, pensions and trade
finance solutions.

CONCLUSION

The coming two years will see the realisation of VISION 2020,
which will see BOV entering the 2020s as a digitalised and
customer-centric bank. In the meantime, management will
remain focused on the implementation of the underlying strategic
plan. Our aim is to build a low-risk and sustainable but profitable
business model which will ensure the long-term stability and
viability of the institution.

I would like to conclude by thanking the executive team and all

staff for their unwavering commitment to the Bank; our Board of
Directors for their oversight and support; our supervisors for the
guidance that they provide; and all our valued customers, without
whom all our efforts would be in vain.

continues to meet the exigencies of its clients in a sustained

manner. In fact, over the course of this period, the Bank, through
its asset management subsidiary BOV Asset Management,
introduced three innovative, risk budget driven contractual
investment funds which were well received by the Bank’s clients
and attracted just under €40 million. The Bank also submitted
its applications with the Malta Financial Services Authority to
upgrade the regulatory license of BOV Asset Management to
be able to provide institutional portfolio management as well as
pension management. On the latter front, the Bank also took
forward initiatives related to the eventual introduction of pension
funds on the market during FY 2018.

The Bank also set in motion the process to upgrade its suite
of debit and credit cards to contactless. In fact, the Bank has
already started rolling out its contactless cards to its clients
where the project covering all credit cards will be finalised by
mid next year. The introduction of contactless cards ushers in
a new era of digital banking in Malta. These cards combine
the same security afforded by traditional chip-and-pin cards,
with the convenience afforded by wireless payments. In this
manner the Bank is making it easier for its clients to pay for
low-value items by card rather than paying in cash. Now
cardholders can simply tap their card on the EPOS machine Mario Mallia
at the retailer and the transaction is processed in seconds.
There is no need to enter a PIN or sign on any slips as long
Chief Executive Officer
as the transaction’s value is below €20. Moreover, the bank 23 March 2018
 Bank of Valletta p.l.c.
xvi Annual Report & Financial Statements 2017

Corporate Social As a concept, Corporate Social Responsibility (CSR) has been

developing since the early 1970s. There are various definitions and
interpretations of this concept. For us at Bank of Valletta, CSR is

Responsibility (CSR) the yardstick against which we measure our policies and practices,
and the manner we interact with the different stakeholder groups.

The impact of an organisation’s operations on society is generally

proportional to its footprint. BOV boasts a history that goes back
200 years and is inextricably linked to the Maltese islands. We are
one of the largest employers, striving to be the employer of choice
and serving over 300,000 personal customers. With a retail network
spanning 36 branches, five Business Centres and six Investment
Centres across Malta and Gozo, in addition to a full-fledged Wealth
Management arm and Corporate Centre, our footprint is significant.

Nonetheless, CSR does not present an easy ‘plug-in’ formula. For

a financial services provider like BOV, where its people constitute
the backbone of the organisation, whether they deal directly with
the external customer or not, embracing CSR means building an
internal culture of commitment to customers and society. An intimate
knowledge of the environment in which the Bank operates and
customers’ specific needs is indispensable to provide customers
with reliable service and added value. It is only by achieving internal
excellence in this regard that valid society results can be achieved.

For BOV, CSR has become congruent to the manner in which

we manage our business. To a great extent, the measure of our
success is the difficulty experienced in trying to extract CSR-driven
action from the day-to-day management of the business.

Here we outline the highlights of our journey during 2017:

CUSTOMERS

Inauguration of Gżira Premises Dedicated Risk Management Unit

The new premises in Gżira represent a direct investment 2017 also saw BOV inaugurating new premises for its Risk
in the Bank’s employees and an indirect one in its Management functions including a dedicated Anti-Financial
customers. In addition to the Branch and Investment Crime Unit. This is evidence of the Bank’s enhanced efforts
Centre, these premises house the Bank’s Training Centre to ensure an adequate balance is reached between its dual
and its Ethic and Employee Development function. goal of business growth and risk monitoring.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 xvii

HERITAGE

Gran Salon Ta’ Ġieżu Church

Bank of Valletta is supporting the conservation of the BOV Executives were among the first to visit the Ta’ Ġieżu
‘Gran Salon’, one of the most captivating features of the Church following the collapse of the ceiling, and pledging
Auberge de Provence in Valletta, boasting richly painted the Bank’s support.
walls and wooden beamed ceiling.

Martyrdom of St Lawrence – Mattia Preti Fondazzjoni Wirt Artna

‘The Martyrdom of St Lawrence’, probably the largest painting Throughout the years during which BOV has collaborated with
by Italian Master Mattia Preti in Malta, found at the Church of Fondazzjoni Wirt Artna, this NGO has remained true to its mission;
St Lawrence in Vittoriosa dates back to 1689. It is currently managing several historical sites and buildings around Malta and
undergoing extensive conservation through the support of Bank Gozo, and bringing history to life through well-researched re-
of Valletta. enactments.

BOV Joseph Calleja Foundation Marigold Foundation – BOV in the Community

This year, the BOV Joseph Calleja Foundation Concert The Marigold Foundation – BOV in the Community organises
provided a showcase for the young talented performers various initiatives to raise awareness about philanthropic
that the Foundation has taken under its wings. The causes and NGOs. BOV employees dedicated a Dress
Foundation runs another programme Vulnerable Child Down Day in October 2017 towards the Pink October
through which it uses music as therapy to help children Campaign coordinated by the Marigold Foundation.
overcome challenging circumstances.
 Bank of Valletta p.l.c.
xviii Annual Report & Financial Statements 2017

ENVIRONMENT

Killifish Conservation Project Dinja Waħda – Birdlife (Malta)

The Killifish Conservation Project saw the Bank 2017 saw BOV resuming its role as the Educational
collaborating with Nature Trust Malta and the Aquaculture Partner of BirdLife Malta in relation to its programme Dinja
Directorate to conserve this small fish endemic to the Waħda which is targeted at Primary School children. This
Mediterranean. This project was a success so much programme provides teachers with a valuable resource kit.
so that Environment Minister José Herrera has recently
declared this fish a national specie.

EDUCATION

Read with Me Programme Discover Valletta

BOV has been collaborating with the National Literacy Discover Valletta is a series of brief narratives about locations
Agency since it was set up. The Read with Me programme in the capital city Valletta, available in audio format through
is designed to make reading a fun activity for children MP3, a pack of flash cards and a map. With BOV’s support,
aged zero to three years, and their parents/carers. the packs are distributed to Form 1 students attending state,
church and independent schools around Malta and Gozo.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 xix

SPORTS

Tazza l-Kbira Football

Bank of Valletta supported ‘It-Tazza l-Kbira’ – the Malta Bank of Valletta supports all senior football competitions
Racing Club’s biggest annual event for horse racing. organised by the Malta Football Association, both male
and female.

Water polo Basketball

BOV’s collaboration with the Aquatic Sports Association Through its support of the Malta Basketball Association,
of Malta has seen the quality of the water polo game the Bank promotes excellence through individual awards
improving year on year. in a team game. The BOV Basketball Player of the Month
rewards the hardest working player and the best performers.
 Bank of Valletta p.l.c.
xx Annual Report & Financial Statements 2017

ARTS AND CULTURE

BOV Retrospective Art Exhibition Joseph Calleja Summer Concert

Renowned contemporary artist Anthony Calleja was the The big voices of the young members of the BOV Joseph
protagonist of the 25th BOV Retrospective Exhibition. Calleja Choir were yet again one of the protagonists of
Sculptures and paintings from the 1980s to his more the Maltese Tenor’s annual summer concert, which this
recent work gave a unique insight into Anthony’s search year marked his 20th anniversary. This choir effectively
for his artistic soul over the years. nurtures a love for music among the very young and their
immediate families.

Teatru Manoel Malta Philarmonic Orchestra

BOV deepened its commitment towards Teatru Manoel, The Bank is committed towards supporting the Malta
not only towards Mozart –Da Ponte’s opera Le Nozze Philarmonic Orchestra, and by extension its sister-
di Figaro, but also vis-à-vis the Theatre’s much-loved ensemble the Malta Youth Orchestra, which serves as
education programme Toi Toi. a launching pad for young musicians, providing them
with more opportunities to fine-tune their skills whilst
concurrently expanding their horizons.

CONCLUSION
For Bank of Valletta, Corporate Social Responsibility is an ongoing journey. Further details about the Bank’s Corporate Social
Responsibility may be found under Principle 12 on page 40.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 1

Directors’ report as at 31 December 2017

The Directors present their 44th Annual Report, together with the audited financial statements of the Bank of Valletta Group (the
Group) and the Bank for the Financial Period ended 31 December 2017.

Principal Activities

The Bank of Valletta Group comprises Bank of Valletta p.l.c. (the Bank) and two subsidiary companies namely BOV Asset Management
Limited (BOV AM) and BOV Fund Services Limited (BOV FS). Both subsidiaries changed their company name during financial period
2017. Valletta Fund Services Limited’s name was changed to BOV Fund Services Limited and Valletta Fund Management Limited’s
name was changed to BOV Asset Management Limited. The Group also has two equity-accounted investee companies, MAPFRE
Middlesea p.l.c. and MAPFRE MSV Life p.l.c. The Group’s principal activities are set out below.

The Group offers banking, financial and investment services and connected activities within the domestic Maltese market. The
principal activities of the Bank comprise the following:

1) The receipt and acceptance of customers’ monies for deposit in current, savings and term accounts which may be denominated
in Euro and other major currencies.

2) The provision of loans and advances to a wide array of customers.

3) The provision of investment services, covering a comprehensive suite of investment products and services that meet the
customers’ needs throughout their lifecycle, including stockbroking, advisory and discretionary portfolio management services.

The Group also provides a number of other services, including, bancassurance, corporate advisory, custody, fund management and
fund administration, and other services, such as 24-hour internet banking service, issuance of major credit cards, night safe facilities,
automated teller machines, foreign exchange transactions, outward and inward payment transfers.

The Bank has a well-developed worldwide network of correspondent banks that provide it with the necessary backbone to service
its customers in international banking and trade transactions.

In most part, the activities of the Bank are licensable activities regulated under the domestic and EU financial regulatory framework.

Pursuant to Article 177 of the Companies Act, 1995 (Chapter 386, Laws of Malta), the Directors declare that there were no significant
changes in the activities of the Bank during Financial Period 2017.

Information on the performance of the Bank is found under the CEO’s Review.

The Parent Company

Bank of Valletta p.l.c. is licensed to carry out the business of banking and investment services in terms of the Banking Act,1994
(Chapter 371, Laws of Malta) and the Investment Services Act,1994 (Chapter 370, Laws of Malta). The Bank is an enrolled tied
insurance intermediary of MAPFRE MSV Life p.l.c. under the Insurance Intermediaries Act, 2006 (Chapter 487, Laws of Malta).

The Bank offers the entire range of retail banking services as well as the sale of financial products such as units in collective
investment schemes. The Bank also offers investment banking services, including underwriting and management of Initial Public
Offerings (IPOs) as well as custody services.

The Subsidiaries

BOV AM provides management services for collective investment schemes and is a fully owned subsidiary of the Bank. On 17 March
2017, BOV AM had its licence extended to offer asset management services beyond collective investment schemes, in order to
tap into the growing demand for bespoke portfolio management services to professional institutional clients. BOV AM has three
regulatory functions: Asset Management, Risk Management and Compliance.

BOV FS is also a fully owned subsidiary of the Bank and is a recognised fund administrator by the Malta Financial Services Authority.
BOV FS provides a comprehensive suite of services to fund managers and fund promoters, as well as a full suite of fund administration
including fund accounting, shareholder registry services, regulatory reporting and corporate services.

The Associates

MAPFRE MSV Life p.l.c. operates as a life assurance company licensed under the Insurance Business Act, 1998 (Chapter 403, Laws
of Malta). MAPFRE Middlesea p.l.c. is engaged in the business of insurance, including group life assurance.
 Bank of Valletta p.l.c.
2 Annual Report & Financial Statements 2017

Directors’ report as at 31 December 2017 (continued)

Strategic Initiatives of the Bank

The Board of Directors has articulated clear corporate goals for the Bank and has set Strategic Initiatives for the years 2018 to 2020.
These goals, which describe what the Bank aims to achieve in the long term, are as follows:

1) Financial stability and sustainability;

2) Protection of the interests of depositors; and
3) Provision of a sustainable and equitable return to Shareholders.

The Board has further identified a number of corporate strategies, which define the ways in which the Bank plans to achieve its goals.
The principal strategies are:

1) Consolidation of long term financial sustainability;

2) Strengthening corporate governance;
3) The adoption of IFRS 9;
4) Revision of the business model; and
5) Reinforcement of HR and IT resourcing.

Principal Risks and Uncertainties pursuant to Article 177 of the Companies Act, 1995 (Chapter 386, Laws of Malta)

The Directors are aware of the various risks faced by the Group as a result of its involvement in different business lines and operations.

A number of measures are in place to ensure that such risks and uncertainties are maintained at acceptable levels and are in line
with the Group’s risk appetite and strategy of sustainable, long term growth and profitability. In March 2017, a revised Risk Appetite
Statement and Framework was approved by the Board for the BOV Group. The document lays out the responsibilities of various
stakeholders, including the Board of Directors and Senior Management, and establishes a number of qualitative and quantitative
parameters for acceptable risk taking.

In line with the provisions of the Risk Appetite Statement and Framework, Senior Management is responsible for the day to day
monitoring and control of risk taking, subject to the regular oversight of the Board through the Risk Management Committee. The
overall structure is aimed at ensuring a sound risk culture supported by a performance management system that discourages
excessive risk taking.

The key risks faced by the Group include credit risk, market risk, operational risk and liquidity risk. These, and other risks and
uncertainties inherent in the business, require sound capital management to ensure adequacy against regulatory requirements and
adverse events. With this in mind, the Group regularly sets out and reviews capital targets in line with actual and forecast business
levels and monitors performance against such targets on a regular basis. A more detailed explanation of key risks and capital
management is included within the Capital and Risk Management Report.

The Directors also recognize the fact that the Group may be subject to reputation and litigation risk as a result of its actions and
operations. Conscious of the serious repercussions such risks may have on the Group’s and the various stakeholders’ wellbeing,
both the Board of Directors and Senior Management exercise zero tolerance to conduct risk and aim to instill the highest levels of
ethical behaviour through a number of appropriate policies, procedures and controls.

Operational Overview

A review of the business of the Group for the period ended 31 December 2017 and an indication of future developments are provided
in the Chairman’s Statement and the Chief Executive Officer’s Review, which can be found in the front section of this Annual Report.

Dividends

A gross interim dividend of €0.0450 per share was paid on 26 May 2017. The Directors propose a final gross dividend of €0.0800 per
share, resulting in a total gross dividend for the period of €0.116 per share (as adjusted for Rights Issue). The aggregate net dividend
for the period is €0.075 per share (as adjusted for Rights Issue) amounting to €39.59 million (2016: €0.06 net per share as adjusted
for bonus issue and Rights Issue, resulting in a net payout of €31.51 million). The total dividend is analysed as follows:

The Bank
2017 2016
€ €
Gross 60,900,000 48,477,000
Tax at source (21,315,000) (16,966,950)

Net 39,585,000 31,510,050

The Directors propose that shareholders are offered the right to elect to receive the dividend either in cash or by the issue of new shares.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 3

Directors’ report as at 31 December 2017 (continued)

Board of Directors

The following Directors served on the Board during the period from 1 October 2016:

Taddeo Scerri (appointed Chairman 16 December 2016)

John Cassar White (resigned 16 December 2016)
Stephen Agius (appointed 16 December 2016)
Alan Attard (appointed 16 December 2016)
Paul V Azzopardi (appointed 16 December 2016)
Miguel Borg (appointed 27 July 2017)
Barbara Helga Ellul (resigned 16 December 2016)
James Grech
Mario Grima (resigned 16 December 2016)
Alfred Lupi
Mario Mallia (appointed 27 July 2017)
Anita Mangion (appointed 16 December 2016)
Antonio Piras (appointed 16 December 2016)
Gabriele Simonetti (resigned 16 December 2016)
Joseph M Zrinzo

Directors’ Responsibilities

The Directors are required by the Companies Act, 1995 (Chapter 386, Laws of Malta) to prepare financial statements in accordance
with International Financial Reporting Standards as adopted by the EU which give a true and fair view of the state of affairs of the
Group and the Bank as at the end of the financial period and of the profit or loss of the Group and the Bank for the period then ended.
In preparing the financial statements, the Directors should:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and the
Bank will continue in business as a going concern.

The Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time
the financial position of the Group and the Bank, and which enable the Directors to ensure that the financial statements comply with the
Banking Act, 1994 (Chapter 371, Laws of Malta) and the Companies Act, 1995 (Chapter 386, Laws of Malta) and with the requirements
of Article 4 of the Regulation on the application of IFRS as adopted by the EU. This responsibility includes designing, implementing and
maintaining such internal controls as the Directors determine necessary to enable the preparation of financial statements that are free
from material misstatements, whether due to fraud or error. The Directors are also responsible for safeguarding the assets of the Group
and the Bank, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

After reviewing the Group’s plans for the coming financial years, the Directors are satisfied that at the time of approving these financial
statements, it is appropriate to continue adopting the going concern basis in preparing these financial statements.

During financial period 2017, the Board of Directors resolved to change the financial reporting date of the Bank from 30 September
to 31 December. The objective was to align the Bank's financial year-end with that of the vast majority of its European counterparts.
The financial period which started on 1 October 2016 had a duration of 15 months and ended on 31 December 2017. Thereafter,
each financial year will commence on 1 January and will end on 31 December.

Auditors

A resolution to re-appoint KPMG Malta jointly with KPMG LLP (United Kingdom) as auditors of the Bank will be proposed at the
forthcoming Annual General Meeting (AGM). KPMG Malta and KPMG LLP (United Kingdom) have expressed their willingness to
remain in office.

Information pursuant to Listing Rule 5.64

Following the approval of the Shareholders of the Bank, during an Extraordinary General Meeting held on 27 July 2017, the Bank’s
authorised share capital increased from €500 million to €1,000 million divided into 1,000 million ordinary shares with a nominal
value of €1.00 each.

The issued shares of the Bank consist of one class of ordinary shares with equal voting rights attached.

Following the approval of the shareholders of the Bank during the 43rd AGM held on 16 December 2016, on the 16 January 2017,
the amount of €30,000,000 from the Bank’s reserves was capitalised for the purpose of a bonus issue of 30,000,000 ordinary
shares of a nominal value of €1.00 each fully paid up. Following this allotment, the issued share capital of the Bank increased
from €390,000,000 to €420,000,000 divided into 420,000,000 ordinary shares with a nominal value of €1.00 each fully paid up.
 Bank of Valletta p.l.c.
4 Annual Report & Financial Statements 2017

Directors’ report as at 31 December 2017 (continued)

During the period under review the Bank went through a Rights Issue of €150 million worth of new ordinary shares. Following the
listing of the new Ordinary Shares on 22 December 2017, the issued and paid up capital of the Bank increased from €420,000,000
to €525,000,000 divided into 525,000,000 ordinary shares with a nominal value of €1.00 each. Since an increase in the issued
share capital requires a change in the Memorandum and Articles of Association, which in turn requires shareholders’ approval, a
specific resolution to this effect will be presented for the shareholders’ approval at the forthcoming AGM.

Clause 4.3 of the Bank’s Memorandum of Association provides that, with the exception of existing large shareholders, presently the
Government of Malta and UniCredit S.p.A., no person may at any time, whether directly or indirectly and in any manner whatsoever
acquire such number of shares in the Bank as would in aggregate be in excess of 5% of the issued share capital of the Bank.
This threshold was previously 3% but was revised to 5% and approved during the Extraordinary General Meeting held on 27 July
2017. As at 31 December 2017, Malta Government Investments Limited had a shareholding in the Bank of 0.48% and National
Development and Social Fund (NDSF) had a shareholding in the Bank of 2.91%. Both entities are fully owned by the Government.

Any shareholder holding in excess of 50% of the issued share capital of the Bank or if no such shareholder exists, the shareholder
holding the highest number of shares not being less than 25% of the issued share capital, may appoint the Chairman. As also
explained in more detail below, Qualifying Shareholders with 10% or more of the shares in issue are entitled to recommend one
Director for every 10% holding.

The Directors confirm that as at 31 December 2017, shareholding in excess of 5% of the issued share capital of the Bank was
held directly by:

Government of Malta 25.23%

UniCredit S.p.A. 11.64%

There were no changes in shareholders holding 5% or more of the issued share capital up to 23 March 2018 except that on 22 March
2018 UniCredit S.p.A. sold 7,670,250 shares by means of an off-exchange transaction. Following said transaction, the percentage
holding by UniCredit S.p.A. in the Bank reduced to 10.0001%.

Memorandum and Articles of Association of the Bank

The Bank’s Memorandum and Articles of Association was revised during the period under review and approved by the Shareholders
during an Extraordinary General Meeting held on 27 July 2017.

One of the main changes therein, related to the introduction of the distinction between Executive and Non-Executive Directors. This with
a view to enable Non-Executive Directors to exercise their monitoring function over management and the executive arm of the Board.

Another change related to the increase of the total number of Directors, from a maximum of eleven Directors to a maximum of twelve
Directors, out of which, nine shall be Non-Executive Directors and a maximum of three shall be Executive Directors. The CEO is
the first Executive Director, who is appointed by virtue of his office as Chief Executive Officer. Upon appointment as CEO, the CEO
assumes the role of Executive Director ex officio and shall remain in office until his/her post as CEO terminates. With respect to the
appointment of any other Executive Directors, the Non-Executive Directors are bound to appoint at least one such Director and may,
if they consider it appropriate to do so on the basis of the skill, competence and experience required at the Board, appoint the third
Executive Director. In either case any person so appointed shall be a senior executive officer of the Bank answerable directly to the
CEO or the Board of Directors.

The new Articles of Association also introduced the set up of the Nominations and Governance Committee (NGC), which is
responsible to ensure that the composition of the Board of Directors provides the appropriate level and mix of experience, skills, and
competence required and ensure that persons occupying the post of Non-Executive Directors meet the legal requirements.

The Articles of Association also clarified the appointment of Non-Executive Directors by Qualifying Shareholders and Non-Qualifying
Shareholders. Shareholders with 10% or more of the issued share capital were previously entitled to appoint one Director for every
10% holding. Whilst in essence this practice was retained, the Qualifying Shareholder shall now make a recommendation to the
NGC, and only if in line with the scrutiny and assessment of that Committee, the recommended person is considered fit and proper,
may that person take up office as Director. The NGC has the power to refuse a recommendation by a Qualifying Shareholder if the
candidate does not meet the attributes required by the Board. In such cases the Qualifying Shareholder will be entitled to make other
recommendations. The threshold applicable for Non-Qualifying Shareholders to nominate Non-Executive Directors was increased
from 5,000 shares to €50,000 in nominal value. The threshold is no longer the number of shares but rather the nominal value. Non-
Qualifying Shareholders will be entitled to make recommendations to the NGC of candidates who meet the criteria set by the same
Committee. Only candidates whose nomination has been approved by the NGC shall be presented to the shareholders in general
meeting for an election. The appointment of all Directors (Executive and Non-Executive) is subject to regulatory approval.

The rules governing the appointment and replacement of the Bank’s Directors are contained in Articles 24 to 31 of the Bank’s Articles
of Association.

An extraordinary resolution approved by the shareholders in general meeting is required to amend the Memorandum and Articles of Association.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 5

Directors’ report as at 31 December 2017 (continued)

The Board of Directors has the power to transact all business of whatever nature, not expressly reserved by the Memorandum and
Articles of Association of the Bank, to be exercised by the Bank in general meeting or by any provision contained in any applicable laws.

The shareholders in general meeting authorised the Board to exercise during the Prescribed Period all the powers of the Bank to
issue and allot shares up to an aggregate nominal amount equal to the Prescribed Amount. The Prescribed Period refers to a term
of five years approved during an Extraordinary General Meeting held on 27 July 2017 and which term expires on the 26 July 2022.
This authority is renewable for further periods of five years each.

The Directors have service contracts with the Bank. More information on the Directors’ service contracts can be found under the
Remuneration Report.

The relative Collective Agreements regulate the compensation payable to employees in case of resignation, redundancy or termination
of employment for other reasons.

It is hereby declared that as at 31 December 2017, information required under Listing Rules 5.64.5, 5.64.7 and 5.64.10 is not
applicable to the Bank.

Information pursuant to Listing Rule 5.70.1

There were no material contracts to which the Bank, or any one of its subsidiaries was a party and in which anyone of the Bank’s
Directors was directly or indirectly interested.

Going concern – Listing Rule 5.62

The financial statements are prepared on a going concern basis. The Directors regard that pursuant to Listing Rule 5.62, this is
appropriate, after due consideration of the Bank’s profitability, liquidity, the statement of financial position, capital adequacy and
solvency. Specifically, the Directors have prepared financial and capital plans for the next five years which shows that the Bank is in
a position to continue operating as a going concern for the foreseeable future. These plans take into account risks facing the Bank,
including but not limited to, the potential crystallisation of known contingent liabilities.

Shareholder Register Information pursuant to Banking Rule 7/2014

Directors’ interests in the share capital of the Bank or in related companies as at 31 December 2017 are contained in the Corporate
Governance Statement.

Number of shareholders analysed by range:

23 March 2018
Range of shareholding Total Shareholders Shares
1 – 500 928 249,554
501 – 1,000 1,837 1,425,908
1,001 – 5,000 7,681 21,999,586
5,001 and over 10,233 501,324,952
Total shareholding 20,679 525,000,000

Declaration pursuant to Investment Services Rule R4-4.3.4

Pursuant to Investment Services Rule R4-4.3.4, it is hereby declared that during the reporting period, there were no breaches of
Standard Licence Conditions or other regulatory requirements.

Information pursuant to the Sixth Schedule of the Companies Act, 1995 (Chapter 386, Laws of Malta)

Branches, Agencies and Centres

The Bank has the following Branches, Agencies and Centres around Malta and Gozo:

• 36 Branches offering both deposit taking and lending services

• 5 Business Centres
• 6 Investment Centres
• 4 Agencies offering deposit services only
• 1 Sub-Agency/Satellite Branch offering both deposit and lending services which reports to the “parent” branch
 Bank of Valletta p.l.c.
6 Annual Report & Financial Statements 2017

Directors’ report as at 31 December 2017 (continued)

Besides the above local Branches, the Bank has four Representative Offices, one in Milan which was opened in 1996, one in Libya
which was opened in 2002, one in Brussels, opened in 2012 and another one in London which was opened in March 2018.

Research and Development

In light of the business sector in which it operates, the Bank does not consider research and development as a main area of activity.

Events occurring after the end of the accounting period

On the 15 and 16 January 2018, UniCredit S.p.A. disposed of 946,185 shares in the Bank, which amount of shares represents
0.18% of UniCredit S.p.A.’s shareholding in the Bank. These shares were traded on the market. As at 16 January 2018, UniCredit
S.p.A. held 11.46% shareholding in the Bank. Furthermore on the 22 March 2018, UniCredit S.p.A. disposed of 7,670,250 shares
in the Bank by means of an off-exchange transaction. This amount of shares represents 1.461% of UniCredit S.p.A.’s shareholding
in the Bank. Therefore, as at 23 March 2018, UniCredit S.p.A. held 10.0001% shareholding in the Bank.

Non-Financial Disclosures

Environmental Friendly Measures – The Bank’s ongoing commitment to promote Green practices within the community and determination
to decrease the carbon footprint led to various Green Initiatives that included installations of modern, energy efficient Heating Ventilation
Air Conditioning (HVAC) systems, continuous disinfection and cleaning of ducting systems at various branches, replacement of lights to
energy efficient Light Emitting Diodes (LED) light fittings and installations of PV Cells which generated electrical energy and which was sold
to the Government. The Bank also participated in the annual global initiative Earth Hour by switching off the BOV Centre and Legal Office
façade lights during the hour indicated, with the aim of reducing electricity consumption. The Bank also participated in the European Week
for Waste Reduction. Waste Separation and Recycling of Electronic Waste was ongoing throughout the reporting period. Furthermore,
twenty trees were planted during a tree planting activity in November 2017.

Human Resources Matters – The Bank is covered by a Collective Agreement which binds the relationship between the organisation
and its employees. The prevailing Collective Agreement includes a number of Family Friendly measures ensuring employee matters
are looked after, including but not limited to Flexible Work Arrangements, Adoption/Fostering Leave, Bereavement Leave, Community
Work Leave, Employee Welfare and an Employee Wellness Allowance. Moreover, the Bank has in place a number of policies ensuring
respect for human rights including a Bullying Policy, Health and Safety Policy, a Code of Ethics and an Equality Policy. Related to
the latter, the Bank has been awarded the Equality Mark, in recognition of the Bank's non-discriminatory approach to its workforce.
An Employee Assistance Programme is also in place to assist employees resolve personal or work related problems that critically
hinder their ability to carry out responsibilities at work. The Bank, in conjunction with the Richmond Foundation, also offers its staff
members free Mental Health Care related services. The Bank's Performance Management System is divided in four quadrants,
namely Financial, Process, Customer and Employee, out of which 60% are non-financial key performance indicators.

Anti-Corruption and Bribery Matters – The Bank has a zero tolerance policy towards bribery and corruption and is committed
to applying high standards of honesty and integrity. Recognising that bribery and corruption can have negative effect on its
shareholders, its clients and the wider financial industry, the Bank is in the process of setting up a dedicated Unit as part of its
Anti-Financial Crime Department. The Bank is also implementing initiatives to address key bribery and corruption risks including
policies, procedures and training.

Other than as disclosed in note 33 to the financial statements, there were no subsequent events which would have otherwise
warranted an adjustment to or disclosure in these financial statements.

Statement by the Directors pursuant to Listing Rule 5.68

We, the undersigned, declare that to the best of our knowledge, the financial statements prepared in accordance with the applicable
accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bank and its
subsidiaries included in the consolidation taken as a whole, and that this report includes a fair review of the performance of the
business and the position of the Bank and its subsidiaries included in the consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face.

Approved by the Board of Directors and authorised for issue on 23 March 2018 and signed on its behalf by:

Taddeo Scerri Joseph M Zrinzo

Chairman Director
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 7

Capital & risk management report 31 December 2017

Pillar 3 Disclosures

Basis for preparation

The Basel III capital adequacy framework consists of three complementary pillars: Pillar 1 provides a framework for measuring
minimum capital requirements for the credit, market and operational risks faced by banks; Pillar 2 addresses the principles of the
supervisory review process, emphasizing the need for a qualitative approach to supervising banks; Pillar 3 requires banks to publish
a range of disclosures aimed at providing further insight on the capital structure, adequacy and risk management practices.

This Capital and Risk Management Report provides Pillar 3 disclosures for BOV Group (hereinafter referred as ‘the Group’) in
accordance with disclosure requirements under Part Eight of EU Regulation No. 575/2013 Capital Requirements Regulation (CRR).
During 2017, the EBA released guidelines on disclosure requirements which aim to improve the comparability and consistency of
institution’s Pillar 3 disclosures. These guidelines, applicable as from December 2017, provide detailed disclosure requirements for
credit risk, counterparty credit risk, market risk and capital requirements.

The Bank publishes these disclosures on an annual basis as part of the Annual Report and Financial Statements in accordance with
Article 433 of the CRR. A reference has been added in cases where the information addressing Pillar 3 requirements is included in
other parts of the Annual Report.

This Capital and Risk Management Report is not subject to external audit, except where a disclosure is equivalent to that made in
the Financial Statements which adhere to International Financial Reporting Standards (IFRS) as adopted by the EU. Nonetheless, this
Capital and Risk Management Report has been verified internally and was approved by the Bank’s Audit Committee and the Board
of Directors (BoD). The Bank is satisfied that internal verification procedures ensure that these Additional Regulatory Disclosures are
presented fairly.

Section 1: BOV Risk Management

It is the core function of every bank to take risks consciously with the aim of managing them to achieve a return. The Group is
consistently working towards achieving the required balance between profitability and growth against the appropriate risk levels.

The Group’s Risk Appetite Framework (RAF) articulates the types and level of risk that the Group is willing to take in pursuit of
the strategic objectives. The RAF ensures that all material risks are kept within appropriate limits, both to safeguard the financial
sustainability of the Group, as well as to meet the needs of the stakeholders (including depositors, shareholders and regulators). Any
breaches or early warning signs need to be immediately escalated to the CEO and/or CRO and further to the Risk Committee, the
Compliance and Crime Prevention Committee or the BoD as applicable. To maintain an environment where staff are comfortable
raising concerns, the Bank also has a whistleblowing policy and the respective procedures in place. During 2017, the Group’s RAF
was reviewed and approved by the BoD and communicated with management and all departments to ensure a robust risk culture
throughout the organisation.

Within this context, the Bank’s organisational structure is built upon a framework that promotes a transparent and efficient, enterprise-
wide risk management culture wherein the behaviour, attitude and decisions reflect risk awareness and mitigation across the Group.
Great importance is given to the risk governance structure, which includes corporate value statements, codes of conduct and ethics,
policies, procedures and risk assessment. The Group strives to strengthen and build upon the existent risk values so as to minimise
risk exposure to insignificant levels.

The Group’s risk culture supports the core competency and business strategy. One of the high priority objectives of the second line of
defence is to instil a cultural awareness which helps to establish a robust risk management and control process. This is done through
training, workshops and continuous sharing of information between different departments and business lines. During this financial
period, the Group engaged in a bank-wide risk register exercise which aids in the identification and management of risk across the
Group and also serves to improve the level of risk awareness.

Risk Governance

The Bank adopts different layers of defence and segregates duties to reinforce the currently implemented risk control mechanisms.
Such approach is embraced through the application of the three lines of defence model. The first line of defence is executed by the
functions that own and manage risks, namely the business units. The second line is executed by the functions that oversee risks,
namely Risk Management, Compliance and Anti-Financial Crime Departments; and the third line is executed by Group Internal Audit,
which is the function that provides independent assurance to the Board. This means that responsibility for risk management resides
at all levels within the Bank. The Group continues to adopt and strengthen the three lines of defence by ensuring effectiveness of
the risk management framework which includes constant monitoring and assurance. The risk governance framework efficiently
enhances the understanding of existing and emerging risks through cooperation between all three lines and effectively executing risk
management controls. The collective effort across different lines of defence ensures that the Group’s risk culture is recognised as an
essential factor to achieve compliance and strategic objectives.
 Bank of Valletta p.l.c.
8 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

The Bank’s risk governance structure is represented below:

BOARD OF
DIRECTORS

BOARD
COMMITTEE

MANAGEMENT
COMMITTEE
AUDIT ASSET LIABILITY RISK MANAGEMENT COMPLIANCE
COMMITTEE COMMITTEE COMMITTEE COMMITTEE

CHIEF RISK
OFFICER
CHIEF RISK OFFICER

OPERATIONAL
DEPARTMENT

INTERNAL CREDIT RISK ANTI-FINANCIAL

RISK MANAGEMENT LEGAL SERVICES COMPLIANCE LINE OF
AUDIT SANCTIONING CRIME
COMMAND

DUTY TO
REPORT

AUDIT

The following points give a brief description of the main functions of the second line of defence.

The Risk Management Department is responsible for the overall risk management of the Bank. In order to ensure integrity, the Risk
Management Department operates independently of the Bank’s business activities. This Department has a number of units including:

• Credit Risk Management Unit (CRMU). The Unit’s objective is to safeguard the soundness of the loan portfolio, to ensure
sustainable credit growth and to enable a diversified portfolio aligned with the Bank’s risk appetite. CRMU is responsible for
the development and maintenance of the Credit Policy, which sets out the Bank’s core principles governing the provision
of credit. The Unit is also responsible for measuring and managing asset quality in line with the prevailing banking rules.

• Enterprise Risk Management Unit (ERMU). ERMU takes a holistic enterprise-wide view of the risks taken on by the Bank in
carrying out its business and ensures that these are consistent with the overall risk appetite framework. It is a central
unit which is responsible for the management of risk reporting, risk data governance and portfolio risk management. The
Unit is responsible for internal stress tests and regulatory periodic stress tests conducted by the European Central Bank
(ECB) and is also actively involved in the compilation and submission of the Internal Capital Adequacy Assessment
Programme (ICAAP), Internal Liquidity Adequacy Assessment Programme (ILAAP) and the Recovery Plan.

• Economics & Risk Research Unit. The Unit brief includes the monitoring of the Bank’s economic environment with special
focus on the local and European economy. The Unit is responsible for conducting all mathematical, statistical and economic
research that is required by the Bank.

• Operational Risk Management Unit. The core operational risk function is responsible to coordinate and oversee the
identification, assessment, management and reporting of operational risks. It is also responsible for the implementation
of the Operational Risk Management Framework (ORMF). The key elements of the ORMF are the risk register, risk
identification, monitoring of risk indicators, loss database, business continuity and scenario analysis. The Unit is also
responsible for the mitigation of operational risks events through the procurement of adequate and cost-effective insurance
cover. In addition, the Unit has an information security function which analyses and communicates information security
risks and evaluates their potential impact on the business processes.

• Risk Coordination Unit. The objective of this Unit is to be the direct link between the first and the second line of defence by
increasing the awareness of risk responsibilities and cultivating a risk culture so that risk can be owned and managed within
each business unit.

The Credit Risk Sanctioning Department is responsible for conducting independent financial and risk analysis of lending and investment
proposals that fall under the dual-voting system and to ensure that these are within the risk appetite communicated by the BoD.

The Legal Services Department ensures that the Bank’s interests are duly safeguarded and that the Bank is kept duly updated with all
legislative developments. This enables the Bank to map the way forward and be legally prepared even in terms of the Bank's processes.

Anti-Financial Crime Department is responsible for the development and implementation of policies, procedures, systems and controls
to counteract financial crime, money laundering, counter terrorism financing, bribery and corruption, and fraud. The Department also
ensures that all applicable sanctions are implemented. The MLRO is the Bank’s liaison with the FIAU.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 9

Capital & risk management report 31 December 2017 (continued)

Compliance Department is responsible to ensure that the Bank and its subsidiaries operate in line with regulatory requirements. The
Compliance Department monitors regulatory developments and assesses the impact and applicability of rules and regulations. It
also carries out specific and thematic reviews on various functions, while ensuring that the Group has effective policies for mitigating
reputational and conduct risk. It provides regular training on regulatory obligations and requirements emanating from internal policies
and procedures.

Key Risks

The Group has specific risk appetite statements for all of its material risks which are reviewed on a regular basis. The main categories
of risk related to the business model to which the Group is exposed are shown in the following table. Further details on how these risks
are identified and managed at different levels of the organisation can be found in the relevant sections as highlighted below.

Capital Management The ability to hold sufficient capital to meet both regulatory requirements and shareholder expectations.
[Notes to the Financial statement note 39.7; Pillar 3 disclosures Section 3, 4 and 5]
Credit Risk The risk of financial loss if a customer or counterparty fails to meet an obligation under a contract
[Notes to the Financial statement note 39.2; Pillar 3 disclosures Section 6]
Market Risk The risk that the fair value or future cash flows will fluctuate because of changes in market prices. Given
that the Group does not operate a Trading book, market risk is limited to interest rate risk, currency risk
and other price risk.
[Notes to the Financial statement note 39.4; Pillar 3 disclosures Section 7]
Operational Risk The risk of losses resulting from inadequate or failed processes, people and internal systems, or from
external events.
[Pillar 3 disclosures Section 8]
Liquidity Risk It is the risk of incurring losses due to the inability of meeting obligations as they become due and can
be categorised into two types:
• Funding liquidity risk which results when the Group cannot fulfil its obligations due to being unable
to obtain new funding.
• Market liquidity risk which occurs when the Group is unable to sell or transform its liquidity buffers
into cash without incurring significant losses.
[Notes to the Financial statement note 39.3; Pillar 3 disclosures Section 10]

The Group’s management body monitors the key indicators on a regular basis to ensure proper monitoring and adherence to risk
appetite limits. In addition, early warning indicators embedded in the Group’s recovery plan are monitored on a frequent basis.
The BoD, Management Board (MB) and various committees are presented with risk reports on a regular basis to ensure adequate
risk management, enabling them to take corrective action in a timely manner. These reports provide insight on particular risks,
highlighting the current position, compliance with set limits and sensitivity analysis.

Section 2: Scope of application of the regulatory framework

The consolidation of the Group’s financial statements is based on the IFRSs, whereas the prudential consolidation in the statement
of capital is based on the CRR 575/2013. The following table gives an overview of the accounting and regulatory consolidation
methods for each entity within the Group. Further information on the Group’s associates and subsidiaries can be found in note 18
and 19 to the Financial Statements, respectively.

EU LI3 - Outline of the differences in the scopes of consolidation (entity by entity)

Method of accounting Method of regulatory consolidation

Name of the entity Description of the entity
consolidation Full consolidation Deducted

Bank of Valletta plc Full consolidation x Credit institution

BOV Fund Services Ltd Full consolidation x Fund Administration
BOV Asset Management Ltd Full consolidation x Fund Management
MAPFRE MSV Life plc Equity method of accounting x Life Assurance
MAPFRE Middlesea plc Equity method of accounting x Insurance
 Bank of Valletta p.l.c.
10 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Section 3: Own Funds

3.1 Capital Overview

The Group maintains its objective of actively managing capital in an integrated way, seeking to fulfil the regulatory requirements,
guarantee solvency, and maximise profit. Through this holistic approach the Group is able to achieve long-term sustainability and
identify growth opportunities that provide a sustainable risk-return performance. The Group’s capital management approach aims to
ensure a sufficient level of capitalisation to absorb unexpected losses from its risk exposures while supporting business growth and
providing adequate return to shareholders.

Capital metrics and the successful implementation of the ICAAP framework are continuously monitored by the BoD, the Assets
and Liabilities Committee (ALCO), and the MB. The BoD regularly receives information and reports from the lines of defence and all
other functions and action is taken on emerging items of concern. They also ensure that the three lines are operating uniformly and
according to best practice. The MB meets on a weekly basis to oversee the overall management of the Bank. The MB formulates
risk strategies and risk profiles, including policies conducive to the achievement of organisational goals. ALCO meets on a monthly
basis to analyse financial information and to assess the impact that the various types of risks arising from changes in interest rates,
exchange rates and the market, have on the profitability and capital of the Bank. Through this structured monitoring, it is ensured
that the Group is adequately capitalised to achieve the strategic objectives set by the BoD.

The Group has a comfortable solvency position which exceeds the minimum requirements of the European Central Bank (ECB) and
other regulations. During the last quarter of the financial period, the Group increased its share capital through a successful rights
issue. This led to a significant increase in the Group’s Common Equity Tier 1 (CET1) ratio, reported at 16.13% as at end of December
2017. This improvement in the capital position enables the Bank to comply with increases in the regulatory capital requirements and
to implement the Bank’s strategic initiatives.

The Group adopts a prudent approach when determining dividend pay-outs, which aims to ensure that an adequate amount of
earnings is retained to strengthen the Tier 1 capital base. The Group’s approach is to determine a target CET1 ratio such that
sufficient earnings are retained to enable the Bank to reach the aforementioned target ratio with the remaining profit then being
deemed eligible for distribution.

3.2 Capital Instruments

The Group’s capital base is composed of CET1 and Tier 2 capital, as defined in Part Two of the CRR. In line with new regulations,
the Group is putting much of its emphasis and monitoring on CET1 capital which is the highest form of quality capital, thus providing
the greatest level of protection against losses.

The Group’s capital base is primarily composed of issued common shares and retained earnings, which are part of CET1 capital –
the Group’s core capital. In line with the CRR, the Group’s capital is subject to relative deductions. The main deductions relate to
intangible assets, unrealised gains and losses, reserve for possible litigation and the reserve held against depositor compensation
scheme which is an added requirement in national legislation. In accordance with Section 3, Chapter 2, Title I, Part Two of CRR
there were no other items requiring deductions from the Own Funds. As at the end of the financial period both the Group’s significant
investments and deferred taxation were below the 10% threshold as stipulated in Article 48(1) of the CRR.

The Group has four subordinated bonds in issue and these are included as part of Tier 2 Capital as they fully qualify for the provisions
listed under CRR (575/2013) Part Two, Title 1, Chapter 4, Article 63. Specifically, these instruments rank after the claim of all other
creditors and are not to be repaid until all other debts outstanding at the time have been settled. The 5.35% and the 4.80% Euro
subordinated bonds are redeemable at par during the next five years (8 June 2019 and 15 March 2020 respectively) and thus the
amortised amount is eligible for inclusion in Own Funds.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 11

Capital & risk management report 31 December 2017 (continued)

In accordance with Article 492 of the CRR, the Group is required to complete a transitional disclosure template during the phasing in
of regulatory adjustments from 1 January 2014 to 31 December 2017. The transitional disclosure template is set out below.

CET1 CAPITAL €'000s

Common Equity Tier 1 capital: instruments and reserves
1 Capital instruments and the related share premium accounts 570,427
2 Retained earnings 245,861

3 Accumulated other comprehensive income (and other reserves, to include unrealised gains and losses under the
applicable accounting standards) 33,194
3a Funds for general banking risk 4,713
6 Common Equity Tier 1 capital before regulatory adjustments 854,195

Common Equity Tier 1 (CET1) capital : regulatory adjustments

8 Intangible assets (net of related tax liability) (negative amount) (28,453)
18 Direct and indirect holdings by an institution of CET1 instruments of financial sector entities where the institution has a -
significant investment in those entities
21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related liability where the -
conditions in 38 (3) are met, negative amount)
Amount exceeding the 17.65% threshold (negative amount)
23 of which: Significant direct and indirect holdings by the institution of the CET1 instruments of financial sector entities -

25 of which: Deferred tax assets arising from temporary differences -

26a Regulatory adjustments relating to unrealised gains and losses (6,639)

26b Amount to be deducted from or added to CET1 capital with regard to additional filters and deductions required pre CRR (44,634)

28 Total regulatory adjustments to Common Equity Tier 1 (CET1) (79,726)

29 Common Equity Tier 1 (CET1) Capital 774,469

TIER 2 CAPITAL
46 Capital instruments and the related share premium accounts 157,016
51 Tier 2 (T2) capital before regulatory adjustments 157,016

57 Total regulatory adjustments to Tier 2 -

58 Tier 2 (T2) Capital 157,016

59 TOTAL CAPITAL 931,485

TOTAL Risk Weighted Assets

59a Risk weighted assets in respect of amounts subject to pre-CRR treatment and transitional treatments
of which deferred tax assets not deducted from CET1 capital 144,808
of which direct holdings by the institution of the CET1 instruments of financial sector entities not included in CET1 capital 127,140
60 TOTAL Risk Weighted Assets 4,802,010

Capital Ratios and buffers

62 Tier 1 capital 16.13%
63 Total capital 19.40%

64 Institution specific buffer requirement 6.81%

65 of which: capital conservation buffer requirement 1.25%
66 of which: countercyclical buffer requirement 0.06%
67 of which: Other Systemically Important Institution (O-SII) buffer 1.00%

68 Common Equity Tier 1 available to meet buffers 11.63%

Amounts below the thresholds for deductions

73 The part of the holdings of CET1 instruments of financial sector entities (as defined in Article 4(1)(27) of CRR) where the 52,870
institution has a significant investment but which is below the 10 % threshold in Article 48(1) point (b) of CRR.
75 Deferred tax assets arising from temporary differences (amount below 10% threshold) 60,217
 Bank of Valletta p.l.c.
12 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

In accordance with Part Eight Article 437 of the CRR the following table discloses the main features and the terms and conditions
of Tier 1 and Tier 2 instruments.
3.5% BOV 3.5% BOV
5.35% BOV 4.8% BOV
Capital Instruments Main BOV Ordinary Subordinated Subordinated
Subordinated Subordinated
Features Shares Notes 2030 Notes 2030
Bonds 2019 Bonds 2020
Series 1 Series 2
1 Issuer Bank of Valletta plc Bank of Valletta plc Bank of Valletta plc Bank of Valletta plc Bank of Valletta plc
2 Unique identifier MT0000020116 MT0000021262 MT0000021270 MT0000021312 MT0000021320
3 Governing Law(s) of the instrument Maltese Law Maltese Law Maltese Law Maltese Law Maltese Law
Regulatory Treatment
4 Transitional CRR rules Common Equity Tier 2 Tier 2 Tier 2 Tier 2
Tier 1
5 Post-transitional CRR rules Common Equity Tier 2 Tier 2 Tier 2 Tier 2
Tier 1
6 Eligible at solo/(sub)consolidated Solo & (Sub) Solo & (Sub) Solo & (Sub) Solo & (Sub) Solo & (Sub)
/ solo & (sub)consolidated consolidated consolidated consolidated consolidated consolidated
8 Amount recognised in regulatory EUR 525 million EUR 14.6 million EUR 30.9 million EUR 66.9 million EUR 44.7 million
capital
9 Nominal amount of instrument EUR 525 million EUR 50.0 million EUR 70.0 million EUR 66.9 million EUR 44.7 million
9a Issue Price N/A At par (€100 per At par (€100 per At par (€100 per At par (€100 per
bond) bond) bond) bond)
9b Redemption Price N/A At €100 At €100 At €100 At €100
10 Accounting classification Share Equity Liability- amortised Liability- amortised Liability- amortised Liability- amortised
cost cost cost cost
11 Original date of issuance 26 August 1992 8 June 2009 15 March 2010 22 December 2015 22 December 2015
and 6 April 2016 * and 6 April 2016 **
12 Perpetual or dated N/A Dated Dated Dated Dated
13 Original maturity date N/A 15 June 2019 15 March 2020 8 August 2030 8 August 2030
14 Issuer call subject to prior No No No No No
supervisory approval
Coupons/dividends
17 Fixed or floating dividend coupon Floating Fixed Fixed Fixed Fixed
18 Coupon rate and any related index N/A 5.35% 4.80% 3.50% 3.50%
19 Existence of dividend stopper No No No No No
20a Fully discretionary, partially Fully discretionary Mandatory Mandatory Mandatory Mandatory
discretionary or mandatory
(in terms of timing)
20b Fully discretionary, partially Partially Mandatory Mandatory Mandatory Mandatory
discretionary or mandatory discretionary
(in terms of amount)
21 Existence of step up or other N/A No No No No
incentive to redeem
22 Noncumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative
23 Convertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible
30 Write-down features No No No No No
35 Position in subordination Subordinated to Subordinated to Subordinated to Subordinated to Subordinated to
hierarchy in liquidation the Issuer’s (BOV) other outstanding, other outstanding, other outstanding, other outstanding,
subordinated bonds unsubordinated unsubordinated unsubordinated unsubordinated
and unsecured and unsecured and unsecured and unsecured
obligations of the obligations of obligations of obligations of
Issuer (BOV), present the Issuer (BOV), the Issuer (BOV), the Issuer (BOV),
and future. present and future. present and future. present and future.
Non-compliant transitional features No No No No No

* €52,705,800 were issued on 22 December 2015 (Tranche 1 - MT0000021312) and €14,214,700 were issued on 6 April 2016 (Tranche II -MT
0000021338) These two tranches were subsequently merged on 8 August 2016 into ISIN MT0000021312
** €22,294,200 were issued on 22 December 2015(Tranche 1-MT0000021320) and €22,376,200 were issued on 6 April 2016 (Tranche II -MT
0000021346) These two tranches were subsequently merged on 8 August 2016 into ISIN MT0000021320
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 13

Capital & risk management report 31 December 2017 (continued)

3.3 Reconciliation of Own Funds to audited Financial Statements

The table below provides a full reconciliation of the Group’s own funds to the statement of financial position within the audited financial
statements for the period ended 31 December 2017.

Reconciliation between accounting and regulatory scope of consolidation

Group
2017
€ 000

Common Equity Tier 1

As per Statement of Financial Position
Called up share capital 525,000
Share premium account 45,427
Retained earnings 358,466
Revaluation reserves 33,194

Less: Own Funds adjustments

Investments in Associates (56,591)
Depositor Compensation Scheme reserve (44,634)
Intangible assets (28,453)
Final dividend (27,300)
Non-distributable reserve for possible litigation (24,000)
Transitional Adjustments (6,639)
774,469

Tier 2
As per Statement of Financial Position
Subordinated liabilities 231,591
Less: Amortisation of subordinated loan capital (74,575)
157,016

Total Own Funds 931,485

Section 4: Capital Requirements (CRR Article 438)

4.1 Overview of Pillar 1 capital requirements

The Group uses the following approaches to calculate the own funds requirements for Pillar I risks.

• The Standardised Approach for credit risk. Risk weights for the Treasury Portfolio are determined by taking the worst credit rating
provided by eligible External Credit Assessment Institutions (ECAIs) – Fitch, Moody’s and S&P. Regulatory risk weights are used for
unrated exposures and the lending portfolio.
• The Basic Indicator Approach for operational risk. Under this approach the Group allocates capital by taking 15% of the average gross
income of the preceding three years.
• The Basic Method with respect to the Group’s foreign exchange risk. The capital charge for foreign exchange risk using the Basic
Method is calculated at 8% of the higher of the sum of all the net short positions and the sum of all the net long positions in each foreign
currency.
• A minimum capital requirement is also determined for non-credit obligation assets (i.e. ‘other assets’ on the balance sheet) in line with
the CRD IV 575/2013.

In addition to the above, Banking Rule BR/15: Capital Buffers of Credit Institutions authorised under the Banking Act, 1994, requires
additional buffers, viz. the Capital Conservation Buffer (CCB), Countercyclical Capital Buffer (CCyB), Other-Systemically Important Institutions
(O-SII) buffer, and Systemic Risk Buffer. These buffers are aimed at strengthening the resilience of the Group and have entered into force
as from January 2016, with full application as from January 2019. Automatic restrictions on capital distributions apply if the Group’s CET1
capital falls below the level of its CRD IV combined buffer.
 Bank of Valletta p.l.c.
14 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

The Group is also required to maintain an institution-specific CCyB. This is calculated on the basis of the geographical location of the
relevant credit exposures for the CCyB. In line with Article 440 of the CRR the table below discloses the geographical distribution of the
Group credit exposures relevant for the calculation of the institution-specific CCyB and the amount of the institution specific CCyB.

Countercyclical Capital Buffer

Country General Credit Total RWA Own Funds Share CCyB Rate
€000 €000 €000
CZ 5,214 2,660 213 1.87% 0.50%
NO 113,044 50,226 4,018 35.36% 2.00%
SE 224,898 87,896 7,032 61.88% 2.00%
SK 6,315 1,263 101 0.89% 0.50%
349,471 142,046 11,364 100.00% 1.96%

Total Capital Required (all portfolio) (in thousands): 384,161

Share of CCyB out of total capital required 2.96%
Institution specific CCyB: 0.06%
CCyB (in thousands): 223
In accordance with Article 438(c) to (f) of the CRR, the following table provides an overview of the total RWA and the capital requirement
for credit risk split by the different exposure classes as well as capital for operational risk, foreign exchange risk, and credit valuation
adjustment risk. No capital is allocated for market risk as the Bank does not operate a trading book. The Bank has no exposure in items
representing securitisation positions. Moreover, the capital allocated to settlement risk and commodities risk is nought. The exposure
value is equal to the total on-balance sheet and off-balance sheet net of value adjustments and provisions and post CCF.

EU OV1 – Overview of RWAs

€ thousands December 2017 December 2016 December 2017
Exposure Class Exposure value RWA RWA Capital required

1 Credit risk (including CCR) 11,531,337 4,307,073 4,244,475 344,566

2 of which the standardised approach 11,531,337 4,307,073 4,244,475 344,566
Central government or central banks 3,765,764 8,154 9,435 652
Regional government or local authorities 263,567 53,263 78,669 4,261
Public sector entities 73,249 36,624 43,832 2,930
Multilateral development banks 139,701 - - -
International organisations - - - -
Institutions 2,131,812 763,583 826,651 61,087
Corporates 1,425,970 1,121,391 1,002,136 89,711
Retail 394,709 288,232 371,720 23,059
Secured by mortgages on immovable 2,648,158 1,319,536 1,216,547 105,563
property
Exposures in default 154,551 163,081 140,957 13,046
Items associated with particular high risk 34,399 51,599 93,003 4,128
Covered bonds - - - -
Claims in the form of CIU 999 999 - 80
Equity exposures 70,106 70,106 86,314 5,608
Other items 428,352 430,505 375,211 34,440
6 Credit valuation adjustment risk 5,679 10,660 454
9 of which the standardised approach 5,679 10,660 454
13 Settlement risk - - -
19 Foreign exchange risk 2,435 768 195
23 Operational risk 486,823 433,191 38,946
24 of which the basic indicator approach 486,823 433,191 38,946
27 Amounts below the thresholds for 271,948 224,881 21,756
deduction (subject to 250% risk weight)
29 TOTAL CAPITAL REQUIRED 4,802,010 4,689,095 384,161
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 15

Capital & risk management report 31 December 2017 (continued)

4.2 Internal Capital Adequacy Assessment Process (ICAAP) and stress testing

The ICAAP document is prepared on an annual basis and includes an assessment of the current and future capital requirements given
the Bank’s strategy, risk profile and capital plan. Apart from encompassing the adequacy of capital requirements for Pillar 1 risks, the
ICAAP includes other material residual risks which are not fully captured under Pillar 1. These include concentration, interest rate risk in the
banking book, reputational risks and other material risks. The ICAAP also includes a number of stress tests which are applied to assess
the resilience of the Bank’s capital to severe but plausible events and identify any potential vulnerabilities. The BoD and senior management
strongly believe that the ICAAP will continue to act as an important contribution to the strengthening of the risk management practices and
capital adequacy of the Bank.

The Group’s internal stress testing is based on various scenarios and sensitivity analysis. On a regular basis various sensitivity assessments
are performed on credit risk, interest rate risk and liquidity risk. Stress tests are an important means of analysing the risk profile since they
give management a better understanding of how the Group’s revenue and capital are impacted by macroeconomic changes. The Bank
also participates in the Supervisory Review and Evaluation Process (SREP) EU-wide external stress test conducted by the ECB. The
purpose of the ECB stress tests is to assess the health of the Single Supervisory Mechanism (SSM) banks under stressed conditions and
the ability of the individual banks to absorb losses in various economic scenarios.

Section 5: Leverage Ratio (CRR Article 451)

The Leverage Ratio was introduced into the Basel III framework as a non-risk-based backstop limit, to supplement risk-based capital
requirements. Its purpose is to limit the leverage effects in the balance sheet as it is a volume-based measure calculated as Tier 1
capital divided by Total exposure. The latter is composed of on-balance sheet assets plus off-balance sheet exposures, such as undrawn
commitments and derivatives potential future exposures, less amounts permitted to be deducted for Tier 1 capital.

As at December 2017, the transitional leverage ratio stood at 6.40% (Sep 2016: 5.34%) on a Tier 1 Capital of €774 million and a total
exposure of €12,109 million. This lies well above the 3% minimum requirement and thus no additional capital is required. There were no
material risks of excessive leverage during the period under review that had a significant negative impact on the reported ratio, with the
increase from September 2016 to December 2017 being mainly due to the increase in Tier 1 capital.

Leverage Ratio Dec-17

€ 000s
On-balance sheet items (excluding derivatives and SFTs) 11,813,140
Asset amounts deducted in determining Tier 1 capital (79,726)
Total on-balance sheet exposures (excluding derivatives and SFTs) 11,733,414

Replacement cost associated with all derivatives transactions 7,490

Add-on amounts for PFE associated with all derivatives transactions (mark-to-market method) 546
Total derivatives exposures 8,037

Off-balance sheet exposures at gross nominal amount 2,084,928

Adjustments for conversion to credit equivalent amounts (1,717,177)
Total Other off-balance sheet exposures 367,751

Leverage ratio total exposure measure 12,109,202

Tier 1 Capital 774,469
Actual Leverage Ratio (transitional) 6.40%
Statutory Minimum 3.00%

The following table provides a summarised reconciliation of accounting assets and leverage ratio exposures.

Summary reconciliation of accounting assets and leverage ratio exposures Dec-17

€ 000s
Total assets as per published financial statements 11,820,630
Adjustments for derivatives financial instruments 546
Adjustments for off-balance sheet items 367,751
Other adjustments (79,726)
Leverage ratio total exposure measure 12,109,202
 Bank of Valletta p.l.c.
16 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

The following table provides a split-up of the on-balance sheet exposures, excluding derivatives.

EU-1 Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures) Dec-17
€ 000s
EU-2 Trading book exposures -
EU-3 Banking book exposures, of which: 11,813,140
EU-4 Covered Bonds -
EU-5 Exposures treated as sovereign 3,765,059
EU-6 Exposures to regional government, MDB, international organisations and PSE not treated as sovereigns 476,517
EU-7 Institutions 2,126,512
EU-8 Secured by mortgages of immovable properties 2,648,760
EU-9 Retail exposures 420,595
EU-10 Corporate 1,676,651
EU-11 Exposures in default 164,017
EU-12 Other exposures 535,029

Section 6: Credit Risk

6.1 Management of Credit Risk

Credit risk is the risk of suffering financial loss should any of the Bank’s counterparties fail to fulfil their contractual payment obligations.
The Group’s exposure to credit risk arises mainly through its lending and investment activities. Credit risk represents the Group’s
largest regulatory capital requirement and is subject to rigorous monitoring and control.

The credit risk management function is responsible for ensuring that the Bank’s credit risk is properly managed. The main objectives
of credit risk management are to (i) maintain a framework of controls to ensure that credit risk-taking is based on sound credit risk
management principles; (ii) identify, assess and measure credit risk clearly, both on an individual level as well as on a portfolio basis,
avoiding undesirable concentrations of exposure by counterparty, sector and geography; and (iii) monitor credit risk while ensuring
that risk-reward objectives are met.

The Bank has in place a number of policies, tailored for each type of business, which articulate the Bank’s appetite towards credit
risk. These include (i) Business Lending; (ii) Home Loans; (iii) Personal Lending and Credit Cards (iv) E-Commerce; (v) Trade Finance;
(vi) Property Lending; and (vii) Treasury management. These policies are underpinned by core principles related to compliance with
the Group’s ethical standards, clear definition of responsibilities, the existence and implementation of procedures, limits that ensure
a high degree of diversification, and through analysis of risk. Procedures for the consideration and monitoring of exceptions to each
policy are included in the respective policy document.

Policies are reviewed periodically to keep them aligned with the ever-changing market conditions, new regulations and the Bank’s
risk appetite, and are approved by the BoD. During this financial period, the focus was mainly on the fine tuning/review and updating
of the Business Lending Policy, Property Lending Policy and the Write off policy.

6.2 Approval authorities

The Bank has in place a dual voting system with regards to business related transactions, governed by the Business Credit Policy.
New lending facilities are sanctioned through a vote by Business Sanctioning Officers and a vote by Risk Sanctioning Officers,
in accordance with the relative limits. For proposals above a certain limit, authorisation is sought from higher levels in the Bank
hierarchy or from the Credit Committee appointed by the BoD. Lending officers are each allocated a voting limit based on their
individual capabilities and experience, and the nature and scale of lending in the business unit where they are posted. Voting limits
are approved by the MB on the recommendation of the Chief Risk Officer.

Other areas such as Trade Finance, E-Commerce, Debt Management and Consumer Lending exposures exceeding a threshold
defined by the Bank are also within the dual voting system, and governed by their respective policies.

The dual voting system does not govern other Consumer Lending for which a separate discretionary lending limits system applies,
in the majority of cases aided by the use of a credit scorecard. The latter analyses data and grades customers according to their
creditworthiness. Borderline cases are referred and become subject to the normal approval process in line with the appropriate
discretionary lending limits. The Bank has been using the credit scorecard for a number of years, and this has evolved from a generic
to a bespoke application after an adequate history of defaults was accumulated.

The investment portfolio is managed by the Treasury Department and it is the Bank’s strategy to buy and hold instruments till
maturity rather than for trading purposes. Investment proposals are allocated limits according to the Treasury Management Policy
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 17

Capital & risk management report 31 December 2017 (continued)

(TMP) with a ‘four-eye’ approach applied when an investment proposal falls outside the criteria set out in the Bank’s TMP. The Credit
Risk Sanctioning Department undertakes an independent analysis of proposals which are then submitted to the Board for their
consideration. The Board’s approval is also required for exposures above TMP.

6.3 Quantitative information on credit risk exposures

The following table shows the net exposure values as at end December 2017 and end December 2016 by exposure classes and the
average net exposure value of this financial period; based on the last 4 end of quarter observations. During the last quarters the term
placements with the Central Bank have continued to increase leading to an increase in the exposure value to central banks.

EU CRB-B: Total and average net amount of exposures Net value of Average net ex- Net value of
€ millions exposures at the posures over the exposures as at
end of Dec 2017 period December 2016
16 Central governments or central banks 3,813 3,474 3,063
17 Regional governments or local authorities 264 327 370
18 Public sector entities 73 340 531
19 Multilateral development banks 140 158 168
20 International organisations - - -
21 Institutions 2,127 2,199 2,294
22 Corporates 3,170 2,496 2,013
23 Of which: SMEs 1,982 1,456 1,096
24 Retail 948 1,040 1,214
25 Of which: SMEs 64 203 412
26 Secured by mortgages on immovable property 2,649 2,625 2,532
27 Of which: SMEs 761 743 689
28 Exposures in default 181 184 194
29 Items associated with particularly high risk 37 40 39
30 Covered bonds - - -
31 Claims on institutions and corporates with a short-term - - -
credit assessment
32 Collective investments undertakings - - -
33 Equity exposures 70 76 86
34 Other exposures 428 412 393
35 Total Standardised Approach 13,899 13,371 12,897

6.3.1 Concentration Risk

Concentration risk occurs when the Bank has significant exposures to one counterparty or to a group of connected counterparties, or
to counterparties with similar characteristics within a given economic sector or to counterparties operating in the same geographical
area. Due to the structure of the local economy and the size of the domestic financial sector, the Bank faces concentration risk in its
lending and investment activities.

As part of the Group’s credit risk management approach and in order to avoid undue concentrations, the Bank has systems
to identify, measure and monitor Single Name, Sectoral and Geographical concentrations. The systems and controls allow the
Bank to ensure adherence to prudential limits set by the BoD and/or the Regulatory Authority to single counterparty or groups
of related counterparties; the Board and senior management being informed on a regular basis on the level of concentration
in the Bank’s portfolio.

The Bank analyses its concentration risk in the advances and investment portfolios. The Herfindahl-Hirschman Index (HHI) calculated
using risk-weighted assets to better reflect the degree of risk sensitivity is used to assign a capital add-on (%) to credit risk. This
results in an amount of capital allocated against concentration risk under Pillar2.

The following tables show the distribution of the exposures (net values of on-balance sheet and off balance sheet balances) by
geographical distribution, industry and residual maturity broken down by exposure classes in line with CRR Article 442(d/e/f).
 Bank of Valletta p.l.c.
18 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Net value
EU CRB-C: Geographical MALTA UNITED FRANCE GERMANY SWEDEN AUSTRALIA UNITED OTHER TOTAL
breakdown of exposures STATES KINGDOM COUNTRIES
€ millions
Central governments
7 3,655 - - 53 - - - 105 3,813
or central banks
Regional
8 governments or local 19 - 36 23 12 - - 174 264
authorities
9 Public sector entities 73 - - - - - - - 73
Multilateral
10 - - - - - - - 140 140
development banks
International
11 - - - - - - - - -
organisations
12 Institutions 41 147 223 119 183 222 154 1,038 2,127
13 Corporates 2,493 196 82 112 49 13 59 166 3,170
14 Retail 943 0 0 0 0 0 0 3 948
Secured by
15 mortgages on 2,620 1 1 0 0 1 8 18 2,649
immovable property
16 Exposures in default 180 - - 0 - 0 0 0 181
Items associated with
17 37 - - - - - - - 37
particularly high risk
18 Covered bonds - - - - - - - - -
Claims on institutions
and corporates with
19 - - - - - - - - -
a short-term credit
assessment
Collective
20 investments - - - - - - - - -
undertakings
21 Equity exposures 26 5 6 4 - - 5 24 70
22 Other exposures 428 - - - - - - - 428
Total standardised
23 10,515 350 348 312 245 236 226 1,668 13,899
approach

Note to EU CRB-C Table: Other countries account for circa 12% of the total net exposure value and comprises of 43 different
countries. The main ones being Belgium, Canada, Luxembourg, Netherlands, Norway, and Japan.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 19

Capital & risk management report 31 December 2017 (continued)

EU CRB-D: Financial Households Public Wholesale Manufacturing Transportation Others Total
Concentration of and and administration and retail and storage
exposures by industry or Insurance Individuals and defence, trade
counterparty types Activities compulsory
€ millions social security
Central
7 governments or 3,006 - 807 1 - - - 3,813
central banks
Regional
8 governments or 46 0 215 - - - 2 264
local authorities
Public sector
9 - - - - - 73 - 73
entities
Multilateral
10 development - - 140 - - - - 140
banks
International
11 - - - - - - - -
organisations
12 Institutions 2,127 - - - - - - 2,127
13 Corporates 468 28 12 501 613 320 1,228 3,170
14 Retail 3 777 0 56 14 6 91 948
Secured by
mortgages on
15 114 1,749 1 198 57 35 495 2,649
immovable
property
Exposures in
16 4 31 - 25 11 19 92 181
default
Items associated
17 with particularly - - - - - - 37 37
high risk
18 Covered bonds - - - - - - - -
Claims on
institutions and
19 corporates with a - - - - - - - -
short-term credit
assessment
Collective
20 investments - - - - - - - -
undertakings
21 Equity exposures 31 - 15 1 6 1 15 70
22 Other exposures - - - - - - 428 428
Total
23 standardised 5,798 2,585 1,190 782 702 455 2,388 13,899
approach
 Bank of Valletta p.l.c.
20 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Net Exposure Value
EU CRB-E: Maturity of Exposures On <= 1 year > 1 year <= 5 > 5 years No stated Total
€ millions demand years maturity
7 Central governments or central banks 3 3,207 471 132 1 3,813
8 Regional governments or local authorities 0 93 152 19 - 264
9 Public sector entities - - - 73 - 73
10 Multilateral development banks - 43 97 - - 140
11 International organisations - - - - - -
12 Institutions 343 510 1,262 11 - 2,127
13 Corporates 553 521 616 947 533 3,170
14 Retail 91 455 84 303 14 948
Secured by mortgages on immovable
15 200 8 141 2,301 - 2,649
property
16 Exposures in default 47 48 24 53 8 181
Items associated with particularly high
17 4 3 10 20 - 37
risk
18 Covered bonds - - - - - -
Claims on institutions and corporates
19 - - - - - -
with a short-term credit assessment
20 Collective investments undertakings - - - - - 0
21 Equity exposures - - - - 70 70
22 Other exposures - - - - 428 428
23 Total standardised approach 1,242 4,888 2,856 3,858 1,054 13,899

6.4 Credit Risk Adjustments

6.4.1 Past due and Impaired

In accordance with article 178 of the CRR, the Bank defines non-performing exposures (NPL) as those that satisfy either or both of
the following criteria:

a) Material exposures which are more than 90 days past due;

b) The debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the
existence of any past due amount or of the number of days past due.

An exposure is deemed to be impaired when cash flows from operations plus the estimated realisable value of any collateral held are
considered insufficient to recover the full exposure. In such cases a specific allowance is set aside to cover the unsecured portion.

The Bank has a comprehensive internal rating system designed to accurately reflect the risk inherent in each lending relationship,
identify problematic loans in a timely and accurate manner and thereby assist in the creation of a quality loan book. The Bank’s loan
portfolio is analysed according to the twelve grading levels within the internal credit rating system. The relative rating is primarily
determined by the operating performance of the account and by other qualitative criteria. Exposures are analysed on a regular basis
to determine whether there is impairment in the customer’s business which merits a change in rating. For business related facilities,
these criteria (both financial and business related) are reviewed at least once a year. For regulatory and high level internal reporting,
the twelve grading levels are regrouped in five categories: Regular, Watch, Substandard, Doubtful and Loss.

6.4.2 Impairment Allowances and Coverage

The Provisions Committee is responsible for developing and maintaining the Bank’s provisioning methodology. It is composed of
representatives from Finance, Risk and Credit with the latter attending as observers.

As defined in Regulation 183/2014 the following shall be classified as specific credit adjustments:
a) losses recognised in the profit or loss account for instruments measured at fair value that represent credit risk
impairment under the applicable accounting framework;
b) losses as a result of current or past events affecting certain exposures;
c) losses for which historical experience, adjusted on the basis of current observable data, indicates that the loss has
occurred but the institution is not yet aware which individual exposure has suffered these losses.

Accordingly, the Group’s specific and general impairment allowances calculated under IAS 39 are classified as specific credit risk
adjustments and in line with CRR article 111 are deducted from the accounting values in order to determine the exposure value of
an asset for risk weighted assets calculations. (Further details related to impairment allowances can be found in the following notes
to the Financial Statements – 17; 39.2)
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 21

Capital & risk management report 31 December 2017 (continued)

Specific Impairment allowances covers two types of exposures:

(i) Impaired exposures on which the Bank does not expect to recover its exposure in full, even after the realisation of collateral.
(ii) Exposures which are deemed to carry a specific risk. Specific risks may vary from time to time and are determined
by taking into consideration external and internal factors. External factors include market forces, the performance
of specific economic sectors in relation with the gross value added within a particular period of time, and
geopolitical circumstances. Internal factors namely include individual significance of exposures and/or day
delinquency equal to or greater than 60 days.

Collective impairment allowances cover performing exposures for losses which have already been incurred, but cannot yet be
specifically identified, and that based on past trends have a high probability of occurring.

Probability of defaults (PDs) based on Moody’s Global Average Cumulative Issuer-weighted Default rates 1983-2016 are used for the
Bank’s portfolio with an increased weighting in the PDs for the calculation of specific risks provisioning. The loss given default rates
are consistent for all exposures. Different rates apply for secured and unsecured portions of exposures.

As from 1 January 2018, the Bank has implemented IFRS 9, further information can be found under Note 1.1.1 of the Financial Statement.

6.4.3 External Credit Assessment Institutions (ECAIs)

The Standardized Approach (SA) requires banks to use the risk assessments prepared by ECAIs to be able to determine the risk
weights to be applied. For treasury investments the Bank uses three of the EBA recognized ECAIs – Fitch, Moody’s and S&P - and
takes the worst credit grading available. The Bank maps these external rating to the credit quality steps in line with EBA guidelines.

6.4.4 Credit quality of the Bank’s exposures

The following tables provide a comprehensive picture of the credit quality of the Bank’s assets by exposure class as at December
2017 in line with EBA guidelines on disclosures, by exposure class, industry and geography.

Gross carrying values of

Non- Specific
EU CR1-A: Credit quality of exposures by exposure class and instrument Defaulted defaulted credit risk
€ millions exposures exposures adjustment Net values
16 Central governments or central banks - 3,813 - 3,813
17 Regional governments or local authorities - 264 0 264
18 Public sector entities - 73 - 73
19 Multilateral development banks - 140 - 140
20 International organisations - - - -
21 Institutions - 2,127 - 2,127
22 Corporates - 3,201 32 3,170
23 Of which: SMEs - 1,995 13 1,982
24 Retail - 955 7 948
25 Of which: SMEs - 66 2 64
26 Secured by mortgages on immovable property - 2,658 10 2,649
27 Of which: SMEs - 766 5 761
28 Exposures in default 298 - 118 181
29 Items associated with particularly high risk - 37 0 37
30 Covered bonds - - - -
31 Claims on institutions and corporates with a short-term credit assessment - - - -
32 Collective investments undertakings - - - -

33 Equity exposures - 70 - 70

34 Other exposures - 428 - 428

35 Total standardised approach 298 13,767 166 13,899

37 Of which: Loans and advances 282 7,720 166 7,835

38 Of which: Debt securities - 3,485 - 3,485
39 Of which: Off-balance-sheet exposures 17 2,071 - 2,088
 Bank of Valletta p.l.c.
22 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

EU CR1-B: Credit quality of exposures by industry or counterparty types Gross carrying values of
€ millions Non- Specific
Defaulted defaulted credit risk
exposures exposures adjustment Net values
Financial and Insurance Activities 4 5,797 3 5,798
Households and Individuals 50 2,562 27 2,585
Manufacturing 24 694 16 702
Public administration and defence, compulsory social security 0 1,190 0 1,190
Transportation and storage 21 449 15 455
Wholesale and retail trade 38 764 21 782
Others 162 2,738 85 2,815
Total 298 13,767 166 13,899

Note - Net Values is equal to Gross carrying values less credit risk adjustments

EU CR1-C: Credit quality of exposures by geography Gross carrying values of

€ millions Non- Specific
Defaulted defaulted credit risk
exposures exposures adjustment Net values
MALTA 298 10,383 166 10,515
UNITED STATES - 350 0 350
FRANCE - 348 0 348
GERMANY 0 312 0 312
SWEDEN - 245 - 245
AUSTRALIA - 236 0 236
UNITED KINGDOM - 226 0 226
OTHERS 0 1,667 0 1,667

Total 298 13,767 166 13,899

The following table provides an ageing analysis of accounting on-balance sheet past due exposures regardless of their impairment
status. All debt securities have no days past due as at end of the financial period 2017.

EU CR1-D: Ageing of past-due Gross carrying values

exposures
€ millions ≤ 30 days > 30 days ≤ > 60 days ≤ > 90 days ≤ > 180 days > 1 year
60 days 90 days 180 days ≤ 1 year
1 Loans 97 21 6 19 15 156
2 Debt securities - - - - - -
3 Total exposures 97 21 6 19 15 156

The Bank has in place various units set up with the aim to support, prevent, reduce, remediate or recover non-performing loans.
Each unit, depending on the stage, exposure and severity of the NPL, has its internal procedures in order to aim to achieve the
desired results.

Fine tuning of the Bank’s policies and procedures regarding the management of NPLs are underway. During this financial period, the
Bank has carried out a write-off exercise on non-performing loans wherein these loans were transferred off-balance sheet. A Write-
Offs Committee was set and entrusted with the sanctioning of definite write-offs as per limits defined by the BoD.

Forbearance measures represent concessions granted by the Bank to borrowers when they are considered to be unable to meet
the original terms and conditions of the contract due to financial difficulties. Through forbearance measures, the Bank may modify
the terms and conditions of the contract to allow the borrower sufficient ability to service the debt or refinance the contract. Rigorous
assessment is undertaken to ensure that restructuring is only allowed in those cases where the underlying fundamentals are sound
and where the customer is expected to meet the revised obligations. When the concession is due to financial difficulty the account
is marked as forborne. As part of its asset quality measure, CRMU reviews the financial difficulty tests and take a final decision as to
whether the facility is to be categorised as Forborne.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 23

Capital & risk management report 31 December 2017 (continued)

The table below provides an overview of non-performing and forborne exposures as at 31 December 2017.

EU CR1-E: Non-performing Gross carrying values of performing and non-performing exposures

and forborne exposures Of which Of which Of which non-performing
€ millions performing performing
but past forborne
due > 30 Of which Of which Of
days and < defaulted impaired which
= 90 days forborne
010 Debt securities 3,485 - - - - - -
020 Loans and advances 8,001 18 37 282 97 185 131
030 Off-balance sheet 2,088 NA 1 17 - NA 1
exposures

Accumulated impairment and provisions and Collaterals and financial

negative fair value adjustments due to credit risk guarantees received
On performing On non-performing On non- Of which
exposures exposures performing forborne
€ millions exposures exposures
Of which Of which
forborne forborne
010 Debt securities - - - - - -
020 Loans and advances 33 2 133 63 149 100
030 Off-balance sheet exposures - - - - - -

6.5 Credit Risk Analysis and Mitigation

An assessment of the borrower’s ability to service and repay the proposed debt is undertaken for each credit request and is a key
element when considering an application for credit. In particular, before making any commitments, the Bank carries out an in-depth
review of the borrower and ensures that it has a thorough knowledge of all the structural aspects of the borrower’s operations and
that adequate monitoring will be possible. Consideration is also given to the sector in which the borrower operates in terms of
economic prospects and potential growth along with the Bank’s default history of the sector.

The credit process provides for at least an annual review of business facilities granted with the review being more frequent under
certain circumstances, such as the emergence of adverse risk factors. All credit exposures are regularly reviewed for objective
evidence of impairment, either individually or as part of a collective assessment, with a view to taking early recovery action. In
addition, hindsight overviews are carried out on a sample basis by CRMU to strengthen the credit decision-making process, wherein
the judgement of the initial decision-makers is reviewed to determine the extent to which such decision-makers were in compliance
with Bank policies and procedures in approving the credit application concerned. This ensures that the quality of the lending
portfolio is properly and regularly monitored by an independent authority, so that any necessary remedial action can be taken.

The granting of credit facilities is primarily based on the capacity to repay, rather than placing primary reliance on credit risk mitigants.
The mitigation of credit risk is however a key aspect of effective risk management used to help mitigate the risk inherent in individual
exposures. The nature and level of collateral required depends on a number of factors, including but not limited to, the amount of
the exposure, the type of facility provided, the term of the facility, the amount of the counterparty’s contribution and an evaluation of
the level of the credit risk or probability of default involved. The main types of collateral accepted by the Bank are listed in the Credit
Policy.

Collateral is taken into account at a margin which is applied to the market value and is only accepted as the main source of
repayment in property development and other exceptional cases. Valuation strategies are established to monitor collateral mitigants
to ensure that they continue to provide the anticipated secure secondary repayment source. Immovable properties held as collateral
against material exposures are subject to regular revaluation in order to maintain a constant true picture of their values and to ensure
that the value being relied on as collateral adequately reflects the current value of the property.

The Bank also mitigates credit risk through the adoption, on the sanctioning of facilities, of terms and provisions known as covenants,
both financial and non-financial, which allow the Bank to take action when a borrower’s default risk increases. A breach of these
covenants is an event of default which may permit a reduction of the maximum amount of borrowing under the commitment,
increases in collateral, repricing and, in a worst case scenario, a call-in of facilities.
 Bank of Valletta p.l.c.
24 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Investment exposures and limits are regularly reviewed upon changes in credit ratings or outlook so as to prompt any mitigating
action if required. Credit risk in the investment portfolio is mitigated through limits set in the TMP. These limits are set on the level of
credit risk undertaken in relation to any counterparty exposure in accordance with external ratings issued by major rating agencies.
The TMP also sets limits in respect of settlements and derivatives.

Settlement risk is the risk of loss due to failure of a company to honour its obligations to deliver cash, securities or other assets as
contractually agreed. This risk is mitigated through settlement limits assigned to counterparties based on external credit ratings or
by effecting payment on a delivery versus payment (DVP) basis.

6.5.1 Quantitative information on credit risk mitigation

The following tables shows an analysis of the on balance sheet exposure value (carrying amount net of provisions) that is covered
by eligible collateral in line with CRR requirements highlighting the amount of the exposure value which is unsecured and secured.

EU CR3: CRM techniques - Overview Exposures Exposures Exposures Exposures

€ millions Total Total secured by secured
unsecured secured - Immovable by Other
- Carrying Carrying Property Eligible
amount amount collateral Collateral

1 Total Loans and Advances 4,408 3,427 2,821 606

2 Total Debt Securities 3,485 - - -

3 Total exposures 7,894 3,427 2,821 606

4 of which Defaulted 0 149 145 4

EU CR4 – Standardised approach – Credit Exposures net of

risk exposure and CRM effects provisions before CCF Exposures post CFF RWA after SME factor
€ millions and CRM and CRM and RWA density
On- Off- On- Off-
Balance Balance Balance Balance
sheet sheet sheet sheet RWA
amount amount amount amount RWAs density
1 Central governments or central banks 3,765 48 3,765 1 8 0.2%

2 Regional government or local authorities 264 - 264 - 53 20.2%

3 Public sector entities 73 - 73 - 37 50.0%

4 Multilateral development banks 140 - 140 - - 0.0%

5 International organisations - - - - - 0.0%

6 Institutions 2,127 - 2,127 - 761 35.8%

7 Corporates 1,677 1,493 1,200 225 1,120 78.6%

8 Retail 421 527 331 64 288 73.0%

9 Secured by mortgages on immovable property 2,649 - 2,648 - 1,320 49.8%

10 Exposures in default 164 17 152 3 163 105.5%

11 Exposures associated with particularly high risk 37 - 34 - 52 150.0%

15 Equity 70 - 70 - 70 100.0%

16 Other items 428 - 428 - 431 100.5%

17 Total 11,814 2,085 11,232 292 4,302 37.3%

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 25

Capital & risk management report 31 December 2017 (continued)

EU CR5: Standardised approach Risk Weight
Exposure Value
€ millions 0% 20% 35% 50% 75% 100% 150% 250% Total
Central governments or central banks 3,746 5 - 14 - - - - 3,766
Regional government or local authorities 19 230 - 14 - - - - 264
Public sector entities - - - 73 - - - - 73
Multilateral development banks 140 - - - - - - - 140
International organisations - - - - - - - - -
Institutions - 1,027 - 1,092 - 3 4 - 2,127
Corporates - 90 - 448 - 887 - - 1,424
Retail - - - - 395 - - - 395

Secured by mortgages on immovable

- - 1,693 378 - 577 - - 2,648
property
Exposures in default - - - - - 137 17 - 155

Exposures associated with particularly high risk - - - - - - 34 - 34

Covered bonds - - - - - - - - -

Institutions and corporates with a short-term

- - - - - - - - -
credit assessment
Collective investment undertakings - - - - - - - - -
Equity - - - - - 70 - - 70
Other items 157 6 - - - 157 - 109 428

Total 4,062 1,357 1,693 2,019 395 1,832 56 109 11,523

6.6 Counterparty Credit Risk

The CRR defines counterparty credit risk (CCR) as the risk that the counterparty to a transaction could default before the final
settlement of the transaction's cash flows. The Group is exposed to CCR through its over the counter (OTC) derivative exposures
which are used to hedge against adverse interest rate and currency movements. To calculate its CCR exposure value the Group
uses the ‘Mark-to-Market’ approach (as defined in Article 274 of the CRR) where predefined add-on is added to the current positive
fair value of the contract in order to account for potential future changes, taking into consideration the netting arrangements in place
as per Article 298 of the CRR.

EU CCR1 - Analysis of CCR exposure by approach Replacement

€ millions cost/current Potential future
market value credit exposure EAD post CRM RWAs

1 Mark to market 1.02 7.02 8.04 5.31

Wrong way risk arises when the probability of default of a particular counterparty is positively correlated to the exposure with the
same counterparty, so that the mark-to-market exposure increases at the same time as the riskiness of the counterparty increases.
This risk is addressed by the Bank through the setting up of internal limits and its collateral management procedure. The TMP, which
sets the limits on the maximum exposures held in derivatives, assumes that the business relationship with most counterparties is an
on-going one; therefore the limits are primarily based on the worst long-term credit rating of the counterparty. For requests falling
outside the TMP, these are also reviewed by Credit Risk Sanctioning Department and approved by the Chief Risk Officer or the BoD
according to the exposure. Limits are reviewed annually or more frequently in the event of a downgrade of the counterparty.

The Bank ensures that an ISDA agreement with the respective counterparties is in place prior to effecting a transaction and that the
agreement covers the deal in question. Furthermore, in order to secure the collateral, the Bank enters into an agreement with the
counterparties in accordance with the Credit Support Annex (CSA) under the ISDA agreement. The CSA is a schedule to the ISDA
Master Agreement. By virtue of such CSAs, a party to a derivative that has an exposure to its counterpart will post collateral to its
counterpart to cover such exposure by way of an outright title transfer of such collateral. All CSAs that the Bank has in place are of
a two-way nature. Variation margin is exchanged on a daily basis.

The Credit Rating Downgrade Threshold clause in some CSA agreements is designed to trigger a series of events which may
include the termination of transactions by the non-affected party if the credit rating of the affected party falls below a specified level.
 Bank of Valletta p.l.c.
26 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Nevertheless, the amount of collateral posted will not change in the event the Bank suffers a credit rating downgrade. The Bank does
not have any credit derivative hedges in place.

‘Credit Valuation Adjustment' (CVA) is defined by the CRR as an adjustment to the mid-market valuation of the portfolio of transactions
with a counterparty. That adjustment reflects potential mark-to-market losses due to counterparty migration risk on bilateral OTC
derivative contracts. The CVA charge is computed according to the Standardised Method as defined in Article 384 of the CRR.

EU CCR2 – CVA capital charge

€ millions Exposure value RWAs

4 All portfolios subject to the standardised method 8.04 5.68

Section 7: Market Risk

7.1 Nature of Market Risk

Market risk is the risk that the Bank’s earnings or capital will be adversely affected by the volatility of market rates or prices such
as interest rates, credit spreads and foreign exchange rates. The Group’s exposure to market risk is limited given that it does not
operate a trading book. Accordingly, the Group’s exposure to market risk comprises three types of risk: (i) interest rate risk in the
banking book (ii) currency risk; and (iii) equity price risk.

7.2 Interest Rate Risk

Interest rate risk is defined as the probability of incurring financial losses due to adverse movements in interest rates. The Bank is
exposed to Interest Rate Risk in the Banking Book (IRRBB) from mismatches between interest rate sensitive assets and liabilities
held in the banking book.

The Bank has an Interest Rate Risk Policy which clearly describes the approaches through which interest rate risk is identified,
evaluated, monitored, managed, and reported to higher management. The policy also outlines the structure, responsibilities and
controls that manage and oversee the interest rate positions of the Bank.

The BoD is ultimately responsible for the interest rate risk assumed by the Bank and the manner in which this risk is managed to
ensure that it is aligned with the interest rate risk strategy and risk appetite.

The Bank’s exposure to interest rate risk is monitored and evaluated on a monthly basis by the Asset Liability Management
Committee (ALCO). The role of ALCO is that of managing the balance sheet to attain an optimal balance between risk and return.
ALCO assesses the interest rate risk with the objective of limiting potential adverse effects of interest rate movements on net interest
income and on equity.

7.2.1 The Measurement of Interest Rate Risk

Risk management processes are in place to control and limit the interest rate risk exposure without negatively affecting the profitability
of the Bank. The Bank takes two different, yet complementary perspectives to the process of controlling and assessing IRRBB.
These are the economic value of equity (EVE) and the earnings-based approach. The EVE approach measures the interest rate risk
by observing the change in the theoretical value of the banking book. Meanwhile, the earnings-based approach focuses on the
impact on the net interest income following changes in the interest rates.

Impact on the Net Interest Income

Changes in the interest rates effect the sensitivity of earnings in the short term by changing its net interest income and the level of
other interest sensitive income and expenses. This approach provides information necessary to manage and optimize the risk-return
position as well as the structure of the balance sheet from an earnings based point of view.

ALCO monitors on a regular basis the current rates being paid on liabilities and the rates earned on assets. This method allows
management to effectively monitor the interest earning potential of the present balance sheet.

In order to remain within the Bank’s guidelines, the Bank consciously chooses low risk/return treasury assets in order to retain the
high quality of the portfolio. During the financial period under review, the ECB maintained the marginal lending facility at 0.25% and
the deposit facility rate at -0.40%. These rates are expected to remain at present levels for an extended period of time.

On a regular basis the Bank also monitors the sensitivity of the financial assets and liabilities to parallel shifts in the yield curve of 200
basis points over a time horizon of one year. Interest rate risk arises from the different re-pricing characteristics of the Bank’s interest-
sensitive assets and liabilities and from the mismatch between interest rate-sensitive assets and liabilities.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 27

Capital & risk management report 31 December 2017 (continued)

Impact on the Economic Value of Equity

As the interest rate increases/decreases, the monetary value of owning an instrument offering a fixed rate of interest decreases/
increases. If this position is not perfectly offset by changes in the value of other instruments held by the Bank an economic loss
materialises. Such open positions mostly result from differences in the nominal/principal values, varied residual terms to maturities
and different interest rate reset dates.

The economic loss (or gain) is estimated through the interest rate term structure – commonly referred to as the yield curve – which
measures the relationship between the discount rates and the time to maturity. Changes to the yield curve are a reflection of the
anticipated future interest rates, inflation and economic growth. The discount rate provides the present value of the Bank’s expected
future cash flows. It is representative of a risk-free yield curve and this is generally a representation of either the secured interest rate
swap curve or, in the absence of such, a high credit rating government yield curve.

In case of positions with no contractual maturity, the Bank regularly monitors the behaviour of non-maturity deposits (NMDs).
Statistical evidence shows that even though NMDs do not have a specific contractual maturity, a significant share of the on-demand
deposits is stable over time even when market rates change. The element of NMDs which is considered to be particularly stable –
core deposits, is spread into different short-term and medium-term time buckets based on the customer. No assumptions are made
with respect to prepayments of loans and advances.

Six prescribed interest rate shock scenarios are simulated to estimate the capital charged with respect to the IRRBB. Such scenarios
capture the possible different shifts to yield curve. These simulations are generated every quarter and subsequently reported to
ALCO. As at December 2017, the capital charge with respect to the IRRBB is €21.9 million and emanates from a downward parallel
shock.

7.3 Currency Risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. The TMP sets limits on the level of net exposure by currency which are monitored on a daily basis. Further
information related to currency risk can be found in the notes to the financial statements Note 39.4.2.

7.4 Exposures to equities not included in the trading book

The Group is exposed to equity price risks arising from the holding of equity instruments classified either as available for sale or at
fair value through profit or loss. The overall strategy of the equity portfolio is to earn regular dividends and not invest in highly volatile
equities. The investment portfolio has a relatively small allocation to equity investments which are not included in the trading book
amounting to approximately €63.8 million as at 31 December 2017.

All equities are priced at mark-to-market and any price changes are passed through the income statement. The fair value of all
equities corresponds to their market value. Cumulative realised gains / losses from sales & liquidations during the financial period
amounted to €1.38 million which is equal to the total unrealised gains and losses. This is due to the fact that all equities are classified
within the FVTPL portfolio, whereby all cumulative gains / losses are netted off with unrealised gains / losses made. Latent revaluation
gains / losses included in Common Equity Tier 1 Capital for the financial period amount to €1.96 million.

Section 8: Operational Risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events. The Risk Appetite Framework states that the Bank has a goal of minimising operational risk whilst ensuring that
its operations are regulatory compliant, efficient and cost-effective. This is achieved through early identification and measurement
of risks, monitoring and mitigation by recommending changes to improve controls, performance and procedures, as well as by the
procurement of appropriate insurance cover.

8.1 The Management of Operational Risk

In line with common industry practice, BOV applies the three lines of defence model for operational risk governance. The Operational
Risk Management Unit (ORMU) is the second line of defence and acts independently from risk generating business lines. Although
ownership and accountability for operational risk resides with the business level, the ORMU co-ordinates, supervises and drives
forward the identification, assessment and monitoring of operational risks and controls. The unit is responsible for providing the
framework, infrastructure, tools and methodology for rolling out operational risk management throughout the Group, ensuring that
the overall risk portfolio is managed in line with the operational risk management policy. ORMU is also responsible to develop and
review policies and procedures to ensure that operational risks are managed effectively.

ORMU supports the business units in identifying and assessing the operational risk exposure. Risk assessments involve risk
identification, risk evaluation and recommendations for managing and mitigating the risks. For the risk identification process, some
of the tools used include audit findings, internal loss data and scenario analysis. The Bank is also compiling a Group Risk Register
and key risks from forty-seven process areas have been identified and assessed. A loss database has been created and maintained
since 2009 and is updated regularly through risk event reporting on internal loss events and near misses. Key Risk Indicators
 Bank of Valletta p.l.c.
28 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

and thresholds have been identified at generic enterprise-wide level and are reported regularly. Business Continuity supporting
documentation at unit level is in place throughout the organisation. A BCM programme is maintained and the Group is implementing
a robust enterprise-wide Business Continuity Plan (BCP). BCPs for critical activities and IT systems are regularly tested, thus ensuring
timely response to disruptions and effective restoration. The Group’s Incident Management Team works in liaison with the ORMU to
effectively manage the organisation's efforts where widespread threats require a more co-ordinated approach.

The Group is exposed to claims and litigation arising from its business operations. On the basis of legal opinion the Board concluded
that it has a strong legal position on the significant claims. Further information can be found under Note 33 of the Financial Statement.

The Group currently uses the Basic Indicator Approach to apportion capital for operational risk and accordingly allocates 15% of the
average gross income over three years in line with Basel III guidelines.

The operational risk regulatory capital requirement for the Group as at December 2017 is €38.95 million (Notional Risk Weighted
Assets €486.8 million).

8.2 Mitigation of Operational Risk

The Group addresses identified risks where these are not aligned with stated risk appetite by improving processes, investing in
technology changes and where necessary tackling human resource vulnerabilities. As part of its BCP the Group maintains and
periodically tests contingency facilities to validate the effectiveness of the plan in the event of a disaster. It also mitigates the possibility
of higher impact risk events through comprehensive insurance coverage on selected business risks. Insurance cover is under on-
going review by a specialised team within ORMU, which works in close liaison with the Group’s Insurance Brokers and the Group’s
different business units.

8.3 Information Security Risk

Information security risk refers to the risk of loss caused by deliberate or accidental loss, alteration, falsification or leakage of
information, or by destruction, disruption, errors or misuse of information systems. The Group applies various international standards
in its integrated approach, which has the fundamental objective of ensuring the confidentiality, integrity and availability of its information
assets.

In order to fulfil the proper handling of information and prevent loss or leakage of information, the Group has developed a number
of qualitative measures to reduce such risks through its organisational structure, with officials having specific responsibilities for
information security issues, the establishment of information security policies, procedures and standards, awareness training and
the implementation of a security infrastructure and systems to ensure a stable information security environment. The approach to the
management of information security risks is in line with global standards, in particular ISO/IEC 27001/2.

As part of our ongoing commitment towards ensuring the security of information systems throughout the Group, we will be increasing
our focus and attention towards some of the prevalent Information Security risks within the industry; key amongst which are logical
access controls specific to our various IT systems. A holistic approach will be applied, based on the analysis of both systems and
operational procedures, setting up appropriate action plans to resolve any deviations from our established policy.

Section 9: Remuneration Policy

The Bank has a Remuneration Policy aimed at aligning individual rewards with the Bank’s performance, business strategy, risk
appetite, values and long-term interests. It also encourages a prudent approach to risk taking. The Policy deals with the remuneration
of all staff members including members of the MB, in accordance with regulation incorporated in the Capital Requirements Directive.
Additional disclosures on the governance process related to remuneration has been made under the Remuneration Report section
in this annual report.

The target population defined as Identified Staff for the purposes of this Disclosure represents 3.5% of total number of employees in
the Group. Identified staff is determined in line with recommended EBA Regulatory Technical Standards1 and includes:

• senior executives responsible for material business units/business lines or internal control functions including Risk,
Compliance and Audit;
• executives of Support Functions;
• other employees who are members of committees with collective authority to commit to risk exposures per
transaction beyond 0.5% of CET1 Capital; and
• employees who, individually or as part of a committee take, approve or veto decisions on new products, material
processes or material systems.

For the purposes of remuneration, Identified Staff have been aggregated and split into business areas according to EBA guidelines2.
The table below includes the total fixed and variable remuneration and the number of beneficiaries for each business area. All fixed and
variable remuneration were paid in cash. On average the ratio of variable to fixed remuneration for Identified Staff is 5.11%.

1
EBA Final Draft Regulatory Technical Standards EBA/RTS/2015/09 dated 16 July 2015
2
EBA Guidelines on the remuneration benchmarking exercise EBA/GL/2014/08 dated 16 July 2016
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 29

Capital & risk management report 31 December 2017 (continued)

9.1 Remuneration of Identified Staff

Remuneration of Supervisory Management Investment Independent Retail Asset Corporate All

Identified staff Function^ Function^ Banking^ Control Banking^ Management^ Functions^ Other^
Functions^
Management Body 13 7
Number of identified 2 5 19 2 14 1
staff
Total fixed € 402,826 € 924,405 € 170,215 € 465,599 € 1,794,756 € 188,676 € 1,138,022 € 83,518
remuneration
Total variable Nil € 91,400 € 3,500 € 30,317 € 72,544 € 7,550 € 55,831 € 2,900
remuneration
*variable remuneration for identified staff includes performance related bonuses and other discretionary benefits
^as defined in EBA guidelines EBA/GL/2014/8. None of the employees individually earn over €500,000.

Link between Pay and Performance

The variable portion of remuneration is linked to the level of profit earned by the Bank during the relative financial period. The
calculation of the bonus attributed to the staff in the clerical and managerial grades is determined in the Collective Agreement and is
based on the profit achieved by the Bank. The bonus is distributed to employees in proportion to the performance achieved by the
individual and in accordance with their respective grades.

Employees in the executive grade are also eligible for an annual bonus determined by the Bank’s performance and their individual
performance. Annual bonus entitlements are also applicable to the CEO and members of the MB as highlighted under the
Remuneration Report.

Performance Management System

Key Performance Indicators (KPIs), by which employees’ performance is measured, provide individual, unit and organisation level
targets aligned with the strategic objectives of the Group.

In order to avoid rewarding individuals for taking excessive risks, KPIs have been designed to account for the Group’s long-term
interest and values, with quality and compliance measures receiving a strong weighting at target setting stage. Financial and non-
financial performance indicators are based on a balanced scorecard approach and therefore, financial targets are counterbalanced
by process, customer satisfaction and employee development measures.

Section 10: Liquidity Risk

During 2017, the EBA has issued a set of guidelines (EBA/GL/2017/01) which aim to harmonise the disclosures in line with CRR
575/2013 Article 435(1) in relation to liquidity risk. Additional disclosures on liquidity risk can be found under the note 39.3 to the
financial statement.

Liquidity risk is the risk that a bank is unable to meet its current or future payment obligations when they fall due and to replace
funds when they are withdrawn, even when this occurs unexpectedly. Funding risk arises when the liquidity needed to fund illiquid
asset positions cannot be obtained on the expected terms and when required. The Bank has always recognised liquidity risk as an
important risk, to this end, the objective of the Bank’s liquidity risk management is to ensure that both foreseeable and unpredicted
funding commitment can be met when due and at a reasonable cost.

The oversight of liquidity risk within the Bank is the responsibility of the ALCO committee. This Committee maintains an on-going
oversight of assets and liability cash flows, their risk and the management of such integrated exposures at a consolidated level
by monitoring the availability of funds to meet commitments. The Treasury Department addresses its available liquidity resources
on a daily basis and compiles a forecast that serves as an early warning indicator in the identification of abnormal liquidity activity.
The resilience of the Bank’s liquidity buffers is evaluated on a frequent basis to ensure a constant state of readiness should an
exceptionally high demand for liquidity arise at any time. The Bank maintains a portfolio of highly marketable assets that can easily
be liquidated in times of need.

Diversification of the Bank’s funding profile is also an important element of the liquidity risk management framework. The Bank
maintains an ongoing presence in funding markets and taps into unsecured credit lines to maintain a strong inter-bank relationship
with fund providers. This is mostly done within the European market. A number of Global Master Repurchase Agreement with foreign
banks are also in place to provide access to repo borrowing.
 Bank of Valletta p.l.c.
30 Annual Report & Financial Statements 2017

Capital & risk management report 31 December 2017 (continued)

Section 10: Liquidity Risk (continued)

In line with the Bank's risk appetite and in order to mitigate liquidity risk, adequate measures are established in a number of policies
as highlighted below:

• TMP sets out the limits and controls that ensure a highly liquid investment portfolio;
• Liquidity Risk Management Policy outlines the liquidity management framework of the Bank developed to identify,
evaluate, monitor, manage and report the Bank’s liquidity position. The policy also sets out the controls available to
manage liquidity risk and oversee the liquidity position of the Bank;
• Internal Liquidity Adequacy Assessment Process (ILAAP) contains detailed qualitative and quantitative information of
the Bank’s processes and methodology used to measure and manage liquidity and funding risk. To better assist the
liquidity management and to ensure the adequacy of the liquidity tolerance levels, the ILAAP document includes a set of
sensitivity analyses and a liquidity stress test; and
• Contingency Funding Plan sets out the strategies that will be activated in case of excessive liquidity demand. It includes
an outlined process and action plan for responding to severe disruptions to the Bank’s ability to fund some or all of its
activities. This will ensure sufficient liquidity resources for meeting all liabilities when they fall due.

The BoD is satisfied with the Bank’s liquidity adequacy and mitigants in place. In fact, in the last ILAAP document (September 2016),
the Bank did not allocate any Pillar II capital against liquidity risk. This has been driven by the high degree of confidence that the Bank
is in a position to address daily liquidity obligations and withstand a period of liquidity stress.

ALCO continuously analyses the best way to utilise the excess liquidity and monitors the Bank’s liquidity position by following the
liquidity risk tolerance/limits set out in the Bank’s Risk Appetite. The Bank kept its highly liquid position during this financial period,
with its loan portfolio fully funded by deposits. The LtD ratio (net of interest in suspense) has been on the decline throughout this
period, standing at 44.2% as at December 2017 (September 2016 46.3%). The decrease in the LtD ratio was the result of a
significantly higher rise in customer deposits when compared to the increase in the lending portfolio. The Bank calculates and
monitors on a frequent basis the LCR and the NSFR ratios. The LCR is designed to promote the short-term resilience of the Bank’s
liquidity profile, while the NSFR is used to monitor the structural long-term funding position of the Bank.

EU LIQ 1 - LCR Disclosure table

€ millions Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
21 Liquidity Buffer 3,367 3,536 3,820 4,131 4,358
22 Total Net Cash Outflows 2,614 2,718 2,804 2,944 2,928
23 Liquidity Coverage Ratios 129% 130% 136% 140% 149%

Section 11: Risk Management in Subsidiary Companies

The Group has two fully owned subsidiaries: BOV Asset Management Limited (“BOVAM”) and BOV Fund Services Limited (“BOVFS”)

BOVAM, formerly known as Valletta Fund Management Limited, was registered as a limited liability company under the laws of
Malta on the 6 June 1995. BOVAM is licensed by the Malta Financial Services Authority (MFSA), to provide investment management
services to collective investment schemes and qualifies as a ‘Maltese Management Company’ in terms of the Investment Services
Act (Marketing of UCITS) Regulations (Subsidiary Legislation 370.18), by virtue of a licence issued on 22 September 1995. On 17
March 2017, BOVAM extended its licence to offer services beyond collective investment schemes. Upon extension of the licence,
BOVAM started offering portfolio management service to institutional clients.

BOVAM is the appointed manager of Vilhena Funds SICAV plc which is a company organised as a multi-fund investment company
with variable share capital pursuant to the Companies Act, Cap 386 of the Laws of Malta, registered on 10 October 1997, bearing
registration Number SV4 and licensed by the MFSA as a collective investment scheme pursuant to the Investment Services Act, Cap
370 of the Laws of Malta and the UCITS Directive.

BOVAM is also the appointed manager of the BOV Investment Funds which is a common contractual fund licenced by the MFSA as
a collective investment scheme pursuant to the Investment Services Act and the UCITS Directive.

Collectively, the sub-funds of the Vilhena Funds SICAV plc and of the BOV Investment Funds as well as the institutional clients will
be referred to as ‘portfolios’.

BOVAM has three regulatory functions, Asset Management, Risk Management and Compliance Monitoring. Risk Management and
Compliance Monitoring are core functions of the company’s culture and operations. Both functions are interlinked and work together to:

a) Ensure compliance with limits laid out in the UCITS directive, MFSA rules, Vilhena Funds SICAV plc Prospectus and
respective Fund Supplements;
b) Ensure that risk measurement arrangements, processes and techniques on the portfolios’ positions are in place, and
that their contribution to the overall risk profile of the portfolios are accurately measured and documented;
c) Conduct periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions
that might adversely impact the portfolios;
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 31

Capital & risk management report 31 December 2017 (continued)

Section 11: Risk Management in Subsidiary Companies (continued)

d) Establish, implement and maintain a documented system of internal limits concerning the measures used to manage
and control the relevant risks of the portfolios;
e) Ensure that the current level of risk complies with the risk limits set; and
f) Establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches to the risk
limits of the portfolios, result in timely remedial actions.

The risk management techniques applied are appropriate and proportionate to the nature, scale and complexity of the BOVAM’s
activities and of the UCITS it manages. From time to time, BOVAM reviews the measurement techniques to ensure that these remain
appropriate and effective, depending on the investment strategies of the portfolios.

BOVAM has a robust governance structure. It has documented policies and procedures in place and a comprehensive risk register
identifying primary and consequential risks. For all the risks outlined in the risk register, BOVAM has internal control principles that
enable it to operate in an efficient and diligent way.

Moreover, the BoD has established a Risk and Regulatory Committee (“RRC”), whose terms of reference are laid out in an appropriate
document. This Committee is, amongst others, responsible to ensure that BOVAM has an appropriate risk management process
in place. The RRC is also responsible to monitor, on a regular basis, the effective implementation of the risk management process,
such that BOVAM is able to monitor, measure and manage at any time the various risks of the positions and their contribution to the
overall risk-profile of the portfolios.

On the other hand, BOVFS (formerly Valletta Fund Services) was set up in 2006 as a fully owned subsidiary of the Bank to provide
asset managers with a comprehensive suite of administration services to investment funds. BOVFS is recognised to provide fund
administration services by the MFSA. In providing its services, BOVFS is exposed to both operational and reputation risks, and to a
lesser extent also market risks. To mitigate these risks, BOVFS has in place compliance and risk monitoring internal audit programs
through the Company’s Compliance and Risk Management Division, aimed at reviewing the processes and the corresponding
control procedures. In addition, periodic audits of the Company’s various operations are undertaken by the Group’s Internal Audit
department. BOVFS has also engaged an independent audit firm to perform a biennial ISAE 3402 examination of its processes
and controls, which consists of an evaluation of the design and operating effectiveness of the controls of the Company. In relation
to managing reputation risks, BOVFS carries out an extensive due diligence process on its potential clients and has in place the
necessary procedures to ensure that the business is compliant with prevention of money laundering regulations.

Lastly, in view of the dependency of the Company on its various IT systems, BOVFS has in place a detailed business continuity plan
in order to appropriately manage the incidence of business interruptions and disaster recovery.

CRR References
CRR Articles Description Reference
Article 435 Risk management objectives and policies Section 1, 10 and 11
Article 436 Scope of application Section 2
Article 437 Own funds Section 3
Article 438 Capital requirements Section 4
Article 439 Exposure to counterparty credit risk Section 6.6
Article 440 Capital buffers Section 4
Article 441 Indicators of global systemic importance N/A
Article 442 Credit risk adjustments Section 6
Article 443 Unencumbered assets Note to the Financial Statement 39.3
Article 444 Use of ECAIs Section 6.4.3
Article 445 Exposure to market risk Section 7
Article 446 Operational risk Section 8
Article 447 Exposures to equities not included in the trading book Section 7.4
Article 448 Exposure to interest rate risk on positions not included in the trading book Section 7.2
Article 449 Exposure to securitisation positions N/A
Article 450 Remuneration policy Section 9 and Remuneration Report
Article 451 Leverage Section 5
Article 452 Use of IRB Approach to credit risk N/A
Article 453 Use of credit risk mitigation techniques Section 6.5
Article 454 Use of advances measurements approaches to operational risk N/A
Article 455 Use of Internal Market Risk models N/A
 Bank of Valletta p.l.c.
32 Annual Report & Financial Statements 2017

Corporate governance statement of compliance

A. INTRODUCTION

Pursuant to the Malta Financial Services Authority Listing Rules, Bank of Valletta p.l.c. (the Bank) as a company whose equity securities
are listed on a regulated market, should endeavour to adopt the Code of Principles of Good Corporate Governance (the Code) contained
in Appendix 5.1 to Chapter 5 of the Listing Rules. In terms of Listing Rule 5.94, the Bank is obliged to prepare a report explaining how it
has complied with the Code. For the purposes of the Listing Rules, the Bank is hereby reporting on the extent of its adoption of the Code.

The Board of Directors (the Board) is committed to the values of truth, transparency, honesty and integrity in all its actions. The Board
strongly believes that the Bank benefits from having in place more transparent governance structures and from improved relations with the
market which enhance market integrity and confidence. The Board acknowledges that the Code recommends principles for the Board and
the Bank’s management to pursue objectives that are in the interest of the Bank and its shareholders.

Good corporate governance is the responsibility of the Board, and in this regard the Board has adopted a corporate decision-making
and supervisory structure that is tailored to suit the requirements of the Bank’s constitutional documents as well as its size, nature and
operational needs. In addition, while the structure provides flexibility and an efficient decentralisation of selective decision-making, it
concurrently provides a system of checks and balances. The Board believes that any structure which is adopted must be geared to meet
the necessary standards of accountability and probity and considers that the structure which it has adopted does so.

As demonstrated by the information set out in this Statement, together with the information contained in the Remuneration Report
and in the Nominations Report, the Bank believes that it has, save as indicated herein, in the section entitled Non-Compliance with
the Code, throughout the accounting period under review, applied the principles and complied with the provisions of the Code. In the
Non-Compliance section, the Board indicates and explains the instances where it has departed from or where it has not applied the Code.

B. COMPLIANCE WITH THE CODE

Principle 1: The Board

The Board’s role and responsibility is to provide the necessary leadership, to set strategy and to exercise good oversight and
stewardship. The Board is composed of a Chairman, two Executive Directors and eight Non-Executive Directors. This mix of
Executive and Non-Executive Directors on the Board enables the Non-Executive Directors to exercise their monitoring function over
the management and the executive arm of the Board at the level of the Board. Moreover, the fact that the Chief Executive Officer
(CEO) is also an Executive Director on the Board, enables the Board to be in receipt of timely and appropriate information in relation
to the business of the Bank and Management’s performance. As a result, the Board can contribute effectively to the decision making
process, whilst at the same time exercising prudent and effective controls.

The Board delegates specific responsibilities to a number of Committees, notably the Asset and Liability Committee, the Audit
Committee, the Risk Management Committee, the Compliance and Crime Prevention Committee, the Remuneration Committee
and the Nominations and Governance Committee, each of which operates under formal terms of reference approved by the Board.

Further details in relation to the Committees and the responsibilities of the Board is found under Principles 4 and 5 of this Statement.

Principle 2: Chairman and Chief Executive Officer (CEO)

The Bank’s current organisational structure incorporates the position of a CEO. The position of the Chairman and that of the CEO
are occupied by different individuals. Their respective positions have been defined with specific roles rendering these positions
completely separate from one another. This separation of roles of the Chairman and the CEO avoids concentration of authority and
power in one individual.

The Chairman is responsible to lead the Board and to set its agenda. The Chairman ensures that the Board’s discussions on any
issue put before it go into adequate depth, that the opinions of all the Directors are taken into account and that all the Board’s
decisions are supported by adequate and timely information. The Chairman ensures that the CEO develops a strategy which is
agreed to by the Board.

On the other hand, the CEO, besides being an Executive Director, leads the Bank’s Management Board, which is the highest
decision-making body within the Bank.

More information on the Bank’s Management Board can be found under the section entitled Management Committees, within this Statement.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 33

Corporate governance statement of compliance (continued)

Principle 3: Composition of the Board

The Board considers that the size of the Board, whilst not being too large as to be unwieldy, is appropriate, taking into account the
size of the Bank and its operations. The combined and varied knowledge, experience and skills of the Board members provide a
balance of competences that are required and add value to the proper functioning of the Board.

Independence of Directors

During the period under review, the Board consisted of seven Independent Non-Executive Directors (including the Chairman) and two
Non-Independent Non-Executive Directors (as indicated on pages (ii) and (iii) of the Annual Report). In determining the independence
or otherwise of its Directors, the Board has considered, amongst others, the notion of independence as contained in the Code, the
Bank’s own practice as well as general good practice principles. The Board believes that, by definition, employment with the Bank
renders Directors Alan Attard and James Grech as Non-Independent from the institution. However, this should not, in any manner,
detract from the said Non-Independent Directors’ ability to maintain independence of analysis, decision and action at all times.

Appointment of Non-Executive Directors

The Board of Directors consists of a minimum of seven and a maximum of twelve individuals. A maximum of three are to be appointed
as Executive Directors whilst the remaining nine are to be Non-Executive Directors.

The appointment of the nine Non-Executive Directors is governed by article 25 of the Articles of Association and appointments may be
made as follows:

(a) By Qualifying Shareholders – namely members holding at least 10% of the issued share capital of the Bank having voting
rights, that are entitled to nominate, for the approval of the Nominations and Governance Committee, one person for each 10%
voting shares held; and

(b) By Non-Qualifying Shareholders not having a Qualifying Shareholding, but who individually or in aggregate hold not less than
€50,000 in nominal value of shares having voting rights in the Bank and who are entitled to make recommendations for the
approval of the Nominations and Governance Committee; or

(c) By the Nominations and Governance Committee itself seeking the recruitment of fit and proper persons having the right attributes
that can add value to the Board of Directors.

Appointment of Executive Directors

The appointment of Executive Directors is regulated by article 24 of the Articles. In accordance with the said article, the CEO of the
Bank shall ex officio become an Executive Director by virtue of his office and shall remain in office until the tenure of office as CEO.
The Non-Executive Directors shall appoint at least one other Executive Director on the Board from amongst the Senior Management
and may also appoint a third Executive Director if the Non-Executive Directors consider it in the best interests of the collective
knowledge and competence of the Board to do so. To date one additional Executive Director has been appointed and that position
is held by the Chief Risk Officer, which is in line with the Bank’s strategic initiatives to highlight risk management even at Board level.

Nominations and Governance Committee

All Directors, irrespective of the manner in which they are proposed, can only take office following the approval of their nomination
by the Nominations and Governance Committee. In this context, the Nominations and Governance Committee is the organ that,
after having scrutinised the list of candidates to ensure that the Board will have the appropriate collective knowledge, experience
and competence, will then place the list of approved candidates for election at the Annual General Meeting. More information on the
Nominations and Governance Committee is found under the Nominations Report.

The appointment of all Directors is subject to regulatory approval.

Rotation of Directors

Following the amendments approved by an Extraordinary General Meeting of Shareholders in July 2017, the Bank has adopted a
system of rotation of Directors aimed at ensuring a certain level of continuity within the Board of Directors. The system of rotation of
Directors contemplates the retirement of one-third of the Non-Executive Directors in each year, with the remaining two-thirds of the
Board retaining office. This is aimed at providing stability of policy-making and implementation by retaining a majority of the Board
in place for a period of at least three years at any time. Those Directors whose turn it is to retire from office, pursuant to the rotation
system, will be eligible for reappointment, subject to approval by the Nominations and Governance Committee. The Directors to
retire first shall be determined as follows:

a) Those Non-Executive Directors who wish to retire and who do not seek reappointment prior to the full term of their appointment;

b) To the extent that there are less than three Non-Executive Directors who intimate their willingness to retire and not seek
reappointment, by agreement between the Non-Executive Directors;
 Bank of Valletta p.l.c.
34 Annual Report & Financial Statements 2017

Corporate governance statement of compliance (continued)

c) In the absence of agreement, those to retire first shall be the Non-Executive Directors who have been longest in office, including
by virtue of re-election, since their first election, but as between persons who became Directors on the same day or in the event
that the duration in office cannot be properly determined those to retire shall (unless they otherwise agree among themselves)
be determined by lot.

A retiring Director shall only be eligible for re-election provided that such person did not occupy the office of Non-Executive Director
for an aggregate period of more than 12 years in any period of 15 years.

The Directors currently in office were appointed in December 2016. They shall all retire at the forthcoming Annual General
Meeting scheduled for 10 May 2018, but shall be subject to reappointment in accordance with the Articles, and subject to
the rotation mechanism explained above. As from the forthcoming Annual General Meeting scheduled for 10 May 2018, all
Directors will be appointed for a term of three years, subject to the rotation mechanism. During each of the annual general
meetings of the year 2019, 2020 and 2021, three out of the nine Non-Executive Directors’ terms of office, shall expire
pursuant to the rotation mechanism in the Articles (set out above), provided that such persons may be reappointed if they
are eligible for reappointment.

Number of directorships held by members of the Board of Directors including the appointment on the Board of Bank of Valletta p.l.c.

Number of Directorships held –

Name Executive Director (ED) and
Non-Executive Director (NED)

Stephen Agius 1 NED

Alan Attard 1 NED
Paul V Azzopardi 3 NED + 1 ED
Miguel Borg 2 NED + 1 ED
James Grech 3 NED
Alfred Lupi 2 NED
Mario Mallia 3 NED + 1 ED
Antonio Piras 1 NED
Joseph M Zrinzo 2 NED

Taddeo Scerri and Anita Mangion are not subject to the provisions of Article 91 of the CRD IV and Article 14 of the Banking Act,
1994 (Chapter 371, Laws of Malta) as regards the number of directorships held by them in view of their appointment in a national
representative capacity.

Principles 4 and 5: The Responsibilities of the Board and Board Meetings

The Board meets approximately twice a month, unless further meetings are required for the Board to discharge its duties
effectively. The Board discusses and decides upon matters relating to the Bank’s business. During the financial period under
review, the Board met 36 times. As from this financial period, the Credit Committee was specifically set up to discuss and
decide upon credit proposals. Thus credit proposals are no longer considered by the Board. More information on the Credit
Committee can be found under the section entitled Board Committees.

The Board regularly reviews and evaluates corporate strategy, major operational and financial plans, risk policies, performance
objectives and business alternatives. The Board also monitors implementation and corporate performance within the parameters
of all relevant laws, regulations and codes of best business practice. The Board has a formal schedule of matters reserved for its
decision and also delegates specific responsibilities to Board Committees.

The Board ensures that it has the appropriate policies and procedures in place which guarantee that the Bank and its
employees maintain the highest standards of corporate conduct, including compliance with applicable laws, regulations,
business and ethical standards.

After each Board meeting, minutes that faithfully record attendance, matters discussed and decisions taken, are prepared and
circulated to all Directors as soon as practicable after the meeting.

Members of Senior Management attend Board Meetings by invitation on a regular basis.

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 35

Corporate governance statement of compliance (continued)

Members Meetings Held: 36

Members Attended

Taddeo Scerri (appointed Chairman 16 December 2016) 35 (out of 36)

John Cassar White (resigned 16 December 2016) 6 (out of 7)
Stephen Agius (appointed 16 December 2016) 27 (out of 29)
Alan Attard (appointed 16 December 2016) 28 (out of 29)
Paul V Azzopardi (appointed 16 December 2016) 29 (out of 29)
Miguel Borg (appointed 27 July 2017) 13 (out of 15)
Barbara Helga Ellul (resigned 16 December 2016) 4 (out of 7)
James Grech 33 (out of 36)
Mario Grima (resigned 16 December 2016) 7 (out of 7)
Alfred Lupi 35 (out of 36)
Mario Mallia (appointed 27 July 2017) 14 (out of 15)
Anita Mangion (appointed 16 December 2016) 26 (out of 29)
Antonio Piras (appointed 16 December 2016) 19 (out of 29)
Gabriele Simonetti (resigned 16 December 2016) 6 (out of 7)
Joseph M Zrinzo 36 (out of 36)

Board Committees

The Board also delegates specific responsibilities to Committees, which operate under their respective formal terms of reference. In
this respect, the Board has established the following Committees:

Credit Committee

The Credit Committee was set up by the Board during the period under review, to discuss and decide upon credit proposals.
The Committee also considers and decides upon investment limits and write-offs on loan bank balances which require a level
of authority higher than that of the Bank’s Executives. The Committee also considers credit related issues which the Bank’s
Executives may wish to escalate. The Credit Committee was originally set up as a Credit Board, however, in August 2017, the
Terms of Reference of the Credit Board were revised and its name was accordingly changed to a Credit Committee. The Credit
Committee is a Board Committee.

Meetings Held: 21
Members Members Attended

Taddeo Scerri (Chairman) 19 (out of 21)
Miguel Borg 5 (out of 5)
Alfred Lupi 19 (out of 21)
Mario Mallia 19 (out of 21)
Joseph M Zrinzo 21 (out of 21)

The Executive Chairman’s Office, the Chief Risk Officer, the Executive Credit Risk Sanctioning Department, the Chief Business
Development Officer – Credit and the Chief Officer Corporate Finance attend the Credit Committee by invitation.

During four Credit Committee Meetings, Mr Alfred Lupi declared a potential conflict of interest and was excused from the discussions
held therein. Mr Taddeo Scerri declared a potential conflict of interest during one committee meeting and Mr Miguel Borg also
declared a potential conflict of interest during one Committee Meeting. Both were excluded from the discussions accordingly.

The Audit Committee

The Audit Committee’s terms of reference include the monitoring of the financial reporting process, the effectiveness of the Bank’s
internal control, internal audit and risk management systems and the audit of the Bank’s annual and consolidated accounts. The
Audit Committee has established internal procedures and monitors these on a regular basis. The Audit Committee also scrutinizes
and approves related party transactions as per the Related Party Transaction Policy. The Audit Committee considers the materiality
and the nature of the related party transactions carried out by the Bank to ensure that the arms’ length principle is adhered to at all
times. The Audit Committee is also responsible for managing the Board’s relationships with internal and external auditors.

In terms of Listing Rules 5.117, 5.118 and 5.118A, the Audit Committee is composed of four Non-Executive Directors, three of
whom are considered as independent of the Bank. The three Non-Executive Independent Directors are considered as independent
as they are free from any business, family or other relationship with the Bank or its management that may create a conflict of interest
such as to impair their judgement. The other Non-Executive Director is a Bank employee and by virtue of his employment with the
Bank, such Director is considered as Non-Independent from the institution.
 Bank of Valletta p.l.c.
36 Annual Report & Financial Statements 2017

Corporate governance statement of compliance (continued)

Alfred Lupi FCCA, FIA, BSc Econ is a Non-Executive Director. He is a professional accountant with an economics degree and is
currently engaged in consultancy services. He is the Director whom the Bank considers as competent in accounting. Alfred Lupi is
independent of the Bank.

James Grech B.Com. (Hons.) Mangt., MBA (Henley) (UK) is a Non-Executive Non-Independent Director. He joined the Bank in 1998
and is currently the Executive Head Foreign Bank Relationships. During his career at the Bank he held various managerial positions
at various branches and departments and is thus considered as a competent member of the Audit Committee.

Anita Mangion B.Sc. Business & Computing, B.Com. Management Hons, MBA eBusiness is a Non-Executive Director. Ms Mangion
is an experienced business and IT consultant and during the last fifteen years has consulted different local and international entities in
various sectors such as financial, ICT and banking. Ms Mangion is independent of the Bank and considered as a competent member
of the Audit Committee.

Joseph M Zrinzo is a Non-Executive Director. Mr Zrinzo has various Board directorship experiences on a number of companies. He
also served as a member of various committees. He is independent of the Bank and considered as competent to be a member of
the Audit Committee.

The Bank considers the Audit Committee members as having the adequate competence and independence criteria as required by
Listing Rule 5.118.

Meetings Held: 22
Members Members Attended

Alfred Lupi (Chairman appointed 20 December 2016) 16 (out of 16)
Barbara Helga Ellul (resigned 16 December 2016) 4 (out of 4)
James Grech (appointed 20 December 2016) 17 (out of 18)
Anita Mangion (appointed 20 December 2016) 15 (out of 16)
Taddeo Scerri (Chairman until 16 December 2016) 3 (out of 3)
Joseph M Zrinzo 21 (out of 22)

The CEO, the Chief Risk Officer, the Chief Finance Officer and a representative of the External Auditors attend the Audit Committee
meetings by invitation. KPMG Malta are the Group’s statutory auditors. The Chief Officer Group Internal Audit also attends the
meetings of the Audit Committee. A designated person from the Office of the Company Secretary acts as Secretary to the Audit
Committee.

During the period under review, the Audit Committee was chaired by Taddeo Scerri until his appointment as Chairman of the Bank
on 16 December 2016. During this period and pursuant to the Bank’s Related Party Transaction Policy, Alfred Lupi chaired one Audit
Committee Meeting, which discussed related party transactions, concerning the Government of Malta or related parties as defined
in the Bank’s Related Party Transaction Policy.

Alfred Lupi was then appointed Chairman of the Audit Committee on 20 December 2016. Paul V Azzopardi chaired two Audit
Committee Meetings which discussed related party transactions instead of Alfred Lupi who could not chair the meeting due to a
potential conflict of interest.

The Remuneration Committee – This is considered under the Remuneration Report.

The CEO and the Chief Risk Officer attend the Remuneration Committee meetings by invitation. The Company Secretary acts as
Secretary to the Remuneration Committee.

The Nominations and Governance Committee – This is considered under the Nominations Report.

The CEO and the Chief Risk Officer attend the Nominations and Governance Committee meetings by invitation. The Company
Secretary acts as a Secretary to the Nominations and Governance Committee.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 37

Corporate governance statement of compliance (continued)

The Risk Management Committee

The Risk Management Committee assists the Board in assessing the different types of risks to which the organisation is exposed.
This Committee is responsible for the proper implementation and review of the Group’s risk policies related mainly, but not restricted
to, Credit, Market and Operational Risks. It reports to the Board on the adequacy, or otherwise, of such policies. The Committee is
also responsible to review delegated limits, together with an oversight of the Group’s monitoring and reporting systems, to ensure
regular and appropriate monitoring and reporting on the Group’s risk positions.

Meetings Held: 7
Members Members Attended

Joseph M Zrinzo (Chairman appointed 20 December 2016) 5 (out of 5)
Stephen Agius (appointed 20 December 2016) 4 (out of 5)
Paul V Azzopardi (appointed 20 December 2016) 5 (out of 5)
Mario Grima (Chairman until 16 December 2016) 2 (out of 2)
Antonio Piras (appointed 20 December 2016) 3 (out of 5)
James Grech (member until 16 December 2016) 2 (out of 2)
Alfred Lupi (member until 16 December 2016) 2 (out of 2)

The CEO, the Chief Finance Officer, the Chief Risk Officer, the Chief Officer Group Internal Audit, the Executive Risk Management
and the Head Enterprise Risk Management attend the Risk Management Committee meetings by invitation. A designated person
from the Office of the Company Secretary acts as Secretary to the Risk Management Committee.

The above information on the Risk Management Committee, together with the information contained in Section 1 of the Capital and Risk
Management Report included in this Annual Report, is also to be considered as a disclosure for the purposes of Regulation 575/2013 of
the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

The Compliance and Crime Prevention Committee

The primary objective of the Compliance and Crime Prevention Committee is to assist and guide the Board of Directors in the
discharge of their obligations imposed from time to time by regulation in the area of financial services and in light of the Bank acting
as a credit and financial institution licensed to provide services under different laws and within the framework of the Compliance
Function as defined in the Compliance Charter and as approved by the Board of Directors. The Committee is also responsible to
assist the Bank in combatting financial crime and money laundering activities.

The CEO, the Chief Risk Officer, the Chief Business Development Officer – Investments, the Executive Legal Services, the Executive Group
Compliance and the Money Laundering Reporting Officer attend the Compliance and Crime Prevention Committee meetings by invitation.
A designated person from the Office of the Company Secretary acts as Secretary to the Compliance and Crime Prevention Committee.

Meetings Held: 8
Members Members Attended

Paul V Azzopardi (Chairman appointed 20 December 2016) 6 (out of 6)
Alan Attard (appointed 20 December 2016) 5 (out of 6)
James Grech (appointed 20 December 2016) 5 (out of 6)
Mario Grima (member until 16 December 2016) 2 (out of 2)
Alfred Lupi (appointed 20 December 2016) 6 (out of 6)
Joseph M Zrinzo (Chairman until 16 December 2016) 2 (out of 2)

Management Committees

The Management Board is primarily responsible for the management of the Bank and its strategy, financial performance, risk
management, human resources, information technology and data management, setting up committees which may become
necessary and escalation procedures. The Bank’s Management Board meets on a regular basis. It is chaired by the CEO and is
composed of the following members:

• The Chief Operations Officer

• The Chief Risk Officer
• The Chief Finance Officer
• The Chief Business Development Officer – Investments
• The Chief Business Development Officer – Credit
• The Chief Technology Officer
 Bank of Valletta p.l.c.
38 Annual Report & Financial Statements 2017

Corporate governance statement of compliance (continued)

The Asset and Liability Committee (ALCO) is an integral part of the BOV Group management. The Committee takes an integrated
view in managing the Group’s assets and liabilities to achieve an optimal balance between risk and return. ALCO evaluates the asset
and liability cash flows, and the management of integrated exposures at a consolidated level, to enable it to give strategic direction
to the business. Consideration is given, inter alia, to solvency, liquidity and interest rate risks. It also provides guidance in respect of
risk and return to the business, and exercises executive authority in the area of interest rate management by setting the interest rates
payable on retail deposit products. Additionally, the Committee monitors hedging strategies and hedge effectiveness in respect of
the risks aforementioned, as well as asset mix, liabilities and balance sheet growth. ALCO also monitors the capital adequacy of the
Group on a continuous basis, making use of capital forecasts to ensure that enough capital is readily available at all times to meet
the demand arising from business growth and regulation. The Committee meets at least once a month to review the balance sheet
risks and ensures its prudent management. ALCO is chaired by the CEO and has as members a Board Director and other members
of Senior Management.

The Provisions Committee is responsible to develop and maintain a provisioning methodology in line with best practice and
regulatory expectations. The Committee meets on a monthly basis unless further meetings are required. The Provisions Committee
is chaired by the Chief Finance Officer and is composed of members of Senior Management.

The IT Steering Committee is responsible for the effective and cost-efficient application of information technologies, related
personnel resources and funding in support of the objectives and needs of the Bank. The Committee meets every two months unless
further meetings are required. The IT Steering Committee is chaired by the Chief Technology Officer and is composed of members
of Senior Management.

The Procurement Committee is responsible for the approval of procurement of goods and services that exceed limits afforded to
management and to make recommendations to the Management Board and to the Board of Directors on the award of contracts
that exceed a defined value. The Committee meets at least once a month unless further meetings are required. The Committee is
chaired by the Chief Operations Officer and is composed of members of Senior Management.

The Core Banking Transformation Steering Committee is responsible for overseeing the implementation of the new selected core
banking solution, together with overseeing the transformation required in line with the Bank’s operations. The Committee takes into
consideration current banking practices that need to be transformed in order to adopt the solution selected. The Committee meets
on a monthly basis and is chaired by the CEO and is composed of members of Senior Management.

The Anti-Financial Crime Committee (AFCC) is responsible to discuss and ensure that legal, regulatory and other developments
related to money laundering, funding of terrorism and other financial crime matters, are implemented in the Bank’s policies and
procedures. This Committee is also tasked to set the risk appetite for financial crime for the Bank and to ensure that the Bank follows
best practice in connection with anti-money laundering, combatting the funding of terrorism and other financial crime. The AFCC is
chaired by the Chief Risk Officer and is composed of members of Senior Management.

The New Product Approval Committee (NPAC) ensures the enhancement of long term value creation for the benefit of all
stakeholders. The aim is to ensure adequate due diligence before a new product or service is launched by understanding and
vetting its features. The Committee aims to identify and mitigate potential risks which impact both the product or service and the
Group. The NPAC makes the final decision to either approve, decline or recommend changes to the proposed product or service.
The Committee also provides guidance and recommendations to the Board of Directors in case of a new business line. The NPAC is
appointed by the Management Board and is chaired by the Chief Risk Officer to ensure a risk adequate approach and the necessary
degree of intervention in relation to product development, hence also ensuring that the new proposed product or service falls within
the Group’s risk appetite.

Principle 6: Information and Professional Development

The CEO is appointed by the Board and is inter alia responsible for the recruitment and selection of Senior Management and consults with
the Nominations and Governance Committee and with the Board on the appointment of Senior Management. Training of management
and employees is a priority and internal and external training is provided by the Bank’s Training Centre specifically set up for this purpose.

On joining the Board, a Non-Executive Director is provided with briefings by the CEO on the activities of the Bank. All Directors are
provided with a dossier that, apart from incorporating the relevant legislation, rules and bye laws, and Memoranda and Articles of Group
companies, also includes the Bank’s Policy documents.

Directors may, where they judge it necessary to discharge their duties as Directors, take independent professional advice on any matter
at the Bank’s expense. Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring
adherence to Board procedures as well as good information flows within the Board and its Committees.

Informative sessions on risk management, corporate governance and training sessions on the Bank’s business operations were
organised during the period under review for the Board and for the members of the Management Board. In addition, the Company
Secretary directs members of the Board to seminars or conferences which serve as professional development for Directors in the
discharge of their functions on the Board and on the Committees.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 39

Corporate governance statement of compliance (continued)

Principle 7: Evaluation of the Board’s Performance

During the period under review, the Nominations and Governance Committee undertook an evaluation of the performance of
the Board, the Chairman and the Board Committees. The evaluation exercise was conducted through a Board Effectiveness
Questionnaire prepared by the Nominations and Governance Committee. The results of the Questionnaire were analysed by the
Nominations and Governance Committee and discussed at Board level.

From the Board Effectiveness Questionnaire, the following points emerged:

• All Board Members support and debate the Company’s strategy and values enabling them to set the tone from the top. The
need for more focus on strategic issues and externalities, with more use of dashboards, particularly to monitor project progress,
was also recommended.
• The Board has a clearer understanding of its responsibilities and promotes high-level discussions.
• The Board follows up on action points taken during previous meetings and ensures that it has a rigorous program of continuous
professional education.
• The Directors present a good level of skills covering a wide range of experiences.
• The Board continually monitors and challenges management with the sole aim of ensuring its success in the interest of all
stakeholders involved.
• Board Committees are properly constituted and their members have the necessary expertise and skills to perform their delegated
roles and report back clearly and fully to the Board.

Principle 8: Committees

The Remuneration Committee is dealt with under the Remuneration Report, which also includes the Remuneration Statement of
Compliance in terms of Code Provisions 8.A.3 and 8.A.4.

The Nominations and Governance Committee was set up by the Board during financial year 2016 as set out in the Code provisions.
Further details on the Nominations and Governance Committee is found under the Nominations Report as per Listing Rule 8.B.7.

Principles 9 and 10: Relations with Shareholders and with the Market and Institutional Shareholders

The Bank recognises the importance of maintaining a dialogue with its shareholders and of keeping the market informed to ensure
that its strategies and performance are well understood.

The Board is of the view that during the period under review the Bank has communicated effectively with the market through a
number of company announcements and press releases.

The Bank also communicates with its shareholders through the Bank’s Annual General Meeting (AGM) (further detail is provided
under the section entitled General Meetings). All Directors attend the AGM and are available to answer questions, if necessary.

The Chairman and the CEO also ensure that sufficient contact is maintained with major shareholders to understand issues and
concerns.

Apart from the AGM, the Bank communicates with its shareholders by way of the Annual Report and Financial Statements, by
publishing and sending to the shareholders its results on a six-monthly basis and through a bi-annual newsletter to shareholders.
Since financial period 2017 covered a period of fifteen months, two sets of interim financial statements were issued, on 27 April 2017
and 26 October 2017 respectively, accompanied with the issuance of three letters to shareholders. The Bank’s website (www.bov.
com) also contains information about the Bank and its business, including an Investor Relations Section.

In addition, the Bank holds a meeting for stockbrokers and financial intermediaries, usually twice a year, to coincide with the
publication of its Financial Statements. Other meetings with stockbrokers and financial intermediaries are held as necessary.

The Bank’s Investor Relations Officer at the Office of the Company Secretary maintains two-way communication between the Bank
and its investors. Individual shareholders can raise matters relating to their shareholdings and the business of the Group at any time
throughout the financial year and are given the opportunity to ask questions at the AGM or submit written questions in advance. In
terms of Article 18.3 of the Articles of Association of the Bank and Article 129 of the Companies Act,1995 (Chapter 386, Laws of
Malta), the Directors may call an extraordinary general meeting on the requisition of shareholders holding not less than one-tenth of
the paid up share capital of the Company.
 Bank of Valletta p.l.c.
40 Annual Report & Financial Statements 2017

Corporate governance statement of compliance (continued)

Principle 11: Conflicts of Interest

The Directors are strongly aware of their responsibility to act at all times in the interest of the Bank and its shareholders as a whole
and of their obligation to avoid conflicts of interest. The latter may, and do arise on specific matters. In such instances, the Bank
ensures that such conflicts, actual or potential, are managed in the best interest of the Bank.

A Director is therefore required to make full and frank disclosure with respect to any matter where there is a potential or actual
conflict, whether such conflict arises from personal interests or the interests of the companies in which such person is a Director or
officer and the said Director is excused from the meeting and accordingly is not involved in the Bank’s Board discussion on the matter
and does not vote on any such matter.

On joining the Board, and regularly thereafter, the Directors are informed of their obligations on dealing in securities of the Bank
within the parameters of the law, including the Listing Rules, as well as the Bank’s Code of Conduct for Securities Transactions and
Directors follow the required notification procedures.

Directors’ interest in the share capital of the Bank as at 31 December 2017 was as follows:

Beneficial Interest*

Alan Attard 14,782 shares
Paul V Azzopardi 9,153 shares
Miguel Borg 6,731 shares
Alfred Lupi 30,154 shares
Joseph M Zrinzo 193,266 shares

*Includes any shares held by spouses or partners

Alan Attard held 15,749,945 shares by way of non-beneficial interest in his capacity as one of the five trustees of the BOV Employees’
Foundation.

No Director has any other benefit or non-beneficial interest in the share capital of the Bank.

As at 31 December 2017, the Directors below also held the following:

Beneficial interest**
Alan Attard 6,500 BOV 5.35% Subordinated Bonds 2019
Joseph M Zrinzo 8,000 BOV 4.80% Medium Term Notes 2018
11,700 BOV 5.35% Subordinated Bonds 2019
31,500 BOV 4.80% Subordinated Bonds 2020
35,000 BOV 3.50% Subordinated Notes 2030 Series 2

**Includes any holdings by spouses or partners

Principle 12: Corporate Social Responsibility (CSR)

"We are committed to play a leading and effective role in the country’s sustainable development, whilst tangibly proving ourselves to
be responsible and caring citizens of the community in which we operate."

Bank of Valletta recognises it has an important role to play in being an active corporate citizen within the Maltese society in which it
operates. It is committed to contribute to the cultural landscape and social fibre of the country, not only to its economic development,
but also through the efficient management of resources for the benefit of all stakeholders involved.

BOV continuously strives to be the employer of choice for its people, whom it considers to be its primary asset. In a bid to promote
a healthy lifestyle and well-being for its employees, the Bank has a number of programmes in place to help its people maintain a
stress-free balance between their work and private life (i.e. health check-ups). Employees are also encouraged to fulfil their role in
the community by participating in events like blood donation drives, dress down days in aid of NGOs and tree-planting activities
organised throughout the year. Meanwhile, teams across the retail network come together to organise an initiative for the benefit of
groups in their community, thereby reinforcing the link between the Bank and the community.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 41

Corporate governance statement of compliance (continued)

The customer, be it personal or corporate, remains at the heart of the Bank’s strategy and vision going forward. 2017 saw Bank
of Valletta inaugurating new premises in Gzira and Centris Business Gateway in Mrieħel. In Gzira, the Bank’s premises houses
various customer-facing initiatives, as well as its Training Academy and the Bank’s Ethics and Employee Development function. The
latter represents a direct investment in the Bank’s people and their future. The offices in Mrieħel are dedicated to areas that a few
years ago were peripheral to the banking business but whose function became more critical as the Bank was recognised to be of
systemic importance to the country. These units include the Bank’s Risk Management Division, Compliance and Anti-Financial Crime
Department and Debt Management Unit. Meanwhile, during the financial period under review, the Bank increased its ATM fleet to
95 across the Maltese Islands, and also introduced contactless cards thereby harnessing technology to provide other innovative
solutions, offering added efficiency and convenience, without forfeiting security to its card base.

Shareholders are kept abreast of developments – beyond regulatory requirements – via the BOV Shareholders’ Link, while the
public is invited to participate in educational sessions to help them become more financially literate and in a better position to take
informed decisions.

The Bank continues to work on its Green agenda, which has been featuring in its Mission Statement for several years now. As
an organisation with roots running deep within the Maltese society, the Bank feels responsible not only to act ethically but also to
actively promote conservation and safeguard the green stakeholder, in its bid to reduce its carbon footprint whilst instilling more
environmentally-friendly practices. This philosophy is extended to the supply-chain by integrating environmental considerations into
all stages of the purchasing process.

The Bank’s roots run deep into the community in which it operates. The sound principles of Corporate Social Responsibility (CSR)
are put into practice through its extensive Community Programme which is distilled into seven distinct pillars, representing diverse
but equally important concerns for the Maltese society. These are:

Arts and Culture – BOV has taken onboard a number of artistic initiatives during the financial period under review. The span includes
performances at the Manoel Theatre and the two theatres in Gozo – Astra and Aurora. BOV remains a leading sponsor of the Malta Philharmonic
Orchestra. The Bank has continued to endorse the Maltese Tenor Joseph Calleja as well as the BOV Joseph Calleja Children’s Choir. The BOV
Retrospective Arts Exhibition, which this period featured works of art by renowned artist Anthony Calleja, has remained a much sought after
annual appointment on the national cultural calendar.

Heritage – The conservation project at the vault of the Sanctuary in Mellieħa was brought to an end, but several other initiatives were
undertaken. Meanwhile, the Bank stepped in to support the conservation of the 16th century baroque ‘Grand Salon’ at the Auberge
de Provence in Valletta, one of the only five wooden trussed roofs still surviving from the period of the Knights of the St John. 2017
also saw Bank of Valletta lending its support when the ceiling of the Ta’ Ġieżu Church in Rabat tragically collapsed. Meanwhile, the
Bank continued to partner Fondazzjoni Wirt Artna, not only in relation to safeguarding historical gems but also vis-à-vis its Hands-
On Heritage programme which focuses on educating the younger generation about our rich past by offering students the unique
opportunity to handle period instruments and tools, and learn how they were used.

Natural Environment – After an absence of several years, 2017 saw Bank of Valletta renewing its backing to Dinja Waħda, a
nationwide education and awareness program run across Primary Schools by the NGO BirdLife Malta. Targeting thousands of school
children, this program aims to instil in them a deeper appreciation for Malta’s fauna and flora. The Bank continued to support the BOV
Adventure Park at Ta’ Qali in a bid to ensure adequate green space for Maltese families to spend quality time together.

Education – The Bank renewed its collaboration with the National Literacy Agency towards the Read with Me programme which
is run free of charge in various centres across Malta and Gozo, in a bid to help combat illiteracy by targeting children aged 0 to 4
years and their parents/guardians. This is done by providing the environment and the professionals who make reading time a fun
experience for everyone involved. The Bank also organised dedicated sessions for its own employees and their children at BOV
Centre. Excellence in education was promoted by sponsoring various educational awards. The BOV Investment Education Project –
a project which gives University students reading for a degree in Economics, Management and Accountancy the opportunity to get
first-hand experience in the world of financial trading – was once again successfully executed.

Philanthropy – Social causes have always featured strongly on the Bank’s agenda. Since it was set up in 2014, the Marigold
Foundation – BOV in the Community acts as a Trust that manages requests by NGOs and individuals with a philanthropic purpose.
The BOV Joseph Calleja Foundation, on the other hand, is a partnership between the Bank and the internationally renowned
Maltese tenor that raises funds to support talented youth in fulfilling their artistic dreams. Dress downs organised during the period
under review, supported the Pink October effort, Dr Klown and Puttinu Cares. Meanwhile, the Bank dedicated its Cards for Charity
campaign towards ‘Service Dogs Foundation – Malta’ and Puttinu Cares. This was indeed marked as a record period in terms of
the Bank’s contribution towards the Malta Community Chest Fund, with its donation towards L-Istrina BOV Piggy Bank campaign
reaching €200,000.

Sport – Promoting a healthy lifestyle has remained a key pillar of the Bank’s Community Relations programme. Witness to this is
the support provided to various sporting associations in a bid to encourage the general public to make sports a more integral part
of their lifestyle. In fact 2017 saw the Malta Basketball Association inaugurate their new pavilion, whilst Bank of Valletta and Sports
Malta collaborated to extend the Youth Development Scheme to twenty Maltese athletes, who have not yet reached the age of 18.
The scheme provides the nominated athletes financial assistance to participate in international competitions overseas.
 Bank of Valletta p.l.c.
42 Annual Report & Financial Statements 2017

Corporate governance statement of compliance (continued)

Strategic Alliances – The Bank continued to work closely with the main representative bodies and business associations, such as the
Malta Chamber of Commerce, Enterprise and Industry and the Malta Hotels and Restaurants Association. 2017 saw Bank of Valletta
support several business initiatives and conferences organised to open discussion about topical issues of interest to businesses in Malta.

There is no one formula for implementing Corporate Social Responsibility. For Bank of Valletta, being a responsible organisation means
keeping the interests of the different stakeholders in mind in all its decisions, from strategic to the daily operational ones. The Community
Programme gives the Bank a framework guiding its support towards the Community, in a fair and managed manner. By implementing
a Programme that strategically directs the Bank’s efforts into specific spheres, the Bank stirs away from adopting an excessively narrow
approach that focuses solely on philanthropy and sponsorships. This also corroborates the Bank’s belief that being a corporate citizen is
really a frame of mind impacting its holistic approach to doing business.

C. NON-COMPLIANCE WITH THE CODE

Principle 4 (Code Provision 4.2.7)

The Code recommends “the development of a succession policy for the future composition of the Board of Directors and particularly
the executive component thereof, for which the Chairman should hold key responsibility”. Although the Bank does not have a
Succession Policy per se, the concept of Rotation of Directors (as further explained under Principle 3 above) was introduced to
ensure continuity at Board level and is embedded within the Bank’s Memorandum and Articles of Association.

Principle 6 (Code Provision 6.4.4)

During the financial period under review there was not a system in place to establish a succession plan for senior management,
however, the Bank has always been successful in appointing individuals internally.

Principle 9 (Code Provision 9.3)

Code Provision 9.3 requires the Bank to have in place a mechanism to resolve conflicts between minority shareholders and controlling
shareholders. This Code Provision is not applicable to the Bank since the Bank has no controlling shareholders.

Listing Rules – Section 5.97.8 – Policy on Diversity

The Bank does not have a Policy on Diversity in place, however it ensures that the Bank is diverse in terms of skills, competency,
gender and age. In the Maltese environment, it is difficult to ensure gender diversity at Board level, which is a nationwide problem.

The Bank is Equality Certified and has an Equality Policy. The Equality Mark is a certification awarded to companies that make gender
equality one of their values and whose management is based on the recognition and promotion of the potential of all employees
irrespective of their gender and caring responsibilities.

Furthermore, the Bank has policies in place which encourage and promote family-friendly measures such as child-care leave and
child-care subsidies.

D. INTERNAL CONTROL

Authority to manage the activities of the Bank is delegated to the CEO within the limits set by the Board.

The Board is ultimately responsible for the Bank’s systems of internal control and for reviewing their effectiveness. Such systems
are designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable
as opposed to absolute assurance against material misstatement or loss. Through the Audit Committee, the Risk Management
Committee and the Compliance and Crime Prevention Committee, the Board reviews the process and procedures to ensure the
effectiveness of the Group’s systems of internal control, which are monitored by the Group Internal Audit Department.

The key features of the Group’s systems of internal control are as follows:

Organisation

The Group operates through the Board of Directors of subsidiary companies and equity-accounted investee companies with clear
reporting lines and delegation of powers.

Control Environment

The Group is committed to the highest standards of business conduct and seeks to maintain these standards across all of its
operations. Group policies and employee procedures are in place for the reporting and resolution of fraudulent activities. The Group
has an appropriate organisational structure for planning, executing, controlling and monitoring business operations in order to
achieve Group objectives.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 43

Corporate governance statement of compliance (continued)

Risk Identification

The management of each of the Group members is responsible for the identification and evaluation of key risks applicable to their
areas of business. The risk management model adopted by BOV is the classic “three lines of defence model” wherein the first line
of defence is constituted by the functions that own and manage risks, namely the business units; the second line is constituted by
the functions that oversee risks, namely Risk Management, Compliance and Anti-Financial Crime; and the third line is constituted
by Internal Audit, which is the function that provides independent assurance. The Risk Management function, within the second line
of defence, falls under the responsibility of the Chief Risk Officer, and operates within a wider Bank structure that reflects the risk
appetite and risk management philosophy articulated by the Board of Directors.

Reporting

Functional, operating and financial reporting standards are applicable to all entities of the Group. These are supplemented by
operating standards set, as required, by the Bank’s Board and the Management Board. Systems and procedures are in place to
identify, control and to report on the major risks including credit risk, changes in the market prices of financial instruments, liquidity,
operational error and fraud. Exposure to these risks is monitored by ALCO and by the Risk Management Committee. The Board
receives periodic management information giving comprehensive analysis of financial and business performance including variances
against budgets.

E. LISTING RULE 5.97.5

The information required by this Listing Rule is found in the Directors’ Report.

F. GENERAL MEETINGS

The general meeting is the highest decision making body of the Bank. A general meeting is called by twenty-one days’ notice and it
is conducted in accordance with the Articles of Association of the Bank.

The Annual General Meeting (AGM) deals with what is termed as “ordinary business”, namely, the receiving or adoption of the
annual financial statements, the declaration of a dividend, the appointment of the auditors, Board authorisation to fix the auditors’
emoluments and the Election of Directors. Other business which may be transacted at a general meeting (including at the AGM) will
be dealt with as Special Business.

All shareholders registered in the Shareholders’ Register on the Record Date as defined in the Listing Rules, have the right to attend,
participate and vote in the general meeting. A shareholder or shareholders holding not less than 5% in nominal value of all the shares
entitled to vote at the general meeting may request the Bank to include items on the agenda of a general meeting and/or table draft
resolutions for items included in the agenda of a general meeting. Such requests are to be received by the Bank at least forty six
days before the date set for the relative general meeting.

A shareholder who cannot participate in the general meeting can appoint a proxy by written or electronic notification to the Bank.
Every shareholder represented in person or by proxy is entitled to ask questions which are pertinent and related to items on the
agenda of the general meeting and to have such questions answered by the Directors or by such persons as the Directors may
delegate for that purpose.
 Bank of Valletta p.l.c.
44 Annual Report & Financial Statements 2017

Remuneration report as at 31 December 2017

1. Terms of Reference and Membership of the Remuneration Committee

The Remuneration Committee (the Committee) is charged with overseeing the development and implementation of the remuneration
and related policies of the Group. Its primary purpose is to make recommendations to the Board on the remuneration policy of
the Group, support the Board in overseeing the remuneration system’s design and operation and ensure that remuneration is
appropriate and consistent with the Bank’s culture, long term business and risk appetite, performance and control environment as
well as with any legal or regulatory requirements. The role of the Committee is to devise the appropriate remuneration packages
needed to attract, retain and motivate Directors, as well as key function holders required for the proper governance of the Group.

The Committee is composed of Taddeo Scerri (Chairman), Anita Mangion and Antonio Piras as members, all of whom are Independent
Non-Executive Directors. The Chief Executive Officer and the Chief Risk Officer attend meetings of the Committee. The Company
Secretary acts as secretary to the Committee.

2. Meetings

The Committee held eight meetings during the period under review, which meetings were attended as follows:

Members Attended
Taddeo Scerri (Chairman appointed 20 December 2016) 8 (out of 8)
John Cassar White (resigned from the Bank 16 December 2016) 1 (out of 1)
Alfred Lupi (member until 16 December 2016) 1 (out of 1)
Anita Mangion (appointed 20 December 2016) 7 (out of 7)
Antonio Piras (appointed 20 December 2016) 7 (out of 7)

3. Remuneration Statement

3.1 Remuneration Policy – Executive Management

The Board determines the framework of the overall remuneration policy for Executive Management based on recommendations from
the Committee. The Committee, on the recommendations of the Chief Executive Officer, then establishes the individual remuneration
arrangements of the Group’s Executive Management, namely the members of the Management Board and Heads of Departments.

The Committee is also charged with considering and determining requests for early retirement based on exceptional circumstances,
which must be assessed by the Bank on a case by case basis.

The Remuneration Policy applies consistently to all employees within the Group. Its objective is to align individual rewards with the
Group’s performance, business strategy, risk appetite, values and long term interests. It also encourages a prudent approach to risk
taking. The overriding principle of the Remuneration Policy is that individual performance is evaluated according to both quantitative/
financial and qualitative/behavioural measures. Further details about the Bank’s Remuneration Policy are found in the Capital and
Risk Management Report.

The Committee considers that the current Executive Management remuneration packages are based upon the appropriate local
market equivalents and are adequate for the responsibilities involved. The Committee is of the opinion that the remuneration packages
are such, so as to enable the Bank to attract, retain and motivate executives having the appropriate skills and qualities, in order to
ensure the proper management of the organisation. Such packages should therefore be kept under constant review.

Hereinafter, for the purposes of this Remuneration Statement, references to “Senior Executives” shall mean the Chief Executive
Officer and the other six members of the Management Board.

Senior Executives are in full employment with the Bank on an indefinite contract but their appointment on the Management Board
is on a definite contract. They enjoy the health insurance arrangements and death in service benefits as all Bank employees. Senior
Executives are also entitled to the use of a company car. Certain members of the Management Board have a clause in their contract
wherein should their contract be terminated without due reason, they may be eligible for monetary compensation. Share options and
profit sharing are not part of the Group’s Remuneration Policy.

The Chief Executive Officer’s remuneration is reviewed and approved by the Committee. The Chief Executive Officer is eligible for an
annual bonus entitlement by reference to the attainment of pre-established objectives and targets as approved by the Committee.
The Members of the Management Board are also eligible for an annual bonus entitlement.

The Members of the Management Board are eligible for an annual salary increase within a maximum salary range approved by the
Committee.

No supplementary pension or other pension benefits are payable to the Senior Executives. Insofar as early retirement schemes
are concerned, the Senior Executives are subject to the schemes which are set out and defined in the Collective Agreement (for
Managerial and Clerical Grades) as may be applicable to employees from time to time.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 45

Remuneration report as at 31 December 2017 (continued)

The Committee is of the view that the amount of performance bonus paid out at all staff levels is not significant.

Total emoluments received by Senior Executives during financial period 2017 are reported below under section 3.3 in terms of Code
Provisions 8.A.5.

Variable Remuneration of Senior Executives (Management Board)

The Variable Remuneration of Senior Executives is determined by the Remuneration Committee. During financial period 2017
Management Board members qualified for a collective performance-related pay system. The payment of bonuses payable to the
Management Board members was linked to the performance and achievement of the objectives of the Management Board. The
objectives of the Management Board were based partly on financial targets (financial ratios) and partly on qualitative targets (quality
ratios).

3.2 Remuneration Policy – Directors

With effect from 27 July 2017, the Board is composed of Executive and Non-Executive Directors. Directors’ remuneration is
determined and regulated by service contracts for Directors as detailed below. The maximum annual aggregate emoluments that
may be paid to the Directors is approved by the shareholders at the General Meeting in terms of Article 33.1 of the Bank’s Articles of
Association. The aggregate emoluments of all directors of €450,000 per annum was fixed at an Extraordinary General Meeting held
on 27 July 2017. This amount excludes the salaries of Directors in the Bank’s employment.

Service Contracts for Directors

The Directors have service contracts with the Bank, none of which provide for severance payments upon termination of their
respective directorships. In terms of the said service contracts, the Directors are entitled to certain benefits after the termination of
their directorship, including discounts on products and services offered by the Group. Service contracts regulate the term of office of
Directors, referring specifically to the concept of Rotation of Directors provided within the Memorandum and Articles of Association
(as further explained under Principle 3 of the Corporate Governance Statement of Compliance). Vacation of office of Director shall
be served in writing. Service contracts also provide for the Directors’ powers and duties vis-à-vis the Bank and their obligation to
dedicate sufficient time to carry out their responsibilities. Directors are obliged to avoid conflicts of interest and shall take reasonable
steps to keep the Bank’s matters confidential. Directors’ emoluments are designed to reflect the time committed by Directors to
the Bank’s affairs, including the different Board Committees of which Directors are members, and their responsibilities on such
Committees. None of the Directors, in their capacity as a Director of the Bank, is entitled to profit sharing, share options or pension
benefits. In terms of non-cash benefits, Directors are entitled to health insurance and to a refund of out-of-pocket expenses.

The Directors’ fees as approved by the Board are as follows:

Directors’ Fees €
Chairman 80,000
All other Directors (both Executive and Non-Executive) 20,500

Board Committees Fees
Chairman 5,000
Members 3,000

Two of the Non-Executive Directors, as well as both the Executive Directors, are employees of the Bank and therefore also receive
remuneration by virtue of their employment.

Total fees received by Directors during financial period 2017 are reported below under section 3.3 in terms of Code Provisions 8.A.5.

Remuneration Policy Review

There were no changes to the Remuneration Policy for Directors and Executive Management during financial period 2017. However,
the current Remuneration Policy will be revised during financial year 2018.

3.3 Code Provision 8.A.5

Senior Executives’ Emoluments (Management Board)

Fixed Remuneration Variable Remuneration Share Options Others

non-cash benefits: health
€924,404.86 €91,399.92 none insurance and refund of out-
of-pocket expenses
 Bank of Valletta p.l.c.
46 Annual Report & Financial Statements 2017

Remuneration report as at 31 December 2017 (continued)

Directors’ Fees

Fixed Remuneration Variable Remuneration Share Options Others

non-cash benefits: health
€402,826 None None insurance and refund of out-
of-pocket expenses

For the Financial Period under review these were paid as follows:

Directors’ fees including benefits – Financial Period 2017 €

Taddeo Scerri (appointed Chairman 16 December 2016) 103,270

John Cassar White (resigned 16 December 2016) 17,739
Stephen Agius (appointed 16 December 2016) 26,974
Alan Attard (appointed 16 December 2016) 27,658
Paul V Azzopardi (appointed 16 December 2016) 28,692
Miguel Borg (appointed 27 July 2017) 8,904
Barbara Helga Ellul (resigned 16 December 2016) 5,310
James Grech 35,638
Mario Grima (resigned 16 December 2016) 5,566
Alfred Lupi 38,520
Mario Mallia (appointed 27 July 2017) 12,185
Anita Mangion (appointed 16 December 2016) 27,231
Antonio Piras (appointed 16 December 2016) 26,500
Gabriele Simonetti (resigned 16 December 2016) 4,375
Joseph M Zrinzo 43,579

Total 412,141
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 47

Nominations report as at 31 December 2017

The Nominations and Governance Committee (NGC)

The Nominations Committee (the Committee) was set up by the Board during financial year 2016. Its name was changed to
Nominations and Governance Committee (NGC) during financial period 2017 and it has been enshrined in the Memorandum and
Articles of Association approved by the Shareholders during the Extraordinary General Meeting held on 27 July 2017. The Committee
follows the Nominations Policy and works under the guidance of its Terms of Reference as approved by the Board.

The role of the NGC is twofold, namely (i) to ensure that the composition of the Board of Directors of the Bank has the appropriate
level and mix of experience, skills, and competence that may be required for the operation of a credit institution and (ii) to ensure that
persons occupying the post of Non-Executive Directors meet the requirements of prevailing legislation and regulation.

From time to time, the Board of Directors sets out the terms of reference of the NGC. However certain fundamentals are entrenched
in the Memorandum and Articles of Association, that set out both the basic role of the NGC as well as the parameters within which
the directors may provide the appropriate terms of reference, namely:

i) To recommend to the Board, candidates having the right attributes, including:

• integrity, skill, competence and experience individually; and
• contributes to the collective skills, experience and competence required at Board level.
ii) To make recommendations to the Board on persons considered as independent to occupy positions on the Board;
iii) To make recommendations on matters such as succession planning, establishment of policies and procedures related to the
selection of senior management and the optimal size of the Board of Directors and the Management Board;
iv) To ensure that nominations to the Board are made on merit and in line with the overall requirements of the skills and competence
required in the Board;
v) To evaluate and test each candidate against guidelines issued from time to time by the Regulators; and
vi) Periodically assess the skills, knowledge and experience that may be required within the Board and make recommendations to
the Board.

With a view to avoid possible perceptions of conflicts of interest in the scrutiny and approval of candidates for appointment as
Non-Executive Directors, the Articles of Association provide that no member of the NGC shall be present when his nomination as a
director or a matter which concerns that member in question, is being evaluated by the NGC. In such instances such member shall
be substituted by another director. In this same context, the proposals include a system of rotation that would, as far as practicably
possible, ensure that members on the Committee will not have an interest in the scrutiny of other candidates for the same position.

The Committee is composed of three Non-Executive Directors and chaired by the Bank’s Chairman. Two of the Non-Executive
Directors appointed thereon are Independent Directors. During financial period 2017, the Committee was chaired by the Chairman
of the Bank Taddeo Scerri, with Stephen Agius and Joseph M Zrinzo as members, all Independent and Non-Executive Directors.
The Chief Executive Officer and the Chief Risk Officer attend meetings of the Committee. The Company Secretary acts as secretary
to the Committee. The Committee held six meetings during the period under review and all members attended all six meetings.

During financial period 2017, the Committee focused on implementing a structured nominations process for the appointment
of Executive Directors, changes in reporting lines, as well as, the composition of Board Committees for financial period 2018.
The Committee was also responsible for the evaluation of the Board’s performance, the Chairman’s performance and the Board
Committees’ performance (as further explained under Principle 7 of the Corporate Governance Statement of Compliance).

Disclosures for the purposes of Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 on
prudential requirements for credit institutions and investment firms:

While information about every member of the Board is found on pages (ii) and (iii) of the Annual Report, a detailed curriculum vitae of
every member of the Board and of the nominees is available at the Office of the Company Secretary.
 Bank of Valletta p.l.c.
48 Annual Report & Financial Statements 2017

Independent Auditors’ Report to the Shareholders of Bank of Valletta p.l.c.

Report required by Listing Rule 5.98 issued by the Listing Authority in Malta

We are required, pursuant to Listing Rule 5.98, to express an opinion to the shareholders of Bank of Valletta p.l.c (the “Bank”) on
specific disclosures in the Annual Report which relate to the directors’ corporate governance statement (the “Disclosures”) for the
period ended 31 December 2017.
Specifically, with respect to the following matters noted in Listing Rule 5.100, we report whether:
(a) we have identified material misstatements with respect to the disclosures referred to in Listing Rule 5.97.4 and Listing Rule
5.97.5. Where any material misstatements are identified, we are required to provide an indication of the nature of such
misstatements; and
(b) the other disclosures required by Listing Rule 5.97 have been provided.
Responsibilities of the Directors
Pursuant to Listing Rule 5.97, the directors are responsible for preparing the Disclosures that are free from material misstatement in
accordance with the requirements of the Listing Rules.
Auditors’ Responsibilities
Our responsibility is to examine the Disclosures and to report thereon in the form of a reasonable assurance conclusion based on
our work. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000, Assurance
Engagements Other Than Audits or Reviews of Historical Financial Information.
We apply International Standard on Quality Control 1 and, accordingly, we maintain a comprehensive system of quality control
including documented policies and procedures regarding compliance with ethical requirements, professional standards and
applicable legal and regulatory requirements.
We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants, together with the ethical requirements that are relevant to our audit of the financial statements in accordance
with the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act
(Chapter 281, Laws of Malta), and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We are not required to, and we do not, consider whether the directors’ statements on internal control and risk management systems
cover all the risks and controls in relation to the financial reporting process or form an opinion on the effectiveness of the Bank’s
corporate governance procedures or its risks and control procedures, nor on the ability of the Bank to continue in operational
existence. Our opinion in relation to the disclosures pursuant to Listing Rule 5.97.4 and Listing Rule 5.97.5 is based solely on
our knowledge and understanding of the Bank and its environment obtained in forming our opinion on the audit of the financial
statements. We have not performed any procedures by way of audit, verification or review on the underlying information from which
the other disclosures required by Listing Rule 5.97 is derived.
We also read the other information included in the Annual Report in order to identify any material inconsistencies with the Disclosures.
Conclusion
Our conclusion has been formed on the basis of, and is subject to, the matters outlined in this report.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.
In our opinion:
(a) in light of the knowledge and understanding of the Bank and its environment obtained during the course of our audit of the
financial statements, we have not identified material misstatements with respect to the following disclosures:
(i) the information referred to in Listing Rule 5.97.4, included in the directors’ Corporate Governance Statement of
Compliance, as this relates to the Bank’s internal control and risk management systems in relation to the financial
reporting process; and
(ii) the information referred to in Listing Rule 5.97.5, included in the Directors’ Report, insofar as it is applicable to the Bank;
(b) the other disclosures required by Listing Rule 5.97 have been included in the directors’ Statement of Compliance on
Corporate Governance, as these apply to the Bank.
The Principal authorised to sign on behalf of KPMG on the work resulting in this assurance report is Noel Mizzi.

KPMG
Registered Auditors

23 March 2018
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 49

Statements of profit or loss for the fifteen months ended 31 December 2017
The Group The Bank
Note 2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000

Interest and similar income

- on loans and advances, balances with
Central Bank of Malta and treasury bills 2 198,997 160,339 198,997 160,339
- on debt and other fixed income instruments 2 60,197 54,063 60,197 54,063
Interest expense 3 (76,247) (65,573) (76,247) (65,573)
Net interest income 182,947 148,829 182,947 148,829

Fee and commission income 98,787 75,021 87,587 66,840

Fee and commission expense (12,498) (8,936) (12,498) (8,936)
Net fee and commission income 4 86,289 66,085 75,089 57,904

Dividend income 1,925 1,901 17,682 9,635

Trading profits 5 22,290 24,724 22,338 24,724
Net gain on investment securities and hedging instruments 6 7,022 9,046 7,022 9,046
Gain on Visa transaction 6 - 27,511 - 27,511
Operating income 300,473 278,096 305,078 277,649

Employee compensation and benefits 7 (79,750) (64,168) (76,507) (62,036)

General administrative expenses (59,463) (40,103) (57,806) (39,085)

Amortisation of intangible assets 20 (4,933) (3,539) (4,933) (3,539)

Depreciation 21 (7,105) (4,968) (7,035) (4,899)
Net impairment reversals/(losses) 8 6,227 (23,142) 6,227 (23,147)
Operating profit 155,449 142,176 165,024 144,943

Share of results of equity-accounted investees, net of tax 18 19,287 3,730 - -

Profit before tax 9 174,736 145,906 165,024 144,943

Income tax expense 10 (55,238) (50,708) (56,180) (50,760)

Profit for the period 119,498 95,198 108,844 94,183

Attributable to:
Equity holders of the Bank 119,498 94,742 108,844 94,183
Non-controlling interest - 456 - -

119,498 95,198 108,844 94,183

Earnings per share 11 27c1 21c6 24c7 21c5

 Bank of Valletta p.l.c.
50 Annual Report & Financial Statements 2017

Statements of profit or loss and other comprehensive income

for the fifteen months ended 31 December 2017
The Group The Bank
Note 2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000

Profit for the period 119,498 95,198 108,844 94,183

Other comprehensive income

Items that may be reclassified subsequently to profit or loss:

Available-for-sale investments
- change in fair value 1,379 33,777 1,379 33,777
deferred tax thereon (483) (11,822) (483) (11,822)
- change in fair value transferred to profit or loss (7,443) (34,876) (7,443) (34,876)
deferred tax thereon 2,605 12,206 2,605 12,206

Items that will not be reclassified to profit or loss:

Property revaluation 21 2,005 960 2,005 960
deferred tax thereon and effect of changes in property tax rates (201) 44 (201) 44

Remeasurement of actuarial losses on defined benefit plans 35 15 (1,448) 15 (1,448)

deferred tax thereon (5) 508 (5) 508

Other comprehensive income for the period, net of tax (2,128) (651) (2,128) (651)

Total comprehensive income 117,370 94,547 106,716 93,532

Attributable to:
Equity holders of the Bank 117,370 94,091 106,716 93,532
Non-controlling interest - 456 - -

117,370 94,547 106,716 93,532

The notes are an integral part of these financial statements.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 51

Statements of financial position

as at 31 December 2017
The Group The Bank
Note 2017 2016 2017 2016
€000 €000 €000 €000
ASSETS
Balances with Central Bank of Malta, treasury bills and cash 13 159,684 171,050 159,684 171,050
Financial assets at fair value through profit or loss 14 326,291 392,430 325,316 391,292
Investments 15 3,374,541 3,736,272 3,374,541 3,736,272
Loans and advances to banks 16 3,431,383 2,098,439 3,431,383 2,098,439
Loans and advances to customers at amortised cost 17 4,162,032 4,001,656 4,162,032 4,001,656
Investments in equity-accounted investees 18 109,461 97,041 52,870 52,870
Investments in subsidiary companies 19 - - 6,230 6,230
Intangible assets 20 28,453 13,272 28,453 13,272
Property and equipment 21 105,222 89,574 105,048 89,452
Current tax 12,034 16,061 9,379 15,091
Deferred tax 22 60,217 67,188 60,217 67,188
Assets held for realisation 40 5,972 11,973 5,972 11,973
Other assets 5,955 4,818 5,872 4,809
Prepayments and accrued income 23 39,385 23,077 40,317 22,697

Total Assets 11,820,630 10,722,851 11,767,314 10,682,291

LIABILITIES
Financial liabilities at fair value through profit or loss 14 11,957 20,327 11,957 20,327
Amounts owed to banks 24 192,196 250,155 192,196 250,155
Amounts owed to customers 25 10,100,625 9,184,517 10,102,164 9,187,940
Debt securities in issue 26 95,400 95,400 95,400 95,400
Deferred tax 22 4,519 4,318 4,519 4,318
Other liabilities 27 197,751 170,518 197,428 170,333
Accruals and deferred income 28 12,451 16,215 11,958 15,802
Derivatives designated for hedge accounting 29 12,053 20,649 12,053 20,649
Subordinated liabilities 30 231,591 231,591 231,591 231,591

Total Liabilities 10,858,543 9,993,690 10,859,266 9,996,515

EQUITY
Called up share capital 31 525,000 390,000 525,000 390,000
Share premium account 31 45,427 988 45,427 988
Revaluation reserves 32 33,194 35,332 33,082 35,220
Retained earnings 32 358,466 302,841 304,539 259,568

Total Equity attributable to equity holders of the Bank 962,087 729,161 908,048 685,776
Total Equity 962,087 729,161 908,048 685,776

Total Liabilities and Equity 11,820,630 10,722,851 11,767,314 10,682,291

MEMORANDUM ITEMS

Contingent liabilities 33 253,851 225,407 253,851 225,407

Commitments 34 1,858,191 1,590,156 1,858,191 1,590,156

The notes are an integral part of these financial statements. These financial statements were approved by the Board of Directors
and authorised for issue on 23 March 2018 and signed on its behalf by:

Taddeo Scerri Joseph M Zrinzo Mario Mallia

Chairman Director Chief Executive Officer
 Bank of Valletta p.l.c.
52 Annual Report & Financial Statements 2017

Statements of changes in equity for the fifteen months ended 31 December 2017
Attributable to Equity holders of the Bank
Share Non-
Share Premium Revaluation Retained controlling Total
Capital Account Reserves Earnings Total Interest Equity
€000 €000 €000 €000 €000 €000 €000
The Group

At 1 October 2015 360,000 988 35,217 272,713 668,918 1,271 670,189

Profit for the year - - - 94,742 94,742 456 95,198
Other comprehensive income
Available-for-sale investments
- change in fair value, net of tax - - 21,955 - 21,955 - 21,955
-c hange in fair value transferred to profit or
loss, net of tax - - (22,670) - (22,670) - (22,670)

Property revaluation, net of tax - - 1,004 - 1,004 - 1,004

Release of surplus on sale of property, net of tax - - (174) 174 - - -

Remeasurement of actuarial losses on defined

benefit plans, net of tax - - - (940) (940) - (940)

Total other comprehensive income/(loss) - - 115 (766) (651) - (651)

Total comprehensive income for the year - - 115 93,976 94,091 456 94,547

Transactions with owners, recorded directly

in equity:
Acquisition of non-controlling interest - - - (4,046) (4,046) (954) (5,000)

Bonus issue 30,000 - - (30,000) - - -

Dividends to equity holders - - - (29,802) (29,802) (773) (30,575)

30,000 - - (63,848) (33,848) (1,727) (35,575)

At 30 September 2016 390,000 988 35,332 302,841 729,161 - 729,161

Profit for the period - - - 119,498 119,498 - 119,498

Other comprehensive income
Available-for-sale investments
- change in fair value, net of tax - - 896 - 896 - 896
- change in fair value transferred to profit or - - (4,838) - (4,838) - (4,838)
loss, net of tax

Property revaluation, net of tax - - 1,804 - 1,804 - 1,804

Remeasurement of actuarial losses on defined

benefit plans, net of tax - - - 10 10 - 10

Total other comprehensive income/(loss) - - (2,138) 10 (2,128) - (2,128)

Total comprehensive income for the period - - (2,138) 119,508 117,370 - 117,370

Transactions with owners, recorded directly

in equity:
Rights issue 105,000 44,439 - - 149,439 - 149,439

Bonus issue 30,000 - - (30,000) - - -

Dividends to equity holders - - - (33,883) (33,883) - (33,883)

135,000 44,439 - (63,883) 115,556 - 115,556

At 31 December 2017 525,000 45,427 33,194 358,466 962,087 - 962,087

The notes are an integral part of these financial statements.

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 53

Statements of changes in equity

for the fifteen months ended 31 December 2017 (continued)
Share
Share Premium Revaluation Retained
Capital Account Reserves Earnings Total
€000 €000 €000 €000 €000
The Bank

At 1 October 2015 360,000 988 35,105 225,953 622,046

Profit for the year - - - 94,183 94,183

Other comprehensive income
Available-for-sale investments
- change in fair value, net of tax - - 21,955 - 21,955
-c hange in fair value transferred to profit or loss, net of tax - - (22,670) - (22,670)

Property revaluation, net of tax - - 1,004 - 1,004

Release of surplus on sale of property, net of tax - - (174) 174 -

Remeasurement of actuarial losses on defined

benefit plans, net of tax - - - (940) (940)

Total other comprehensive income/(loss) - - 115 (766) (651)

Total comprehensive income for the year - - 115 93,417 93,532

Transactions with owners, recorded directly in equity:

Bonus issue 30,000 - - (30,000) -

Dividends to equity holders - - - (29,802) (29,802)

30,000 - - (59,802) (29,802)

At 30 September 2016 390,000 988 35,220 259,568 685,776

Profit for the period - - - 108,844 108,844

Other comprehensive income
Available-for-sale investments
- change in fair value, net of tax - - 896 - 896
- change in fair value transferred to profit or loss, net of tax - - (4,838) - (4,838)

Property revaluation, net of tax - - 1,804 - 1,804

Remeasurement of actuarial losses on defined

benefit plans, net of tax - - - 10 10

Total other comprehensive income/(loss) - - (2,138) 10 (2,128)

Total comprehensive income for the period - - (2,138) 108,854 106,716

Transactions with owners, recorded directly in equity:

Rights issue 105,000 44,439 - - 149,439

Bonus issue 30,000 - - (30,000) -
Dividends to equity holders - - - (33,883) (33,883)
135,000 44,439 - (63,883) 115,556
At 31 December 2017 525,000 45,427 33,082 304,539 908,048

The notes are an integral part of these financial statements.

 Bank of Valletta p.l.c.
54 Annual Report & Financial Statements 2017

Statements of cash flows for the year ended 31 December 2017

Note The Group The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
Cash flows from operating activities
Interest and commission receipts 301,893 237,321 290,744 229,154
Interest, commission and compensation payments (91,668) (77,205) (91,748) (77,026)
Payments to employees and suppliers (137,262) (103,563) (133,675) (99,601)

Operating profit before changes in operating assets

and liabilities 72,963 56,553 65,321 52,527
(Increase)/decrease in operating assets:
Loans and advances 16,706 (53,038) 16,706 (53,038)
Reserve deposit with Central Bank of Malta (11,254) (8,643) (11,254) (8,643)
Fair value through profit or loss financial assets 66,844 97,902 66,844 97,902
Fair value through profit or loss equity instruments 15,843 1,303 15,680 477
Treasury bills with original maturity of more than 3 months (4,503) - (4,503) -
Other assets (2,638) (311) (2,564) (302)
Increase in operating liabilities:
Amounts owed to banks and to customers 872,724 752,337 870,840 752,384
Other liabilities 17,639 (33,187) 17,523 (33,120)

Net cash from operating activities before tax 1,044,324 812,916 1,034,593 808,187
Tax paid (42,122) (44,862) (41,381) (44,955)

Net cash from operating activities 1,002,202 768,054 993,212 763,232

Cash flows from investing activities

Dividends received 8,794 5,628 17,682 9,636
Interest received from held-to-maturity debt and other fixed
income instruments 74,725 59,783 74,725 59,783
Acquisition of non-controlling interest - (5,000) - (5,000)
Purchase of debt instruments (897,650) (1,257,546) (897,650) (1,257,546)
Proceeds from sale or maturity of debt instruments 1,155,933 869,184 1,155,933 869,184
Proceeds from sale of equity instruments 4,350 3,043 4,350 3,043
Proceeds from Visa transaction - 22,042 - 22,042
Purchase of property and equipment and intangible assets (33,341) (8,111) (33,239) (8,070)
Proceeds from disposal of property and equipment - 598 - 598

Net cash from/used in investing activities 312,811 (310,379) 321,801 (306,330)

Cash flows from financing activities

Proceeds from rights issue 149,439 - 149,439 -

Proceeds from issue of subordinated bonds - 111,591 - 111,591

Dividends paid to Bank's equity holders (33,883) (29,802) (33,883) (29,802)
Dividends paid to non-controlling interests - (773) - -
Net cash from financing activities 115,556 81,016 115,556 81,789
Net change in cash and cash equivalents 1,430,569 538,691 1,430,569 538,691

Effect of exchange rate changes on cash and cash equivalents 772 - 772 -
Net change in cash and cash equivalents after effect of 1,429,797 538,691 1,429,797 538,691
exchange rate changes
Net change in cash and cash equivalents 1,430,569 538,691 1,430,569 538,691
Cash and cash equivalents at 1 October 1,848,038 1,309,347 1,848,038 1,309,347
Cash and cash equivalents at 31 December / 30 September 36 3,278,607 1,848,038 3,278,607 1,848,038

The notes are an integral part of these financial statements.

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 55

Notes to the financial statements for the fifteen months ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES

1.1 Basis of preparation

Legal Notice 19 of 2009 as amended by Legal Notice 233 of 2016, Accountancy Profession (Accounting and Auditing Standards)
(Amendments) Regulations, 2016, defines compliance with generally accepted accounting principles and practice as adherence to
International Financial Reporting Standards (IFRS) as adopted by the EU for financial periods starting on or after 1 January 2008.
These Regulations have come into force on 17 June 2016.

Article 4 of Regulation 1606/2002/EC requires that, for each financial period starting on or after 1 January 2005, companies
governed by the law of an EU Member State shall prepare their consolidated financial statements in conformity with IFRS as
adopted by the EU if, at their reporting date, their securities are admitted to trading on a regulated market of any EU Member State.
This Regulation prevails over the provisions of the Companies Act, 1995, (Chapter 386, Laws of Malta) to the extent that the said
provisions of the Companies Act, 1995, (Chapter 386, Laws of Malta) are incompatible with the provisions of the Regulation.

Consequently, the separate and the consolidated financial statements are prepared in conformity with IFRS as adopted by the EU.

These financial statements have also been prepared in accordance with the provisions of the Banking Act, 1994 (Chapter 371,
Laws of Malta) and the Companies Act, 1995 (Chapter 386, Laws of Malta).

The Group has changed its accounting reference date from 30 September to 31 December. This set of financial statements is the
first one prepared under this new date and therefore covers a fifteen month period from 1 October 2016 to 31 December 2017. The
comparative period is the twelve months from 1 October 2015 to 30 September 2016.

The financial statements have been prepared on the historical cost basis. Assets and liabilities are measured at historical cost
except for the following that are measured at fair value: available-for-sale financial assets, financial instruments classified at fair
value through profit or loss, derivatives and land and buildings. Additionally, assets held for realisation are measured at fair value
less costs to sell.

The financial statements are prepared on a going concern basis. The Directors regard that this is appropriate, after due consideration
of the Bank’s profitability, liquidity, the statement of financial position, capital adequacy and solvency. Specifically, the directors
have prepared financial and capital plans for the next five years which shows that the Bank is in a position to continue operating
as a going concern for the foreseeable future. These plans take into account risks facing the Bank, including but not limited to, the
potential crystallisation of known contingent liabilities.

A number of new standards and amendments were endorsed by the EU but effective for periods starting on or after 1 January
2017 as disclosed hereunder. The directors have assessed the impact of IFRS 9 Financial Instruments and IFRS15 Revenue from
Contracts with Customers as disclosed in Note 1.1.1.2.2 and 1.1.2 respectively. The impact that the adoption of other International
Financial Reporting Standards will have on the financial statements of the Group and the Bank in the period of initial application is
currently being assessed by the directors. These standards and amendments include the following:

Standards:
- IFRS15 Revenue from Contracts with Customers (issued on 28 May 2014) and clarifications thereon (issued on 12 April 2016) -
effective 1/1/2018
- IFRS9 Financial Instruments (issued on 24 July 2014) - effective 1/1/2018
- Annual Improvements to IFRSs 2014-2016 Cycle - various standards (issued on 8/12/2016) - effective 1/1/2018
- IFRS16 Leases (issued on 13 January 2016) - effective 1/1/2019.
 
Amendments:
- Amendments to IAS 7: Disclosure initiative (issued on 29 January 2016) - effective 1/1/2017
- Amendments to IAS12: Recognition of Deferred Tax Assets for Unrealised Losses (issued on 19 January 2016) - effective
1/1/2017.

In addition, the following new interpretations and amendments have not yet been endorsed by the EU:

- IFRIC 22 Foreign Currency Transactions and Advance Consideration (issued on 8 December 2016) and effective for periods
starting on or after 1/1/2018
- IFRIC 23 Uncertainty over Income Tax Treatments (issued on 7 June 2017) and effective for periods starting on or after
1/1/2019
- Amendments to IFRS 9: Prepayment Features with Negative Compensation (issued on 12 October 2017) and effective for
periods starting on or after 1/1/2019
- Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (issued on 12 October 2017) and effective for
periods starting on or after 1/1/2019
- Annual Improvements to IFRS Standards 2015-2017 Cycle (issued on 12 December 2017) and effective for periods starting on
or after 1/1/2019
- Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (issued on 7 February 2018) and effective for periods
starting on or after 1/1/2019.
 Bank of Valletta p.l.c.
56 Annual Report & Financial Statements 2017

Notes to the financial statements for the fifteen months ended 31 December 2017 (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.1 Basis of preparation (continued)

Standards issued but not yet effective:

1.1.1 IFRS 9 Financial Instruments

In July 2014, the International Accounting Standards Board issued the final version of IFRS 9, Financial Instruments.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group will adopt
IFRS initially on 1 January 2018.

The new standard requires the Group to revise its accounting processes and internal controls related to reporting financial
instruments.

1.1.1.1 Implementation Strategy

The Group's IFRS 9 implementation process is governed by a Steering Committee whose members include representatives from
risk, treasury, finance, credit, and IT functions. The Steering Committee set up an IFRS 9 working group as well as met regularly
to challenge key assumptions, approve decisions and monitor the progress of the implementation work across the Group. The
Board and Audit Committee were being updated on the project's progress on a regular basis and its approval for key decisions
was sought and obtained.

1.1.1.2 Classification and measurement of financial assets

1.1.1.2.1 Classification of financial assets

From 1 January 2018, the Group will apply IFRS 9 and classify its financial assets in the following measurement categories:

• Amortised cost;
• Fair value through other comprehensive income (FVOCI);
• Fair value through profit or loss (FVTPL).

The standard eliminates the existing IAS39 categories of held to maturity, loans and receivables and available for sale.

Debt instruments are those instruments that meet the definition of a financial liability from the issuer's perspective, such as loans,
government and corporate bonds.

Classification and subsequent measurement of debt instruments depend on:

i. the Group's business model for managing the asset; and

ii. the cash flow characteristics of the asset.

Based on these factors, the Group will classify its debt instruments into one of the following three measurement categories:

• Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely
payments of principal and interest ('SPPI'), and that are not designated at FVTPL, are measured at amortised cost. The
carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as
described in note 1.1.1.2.3.1. Interest income from these financial assets is included in 'Interest and similar income' using
the effective interest rate method.
• Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash
flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that
are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except
for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the
instrument's amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in 'Net
gain on investment securities and hedging instruments'. Interest income from these financial assets is included in 'Interest
and similar income' using the effective interest rate method.
• Fair value through profit or loss (FVTPL): Assets that do not meet the criteria for amortised cost or FVOCI are measured
at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at FVTPL and is not
part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement within 'Trading
profits'. Interest income from these financial assets is included in 'Interest income'.

Also, IFRS 9 permits new elective designations at FVTPL or FVOCI to be made on the date of initial application and permits
or requires revocation of previous FVTPL elections at the date of initial application depending on the facts and circumstances
at that date.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 57

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.1 Basis of preparation (continued)

1.1.1.2.1 Classification of financial assets (continued)

Financial assets and liabilities are designated at fair value through profit or loss on initial recognition where such designation results
in more relevant information because it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes
referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains
and losses on them on different bases.

Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never
bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification.
 
Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is instruments that do
not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity
instruments include basic ordinary shares.
 
On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election is made on an investment-by-investment basis and is irrevocable.
 
Gains and losses on such equity instruments are never reclassified to profit or loss and no impairment is recognised. Dividends are
recognised in profit or loss unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised
in OCI. Cumulative gains and losses recognised in OCI are transferred to retained earnings on disposal of an investment.

1.1.1.2.1.1 Business model assessment

The Group made an assessment of the objective of a business model in which an asset is held at a portfolio level because this
best reflects the way the business is managed and information is provided to management. The information considered included:
 
• the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether
management's strategy focuses on earning contractual interest revenue maintaining a particular interest rate profile,
matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash
flows through the sale of the assets;
• how the performance of the portfolio is evaluated and reported to the Group's management;
• the risks that affect the performance of the business model (and the financial assets held within that business model)
and how those risks are managed;
• the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future
sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment
of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realised.
 
Financial assets that are held for trading and whose performance is evaluated on a fair value basis will be measured at FVTPL because
they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

1.1.1.2.1.2 Cash flows that represent solely payments of principal and interest

For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is
defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a
particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, the Group will consider the contractual
terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing
or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers:
 
• contingent events that would change the amount and timing of cash flows;
• leverage features;
• prepayment and extension terms;
• terms that limit the Group's claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and
• features that modify consideration of the time value of money – e.g. periodical reset of interest rates.
 Bank of Valletta p.l.c.
58 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.1 Basis of preparation (continued)

1.1.1.2.2 Impact assessment

Based on its assessment of changes to the classification and measurement of financial assets held as at 31 December 2017, the Group’s
expectation is that:
• trading assets and derivative assets held for risk management that are classified as held-for-trading and measured at FVTPL
under IAS 39 would also be measured at FVTPL under IFRS 9;
• loans and advances to banks and to customers that are classified as loans and receivables and measured at amortised cost
under IAS 39 would, in general, also be measured at amortised cost under IFRS 9 while those at FVTPL would also in general
continue to be measured at fair value;
• held-to-maturity investment securities measured at amortised cost under IAS 39 would, in general, also be measured at
amortised cost under IFRS 9;
• debt securities that are classified as available-for-sale under IAS 39 would, in general, be measured at FVOCI;
• equity securities that meet the definition of equity in their entirety and which are classified as fair value through profit or loss
or as available-for-sale under IAS 39 would, generally, be measured at FVOCI under IFRS 9, with a minority of such securities
classified and measured at FVTPL;
• investments in collective investment schemes that are classified as FVTPL under IAS 39 would continue to be classified and
measured at FVTPL under IFRS 9.
1.1.1.2.3 Impairment of financial assets
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable
judgement over how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.
The new impairment model will apply to the following financial instruments that are not measured at FVTPL:
• financial assets that are debt instruments;
• financial guarantee contracts issued; and
• loan commitment issued.
No impairment loss will be recognised on equity investments.
Under IFRS 9, the Group will recognise a loss allowance at an amount equal to lifetime ECL, except in the following cases, where
the amount recognised will be 12-month ECL:
• debt investment securities that are determined to have low credit risk at the reporting date; and
• other financial instruments on which credit risk has not increased significantly since their initial recognition.
1.1.1.2.3.1 Expected credit loss measurement
IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below:
• A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk
continuously monitored by the Group.
• If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to
‘Stage 2’ but is not yet deemed to be credit-impaired. The assessment of whether credit risk on a financial asset has
increased significantly will be one of the critical judgements in implementing the impairment model of IFRS 9.
• If the financial instrument is deemed to be credit-impaired, the financial instrument is then moved to ‘Stage 3’.
• Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit
losses that result from default events possible within the next 12 months. Instruments in Stages 2 and 3 have their ECL
measured based on expected losses on a lifetime basis.
• A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information.
The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired
financial assets):

Change in credit quality since initial recognition

Stage 1 Stage 2 Stage 3

(Initial recognition) (Significant increase in credit risk since (Credit impaired assets)
initial recognition)
12-month expected credit losses Lifetime expected credit losses Lifetime expected credit losses
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 59

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
1.1 Basis of preparation (continued)
1.1.1.2.3.2 Significant increase in credit risk
The assessment of whether credit risk on a financial asset has increased significantly is one of the critical judgements in implementing
the impairment model of IFRS 9.

With the exception of those instruments measured at FVTPL, exposures with low credit risk at the reporting date and any purchased
or originated credit-impaired financial assets, the Group assesses whether debt instruments have experienced a significant increase
in credit risk since initial recognition.
 
When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the
Group would consider reasonable and supportable information that is relevant and available without undue cost or effort. This
includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and expert credit
assessment and including forward-looking information.
 
In the case of the Group’s loan portfolio, the objective of the assessment is to identify whether a significant increase in credit risk
has occurred for an exposure by comparing:
 
• the remaining lifetime probability of default (PD) as at the reporting date; with
• the remaining lifetime PD for the point in time that was estimated at the time of initial recognition of the exposure
(adjusted where relevant for changes in prepayment expectations).

The Group will apply the low credit risk simplification for all investments which are of an investment grade, which comprises the
vast majority of its treasury portfolio. The Group will accordingly only assess SICR for investments in those debt securities which
are rated as sub-investment grade. For sub-investment grade securities, the Group will consider a security to have experienced a
significant increase in credit risk if the security has been the subject of a credit rating downgrade since initial recognition.

In assessing whether a borrower is in default, the Group considers indicators that are:
 
• qualitative – e.g. breaches of covenant;
• quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and
• based on data developed internally and obtained from external sources.
 
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect
changes in circumstances.

Financial assets that are credit-impaired are defined by IFRS 9 in a similar way to financial assets that are impaired under IAS 39,
which is also in line with EBA's technical standard.
 
The Group considers a financial asset to be in default when:
 
• the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such
as realising security (if any is held); or
• the borrower is past due more than 90 days on any material credit obligation to the Group. Overdrafts are considered
as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current
amount outstanding.

This is in line with the non performing loan defintion given in the EBA guidelines.

The Group will assess on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument assets
carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial guarantee contracts. The
Group will recognise a loss allowance for such losses at each reporting date. The measurement of ECL will reflect:
 
• An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
• The time value of money; and
• Reasonable and supportable information that is available without undue cost or effort at the reporting date about past
events, current conditions and forecasts of future economic conditions.
 Bank of Valletta p.l.c.
60 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
1.1 Basis of preparation (continued)
1.1.1.2.3.4 Measuring ECL
The ECL is measured on either a 12-month (12M) or Lifetime basis depending on whether a significant increase in credit risk has occurred
since initial recognition or whether an asset is considered to be credit impaired. Expected credit losses are the discounted product of the
Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD), defined as follows:
• The PD represents the likelihood of a borrower defaulting on its financial obligation (as per "Definition of default and
credit-impaired" above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation.
• EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (12M EAD)
or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Group includes the current
drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of
default, should it occur.
• LGD represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type of counter
party, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage
loss per unit of exposure at the time of default (EAD). LGD is calculated on a 12 month or Lifetime basis, where 12-month
LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the
percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.
The ECL is determined by projecting the PD, LGD, and EAD for each future month and for each individual exposure or collective
segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid
or defaulted in an earlier month). This effectively calculates an ECL for each future month, which is then discounted back to the reporting
date and summed. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof.
1.1.1.2.3.5 Forward-looking information
The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The Group has performed historical
analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio.
 
These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Expert judgement will also
be applied in this process. Forecasts of these economic variables (the "base economic scenario") which will be sourced externally and
reviewed by the Group's economic team, provide the best estimate view of the economy over the next five years.

1.1.1.2.3.6 Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL will be presented in the statement of financial position as follows:
• Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
• Loan commitments and financial guarantee contracts: generally, as a provision;
• Where a financial instrument includes both a drawn and undrawn component, and the Group cannot identify the ECL on the
loan commitment component separately from those on the drawn component: the Group will present a combined loss
allowance for both components. The combined amount will be presented as a deduction from the gross carrying amount
of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component will be presented
as a provision; and
• Debt instruments measured at FVOCI: no loss allowance will be recognised in the statement of financial position because the
carrying amount of these assets is their fair value. However, the loss allowance will be disclosed and recognised in the fair
value reserve.
1.1.1.2.3.7 Measurement of ECL
ECL are a probability-weighted estimate of credit losses. They will be measured as follows:
• financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the
difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group
expects to receive);
• financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and
the present value of estimated future cash flows;
• undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to
the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and
• financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects
to recover.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 61

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
1.1 Basis of preparation (continued)

1.1.1.3 Classification and measurement of financial liabilities

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities.
IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value.
This amendment does not have an impact on the Bank or the Group.
1.1.1.4 Hedge Accounting
When initially applying IFRS 9, the Group will chose its accounting policy to continue to apply the hedge accounting requirements of IAS 39
instead of the requirements of IFRS 9. However, the Group will provide the expanded disclosures on hedge accounting introduced by IFRS
9 amendments of IFRS 7 because the accounting policy election does not provide an exemption from these new disclosure requirements.
1.1.1.4.1 Disclosures
IIFRS 9 will require extensive new disclosures, in particular about hedge accounting, credit risk and ECLs. The Group’s preliminary
assessment included an analysis to identify data gaps against current processes and the Group has implemented systems and
controls changes that were necessary to capture the required data.
1.1.1.5 Transition
The Group has taken advantage of the exemption allowing it not to restate comparative information for prior periods with respect to
classification and measurement and impairment changes. Differences in the carrying amounts of financial assets and financial liabilities
resulting from the adoption of IFRS 9 will generally be recognised in retained earnings and reserves as at 1 January 2018 as detailed below:

Estimated impact of adoption of IFRS 9

Estimated Estimated
As reported Classification and adjustments adjusted
31 December measurement Impairment due to adoption opening balance
2017 adjustments adjustments of IFRS9 at 1 January 2018
€ million € million € million € million € million
Reserves 33.2 9.6 - 9.6 42.8
Retained Earnings 358.5 (12.7) (5.0) (17.7) 340.8
(3.1) (5.0) (8.1)
1.1.2 IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for determining whether, how much
and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction
Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual periods beginning on or after 1 January
2018, with early adoption permitted.
On 1 January 2018, the Group will adopt IFRS 15 Revenue from Contracts with Customers issued by the IASB in May 2014. The
Group has carried out an impact assessment and concluded that this standard will not have a material impact on the Group’s
retained earnings or opening balance at 1 January 2018. Most of the Group’s revenue, including net interest income, is not
impacted by the implementation of IFRS 15.
1.1.3 IFRS 16 Leases
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of
more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right
to use the underlying leased asset and a lease liability representing its obligation to make lease payments. A lessee measures right-of-use
assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities.
As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash
repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying
IAS 7 Statement of Cash Flows. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement
includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if
the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease.
This new standard substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its
leases as operating leases or finance leases, and to account for those two types of leases differently. Additionally, this standard requires
(i) lessees to apply judgement in deciding upon the information to disclose to meet the objective of providing a basis for users of financial
statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee, and (ii) lessors
to disclose enhanced information about lessor’s risk exposure, particularly to residual value risk.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Earlier application is permitted for entities that apply IFRS 15
Revenue from Contracts with Customers at or before the date of initial application of IFRS 16. The Group is currently assessing the potential
impact on its consolidated and separate financial statements resulting from the application of this standard.
 Bank of Valletta p.l.c.
62 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
1.1 Basis of preparation (continued)

1.1.3 IFRS 16 Leases (continued)

Other than the Standards specifically mentioned above, the impact that the adoption of these other standards and amendments will have
on the financial statements of the Group and the Bank is currently being assessed by the directors. The directors anticipate that the adoption
of other International Financial Reporting Standards that were in issue at the date of authorisation of these financial statements, but not yet
effective, as well as amendments to existing standards, will not have a material impact on the financial statements of the Group and the Bank
in the period of initial application.
1.2 Basis of consolidation
The Group financial statements comprise the financial statements of Bank of Valletta p.l.c., (the Bank), a limited liability company
domiciled and incorporated in Malta, and its subsidiaries. Subsidiaries are entities controlled by the Group. The Group 'controls'
an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity. The Group reassesses whether it
has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights
held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee.
The results of subsidiaries are included in the Group financial statements from the date that control commences until the date
that control ceases. Intragroup balances, transactions, income and expenses are eliminated on consolidation. Non-controlling
interests that represent ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event
of liquidation may be initially measured either at their present ownership interests' proportionate share in the recognised amounts
of the acquiree's identifiable net assets or at fair value. The choice of measurement basis is made on an acquisition-by-acquisition
basis. After initial recognition, non-controlling interests in the net assets consist of the amount of those interests at the date of the
original business combination and the non-controlling interests’ share of changes in equity since the date of the combination.

The excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets and liabilities is recognised
as goodwill and is included within the carrying amount of the investment and assessed for impairment as part of the investment.
If the cost of acquisition is less than the Group’s share of the net fair value of the identifiable assets and liabilities, the difference is
included as income in the determination of the Group's share of the profit or loss in the period in which the investment is acquired.
Equity-accounted investees comprise interests in associates. The results and assets and liabilities of equity-accounted investees
are incorporated in the Group financial statements using the equity method of accounting from the date that significant influence
or joint control commences until the date that significant influence or joint control ceases. Equity-accounted investees are those
entities in which the Group has significant influence, but not control or joint control over the financial and operating policies. A joint
venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement
rather than rights to its assets and obligations for its liabilities. The significant accounting policies adopted are set out below.
1.3 Financial assets at fair value through profit or loss, investment securities and loans and receivables

The Group classifies its financial assets in the following categories: (i) financial assets at fair value through profit or loss; (ii) investment
securities; and (iii) loans and receivables. The classification depends on the purpose for which the investments were acquired.

1.3.1 Financial assets at fair value through profit or loss

This classification includes financial assets classified as held for trading, and those designated at fair value through profit or
loss upon initial recognition. Derivatives are categorised as held for trading unless they are designated and effective hedging
instruments. Financial assets at fair value through profit or loss are initially recognised and are subsequently measured at fair value
based on quoted bid prices in an active market. A market is regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on an ongoing basis. If the market for a financial asset is not
active, the Group establishes fair value by using valuation techniques that maximise the use of relevant observable inputs and
minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants
would take into account in pricing a transaction. Interest receivable on financial assets at fair value through profit or loss is included
with interest receivable and similar income. All related realised and unrealised gains and losses are included in trading profits in
the year in which they arise.

Portfolios of over-the-counter derivatives that are exposed to credit risk and are managed by the Group on the basis of the net
exposure to credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer
a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and
liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

1.3.2 Investment securities

Investment securities are classified into two sub-categories: held-to-maturity and available-for-sale financial assets. Non-derivative
investment securities, with fixed or determinable payments and fixed maturity, where the Group has both the positive intent and the
ability to hold them to maturity, other than those that upon initial recognition are designated as at fair value through profit or loss, those
that are designated as available-for-sale financial assets and those that meet the definition of loans and receivables, are classified as held-
to-maturity financial assets. Investment securities intended to be held for an indefinite period of time, but which may be sold in response
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 63

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.3 Financial assets at fair value through profit or loss, investment securities and loans and receivables (continued)

1.3.2 Investment securities (continued)

to needs for liquidity or changes in interest rates, exchange rates or market prices are classified as available-for-sale financial assets.
All investment securities are initially measured at fair value plus transaction costs, if any, that are directly attributable to their acquisition.

Those investment securities classified as available-for-sale financial assets are subsequently measured at fair value based on quoted bid
prices in an active market, or by reference to a valuation technique if the market is not active, with the exception of equity instruments that
do not have a quoted price in an active market for an identical instrument (ie. a Level 1 input) and whose fair value cannot be measured
reliably which are measured at cost less any impairment losses. Gains and losses arising from changes in the fair value of securities
classified as available-for-sale that are not designated as hedged items in a fair value hedge are recognised in other comprehensive
income, except for impairment losses and foreign exchange gains and losses on monetary items, until the security is derecognised, at
which time the related accumulated fair value adjustments previously recognised in other comprehensive income are included in profit or
loss as a reclassification adjustment within net gains or losses on investment securities. With respect to available-for-sale securities that
are designated as hedged items in a fair value hedge, gains and losses arising from changes in fair value attributable to the hedged risk
are accounted for in profit or loss. Fair value movements attributable to other factors, such as changes in credit status, are recognised
in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items. Interest
calculated using the effective interest method is recognised in profit or loss.

Those investment securities classified as held-to-maturity financial assets are subsequently measured at amortised cost using the
effective interest method, less any impairment losses. Interest calculated using the effective interest method and impairment losses are
recognised in profit or loss.

The Bank, in line with IAS39, does not classify financial assets as held-to-maturity if it has during the current financial year or during
the two preceding years, sold or reclassified more than an insignificant amount of the held-to-maturity portfolio other than sales or
reclassifications that are specifically exempted for the purpose of this requirement. Significance is measured in relation to the total amount
of held-to-maturity investments.

1.3.3 Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market, other than those that are held for trading or are designated upon initial recognition as at fair value through profit or loss
or as available-for-sale financial assets or those for which the Group may not recover substantially all of its initial investment
other than because of credit deterioration. These mainly comprise loans and advances to banks and customers.

Loans and receivables are initially measured at fair value plus transaction costs, if any, that are directly attributable to their
acquisition, and are subsequently measured at amortised cost using the effective interest method, less any impairment
losses. Gains and losses are recognised in profit or loss when the financial asset is derecognised or impaired and through the
amortisation process using the effective interest rate.

Impairment
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of
financial assets are impaired. A financial asset or a group of financial assets are impaired and impairment losses are incurred
if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the
asset (a ‘loss event’) and that loss event(s) has an impact on the estimated future cash flows of the financial asset or group of
financial assets that can be reliably estimated.

(i) Financial assets carried at amortised cost

The Group considers evidence of impairment for loans and advances at both a specific asset and a collective level. All
individually significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are
not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk
characteristics.

For held-to-maturity securities carried at amortised cost and quoted in an active market, if there is objective evidence that an
impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at
the financial asset’s original effective interest rate, by reference to the asset's quoted market price.

For individually significant loans and receivables, if there is objective evidence that an impairment loss has been incurred, the
amount of loss is measured in line with Banking Rule 09 'Measures Addressing Credit Risks arising from the Assessment of the
Quality of Asset Portfolios of Credit Institutions Authorised under the Banking Act 1994' (Chapter 371, Laws of Malta) which is
 Bank of Valletta p.l.c.
64 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.3 Financial assets at fair value through profit or loss, investment securities and loans and receivables (continued)

1.3.3 Loans and receivables (continued)

in line with the IAS 39. The measurement of the loss amount takes account of the repayment history of the borrower and
the value of collateral held against borrowings. Financial assets which do not attract a specific allowance are categorised
according to credit risk characteristics and the amount of loss thereon is measured by taking account of the probability of
default and loss given default for similar assets, after considering the level of collateral held.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised
in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases, and the decrease can be related objectively to
an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through an
allowance account, so that the reversal does not result in a carrying amount that exceeds what the amortised cost would have
been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised
in profit or loss.

(ii) Impairment losses on restructured/refinanced corporate assets (forbearance)

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to
financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised. If
the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original
financial asset are deemed to have expired. In this case, the original financial asset is derecognised and the new financial asset
is recognised at fair value.

In the case of loans and advances which encounter actual or apparent financial difficulties, the Group may grant a concession
where a customer's financial difficulty indicates that with the original terms and conditions of the contract satisfactory repayment
may not be possible.

A concession refers to either of the following:

- a modification of the previous terms and conditions of a contract the customer is considered unable to comply with due to
its financial difficulties to allow for sufficient debt service ability, that would not have been granted had the customer not
been in financial difficulties;
- a total or partial refinancing of a troubled debt contract, that would not have been granted had the customer not been in
financial difficulties.

When accounts are classified as 'non-performing' assets, prior to the restructuring, they continue to be assessed for impairment
individually taking into account the value of the collateral held as confirmed by professional valuations and the available cash
flow to service debt over the period of the restructuring. If classified as 'performing' assets, restructured loans continue to be
assessed for impairment collectively for inherent losses under the Group's normal collective assessment methodology.

(iii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognised in other comprehensive income
and there is objective evidence that the asset is impaired, the cumulative loss is reclassified from equity to profit or loss. The
cumulative loss is measured as the difference between the acquisition cost, (net of any principal repayment and amortisation),
and the current fair value, less any impairment losses previously recognised in profit or loss.

Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss. If, in a subsequent
period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related
to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit or loss;
otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an impaired
available-for-sale equity security is always recognised in OCI. Changes in impairment attributable to application of the effective
interest method are reflected as a component of interest income. The impairment loss on investments in equity instruments
that do not have a quoted market price in an active market for an identical instrument (ie. a Level 1 input) and whose fair value
cannot be reliably measured is recognised in profit or loss and is not reversed in a subsequent period.
The Group writes off a loan or an investment debt security, either partially or in full, and any related allowance for impairment
losses, when Group Credit determines that there is no realistic prospect of recovery.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 65

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.4 Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into,
and the definitions of a financial liability and an equity instrument.
Financial liabilities are initially measured at fair value less, in the case of financial liabilities not at fair value through profit or loss,
transaction costs that are directly attributable to their issue. Financial liabilities are subsequently measured at amortised cost using
the effective interest method, except for financial liabilities at fair value through profit or loss, which are measured at fair value.
Financial liabilities at fair value through profit or loss include financial liabilities classified as held for trading and those designated at
fair value through profit or loss upon initial recognition. During the current and the previous year, the Group did not designate any
financial liabilities as at fair value through profit or loss upon initial recognition. Derivatives are categorised as held for trading, unless
they are designated and effective hedging instruments.
Financial liabilities that are measured at amortised cost using the effective interest method include amounts owed to banks,
amounts owed to customers, debt securities in issue, other liabilties and subordinated liabilities.
The gain or loss on financial liabilities at fair value through profit or loss is recognised in profit or loss. For financial liabilities carried
at amortised cost, the gain or loss is recognised in profit or loss when the financial liability is derecognised and through the
amortisation process whereby any difference between the proceeds net of transaction costs, and the settlement or redemption is
recognised over the term of the financial liability.
Equity instruments are recorded at the proceeds received, net of direct issue costs.
1.5 Recognition, derecognition and offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are recognised when a Group entity becomes a party to the contractual provisions of the instrument.
All loans and receivables are recognised when cash is advanced to borrowers.
All purchases and sales of securities are recognised and derecognised on settlement date, which is the date that an asset is delivered
to or by the Group.
A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or when the Group
transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership
of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards
of ownership and it does not retain control of the financial asset and the transfer qualifies for derecognition. A financial liability is
derecognised when it is extinguished. This occurs when the obligation specified in the contract is discharged, cancelled or expires.
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when the Group
currently has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis or to realise the
asset and settle the liability simultaneously.

1.6 Classification of financial assets and financial liabilities at fair value through profit or loss upon initial recognition
Financial assets and liabilities are designated at fair value through profit or loss on initial recognition where such designation results
in more relevant information because either:
- it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting
mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on
different bases; or
- a group of financial assets, financial liabilities or both, is managed and its performance is evaluated on a fair value basis, in
accordance with the Group’s documented risk management and investment strategy, and information about the Group is
provided internally on that basis to key management personnel, including the Board of Directors and Chief Executive Officer.
 Bank of Valletta p.l.c.
66 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.7 Derivative financial instruments

Derivative financial instruments are initially recognised and subsequently measured at fair value. Fair values are obtained from
quoted market prices in active markets and through the use of discounted cash flow models where an active market does not exist.
All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The method of recognising the fair value gain or loss depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged.

Certain derivative instruments are not designated in a hedge relationship for accounting purposes. The Group classifies forward
exchange contracts, options and certain interest rate swaps as at fair value through profit or loss, and accordingly any changes in
their fair value are included in trading profits.

The Group designates certain interest rate swaps as hedges of the exposure to variability in the fair value of certain available-for-
sale financial assets, which arises from interest rate movements. Changes in the fair value of interest rate swaps that are designated
and qualify as fair value hedging instruments, together with any changes in the fair value of the hedged items that are attributable
to the hedged risk, are recognised in profit or loss.

1.8 Sale and repurchase agreements

Securities sold subject to a linked repurchase agreement ('repos') are retained in the financial statements at fair value through profit or
loss or as investment securities as appropriate, and the counterparty liability is included in amounts owed to banks. Securities purchased
under agreements to resell ('reverse repos') are not recognised but the amounts paid are recorded as loans and advances to banks. The
difference between sale and repurchase price or purchase and subsequent sale price is recognised over the life of the repo/reverse repo
agreements using the effective interest method and is treated as interest.

1.9 Investments in subsidiaries and equity-accounted investees

Investments in subsidiaries and equity-accounted investees are initially included in the Bank’s statement of financial position at cost
and subsequently at cost less any impairment loss which may have arisen. Interest in equity-accounted investees are accounted
for using the equity method at Group level. They are initially recognised at cost, which includes transaction costs. Subsequently,
the consolidated financial statements include the Group's share of profit or loss and other comprehensive income of equity-
accounted investees, until the date on which significant influence ceases. Dividends from the investments are recognised in profit
or loss when its right to receive dividend is established.

Impairment
At the end of each reporting period, the Bank reviews the carrying amount of its investments in subsidiaries and equity-accounted
investees to determine whether there is any indication of impairment and if any such indication exists, the recoverable amount of
the asset is estimated.

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable
amount is the higher of fair value less costs of disposal and value in use. An impairment loss recognised in a prior year is reversed
if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss
was recognised. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised
estimate of its recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised for the asset in prior years. Impairment losses and reversals are
recognised immediately in profit or loss.

1.10 Property and equipment

Property and equipment are classified into the following classes – land and buildings, IT infrastructure and equipment and other (primarily
furniture and fittings).

Property and equipment are initially measured at cost. Subsequent costs are included in the asset’s carrying amount when it is probable
that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Expenditure
on repairs and maintenance of property and equipment is recognised as an expense when incurred.

Subsequent to initial recognition, freehold and long-term leasehold properties are stated in the statement of financial position at revalued
amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated
impairment losses.

Revaluations are performed by a professionally qualified architect on a regular basis such that the carrying amount does not differ
materially from that which would be determined using fair values at the end of the reporting period. Any surpluses arising on such
revaluation are recognised in other comprehensive income and accumulated in equity as a revaluation reserve unless they reverse a
revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 67

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.10 Property and equipment (continued)

the extent of the decrease previously charged. Any deficiencies resulting from decreases in value are deducted from this revaluation
reserve to the extent that the balance held in this reserve relating to a previous revaluation of that asset is sufficient to absorb these, and
charged to profit or loss thereafter.

Other tangible assets are stated at cost less any accumulated depreciation and any accumulated impairment losses.

Property and equipment are derecognised on disposal or when no future economic benefits are expected from their use or disposal.
Gains or losses arising from derecognition represent the difference between the net disposal proceeds, if any, and the carrying amount,
and are included in profit or loss in the period of derecognition.

1.11 Intangible assets

Intangible assets comprise computer software. In determining the classification of an asset that incorporates both intangible and
tangible elements, judgement is used in assessing which element is more significant. Computer software which is an integral part
of the related hardware is classified as property and equipment and accounted for in accordance with the Group’s accounting
policy on property and equipment. Where the software is not an integral part of the related hardware, this is classified as an
intangible asset. Computer software is externally generated.

Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates.

Computer software is initially measured at cost. It is subsequently carried at cost less any accumulated amortisation and any
accumulated impairment losses.

Computer software is derecognised on disposal or when no future economic benefits are expected from its use or disposal. Gains
or losses arising from derecognition represent the difference between the net disposal proceeds, if any, and the carrying amount,
and are included in profit or loss in the period of derecognition.

1.12 Depreciation and amortisation

Depreciation on property and equipment and amortisation on intangible assets commence when these assets are available for
use and are charged to profit or loss so as to write off the cost or revalued amount of assets, other than land, less any estimated
residual value, over their estimated useful life, using the straight line method, on the following bases:

Property and equipment

Freehold and long-term leasehold buildings 2% per annum
IT infrastructure and equipment 10% - 25% per annum
Other (primarily furniture and fittings) 5% - 33% per annum

Intangible assets
Computer software 10% - 20% per annum

The depreciation or amortisation method applied, the residual value and the useful life are reviewed at the end of each reporting
period and adjusted if appropriate.

1.13 Impairment of property and equipment and intangible assets

At the end of each reporting period the Group reviews the carrying amount of its property and equipment and intangible assets
to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists the
recoverable amount is estimated in order to determine the extent of the impairment loss and the carrying amount of the asset is
reduced to its recoverable amount. The recoverable amount is the higher of fair value less costs of disposal and value in use.

An impairment loss is recognised immediately in profit or loss, unless the asset is carried at a revalued amount, in which case the
loss is recognised in other comprehensive income to the extent that it does not exceed the amount in the revaluation surplus for
that asset.

An impairment loss recognised in a prior year is reversed if there has been a change in the estimates used to determine the
asset’s recoverable amount since the last impairment loss was recognised. When an impairment loss subsequently reverses,
the carrying amount of the asset is increased to the revised estimate of its recoverable amount, to the extent that it does not
exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior
years. Impairment reversals are recognised immediately in profit or loss, unless the asset is carried at a revalued amount, in which
case the impairment reversal is recognised in other comprehensive income, unless an impairment loss on the same asset was
previously recognised in profit or loss.
 Bank of Valletta p.l.c.
68 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.14 Provisions, contingent liabilities and contingent assets

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, and it is probable
that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be
made of the amount of the obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle
the present obligation at the end of the reporting period. If the effect of the time value of money is material, provisions are determined
by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability. In such case, the unwinding of the discount is recognised as finance cost.

A contingent liability is (a) a possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present
obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient
reliability. Contingent liabilities are not recognised but are disclosed unless the possibility of an outflow of resources embodying
economic benefits is remote.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent assets are not
recognised. Contingent assets are disclosed where an inflow of economic benefits is probable.

‘Financial guarantees’ are contracts that require the Group to make specified payments to reimburse the holder for a loss that it
incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. ‘Loan
commitments’ are firm commitments to provide credit under pre-specified terms and conditions.

1.15 Non-current assets and disposal groups held for sale

Non-current assets and disposal groups are classified as held for sale if it is highly probable that they will be recovered primarily
through a sale transaction rather than through continuing use. Such assets, or disposal groups, are generally measured at the
lower of their carrying amount and fair value less costs to sell and the asset or disposal group is available for immediate sale
in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a
completed sale within a reasonable period from the date of classification. An impairment loss is recognised in profit or loss. Non-
current assets are not depreciated (or amortised) while they are classified as held for sale or while they are part of a disposal group
classified as held for sale.

1.16 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and deposits repayable on demand or with a contractual period to maturity of less
than 3 months; advances to banks repayable within 90 days from the date of the advance; balances with the Central Bank of Malta,
excluding reserve deposit requirements and treasury bills with an original maturity of less than 3 months. Amounts owed to banks
that are repayable on demand or with a contractual period to maturity of less than 3 months and which form an integral part of the
Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statements of cash flow.

1.17 Dividends payable

Interim dividends are approved by the directors and recognised when paid. Final dividends are recognised as liability upon approval
by the shareholders at the Annual General Meeting.

1.18 Operating segments

An operating segment is a component of an entity (a) that engages in business activities from which it may earn revenues and
incur expenses, (b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its performance, and (c) for which discrete financial information is
available. Unallocated items comprise mainly head office expenses and tax assets and liabilities.

1.19 Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, its absence, the most advantageous market to which the Group has
access at the date. The fair value of a liability reflects its non-performance risk.

Fair value reflects conditions, including but not limited to liquidity in the market, at a specific date and may therefore differ significantly
from the amounts which will actually be received on the maturity or settlement date. The Bank's portfolio remains deployed across
a wide spread of holdings of moderate duration debt securities issued by quality, credit rated, sovereign, supranational, corporate
and financial institutions, as further disclosed in notes 14 and 15 to the financial statements.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 69

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.19 Fair value (continued)

The best evidence of fair value of an instrument is a quoted price in an actively traded market for that instrument. The determination
of what constitutes an active market is subjective and requires the collation of data and the exercise of judgement. A financial
instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer,
broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market
transactions on an arm's length basis. The Bank determines whether active market conditions exist by taking into consideration
various characteristics, including:

- a significant decline in volume and level of trading activity;

- significant variations in available prices either over time or among market participants;
- the absence of or stale prices;
- unusually wide bid/offer spreads; and
- exceptionally minimal transactions when compared with the quantum of the issue in question.

Where it is concluded that an active market does not exist a valuation technique is used. The latter gives consideration to transaction
prices in inactive markets, however it makes use of other observable market data which include a combination of the following:

- the risk premium of more active instruments of the same issuer, the same type of debt, the same currency and with the
same or similar maturity;
- the spreads payable on Credit Default Swaps of the issuer;
- the risk premium over and above the risk free bonds for similarly rated issuers in the same industry sector;
- yield curve or DCF calculations to maturity using appropriate interest rate/discount factors;
- liquidity adjustments to reflect ability to sell asset over a reasonable timeframe; and
- other overall reasonableness tests.

The main assumptions and estimates which management considers when using valuation techniques are the likelihood and
expected timing of future cash flows on the instrument, selecting an appropriate discount rate for the instrument and a risk
premium. The valuation techniques used by the Bank incorporate all factors that market participants would consider in setting a
price and are consistent with accepted economic methodologies for pricing financial instruments.

1.20 Taxation

Income tax expense comprises current and deferred tax and is recognised in profit or loss, except when it relates to items
recognised in other comprehensive income or directly in equity, in which case it is dealt with in other comprehensive income or in
equity, as appropriate.

Current tax
Current tax is based on the taxable result for the period. The taxable result for the period differs from the result as reported in
profit or loss because it excludes items which are non-assessable or disallowed and it further excludes items that are taxable or
deductible in other periods. Current tax also includes any tax arising from dividends. It is calculated using tax rates that have been
enacted or substantively enacted by the end of the reporting period.

Deferred tax
Deferred tax is determined under the liability method in respect of all temporary differences between the carrying amount of an
asset or liability in the financial statements and its tax base. Deferred tax liabilities are generally recognised for all taxable temporary
differences subject to certain exceptions and deferred tax assets are recognised to the extent that it is probable that taxable profits
will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is
settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realised. Deferred tax is not recognised for temporary differences related to investments in subsidiaries to the extent that it is
probable that they will not reverse in the forseeable future.

1.21 Revenue recognition

Revenue is recognised to the extent that it is probable that future economic benefits will flow to the Group and these can be
measured reliably. The following specific recognition criteria must also be met before revenue is recognised.

Dividend income from investments is recognised when the right to receive payment has been established.

Interest income and expense is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the instrument
 Bank of Valletta p.l.c.
70 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.21 Revenue recognition (continued)

or, when appropriate, a shorter period to that instrument’s net carrying amount. When calculating the effective interest rate, the Group
estimates cash flows considering all contractual terms of the instrument but not future credit losses. The calculation includes payments
and receipts that are an integral part of the effective interest rate, transaction costs and all other discounts or premiums.

Fees and commissions that are earned on the execution of a significant act (for example, fees arising from negotiating, or participating
in the negotiation of, a transaction for a third party, such as an arrangement for the acquisition of shares or other securities) are
recognised as revenue when the significant act has been completed. Fees and commissions that are earned as services are provided
to the customer are recognised as revenue as the services are provided. Where fees are charged to cover the cost of a continuing
service, these are recognised in proportion to the costs required to render the services over the relevant period.

1.22 Foreign currency translation

For the purpose of the consolidated and separate financial statements, the presentation currency is the Euro. The functional currency
of the Bank and of all its subsidiaries is the Euro.

In preparing the financial statements of the individual group entities, transactions denominated in currencies other than the functional
currency are translated at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated to Euro at the rates of exchange ruling at the end of the reporting period. Gains and losses arising from such
translation are dealt with in profit or loss and presented with trading income. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to Euro at the exchange rate ruling on the date the fair value was measured. Non-
monetary assets and liabilities denominated in foreign currencies that are measured in terms of historical cost are not retranslated.

1.23 Employee benefits

The Group and the Bank contribute towards the state pension in accordance with local legislation. The only obligation of the Group
and the Bank is to make the required contribution. Costs are expensed in the period in which they are incurred in profit or loss.

For the Group’s and the Bank’s defined benefit plans, the cost of providing benefits is determined using the projected unit credit
method, with estimations being carried out at each reporting date. Past service cost is recognised as an expense at the earlier of the
following dates (a) when the plan amendment or curtailment occurs and (b) when the entity recognises related restructuring costs
or termination benefits. The amount recognised in the Statement of Financial Position represents the present value of the expected
future payments required to settle the obligation resulting from employee service in the current and prior periods. The service cost
and the net interest on the net defined benefit liability are recognised in profit or loss. Remeasurements of the net defined benefit
liability, comprising actuarial gains and losses are recognised in other comprehensive income and are not reclassified to profit or loss
in a subsequent period. Such remeasurements are reflected immediately in retained earnings. Actuarial gains and losses are changes
in the present value of the defined benefit obligation resulting from experience adjustments and the effects of changes in actuarial
assumptions. Actuarial assumptions are an entity’s best estimates of the variables that will determine the ultimate cost of providing
post-employment benefits. Due to the nature of the actuarial assumptions, in accordance with the provisions of IAS 19, the Group and
the Bank did not involve a qualified actuary in the measurement of their post-employment benefit obligations.

1.24 Judgements in applying accounting policies and key sources of estimation uncertainty

The amounts recognised in the financial statements are sensitive to the accounting policies, assumptions and estimates that underlie
the preparation of financial statements. The judgements made by management in applying the Group’s and the Bank's accounting
policies that have the most significant effect on the amounts recognised in the financial statements, together with information about
the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that
have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year,
are either disclosed below or in the remaining notes to the financial statements.

1.24.1 Impairment losses on loans and advances

The Group reviews its loan portfolio on an ongoing basis to assess whether there is any objective evidence of impairment. Objective
evidence that individual loans and advances are impaired includes observable data that comes to the attention of the Group about
loss events, such as repayments falling into arrears, a deterioration in the financial situation of the principal debtor or guarantor,
economic conditions which may adversely affect the borrower’s business activity or market, technological change and changes in
the fair value of collateral. With respect to a group of loans and receivables, loss events include probabilities of default associated
with the credit status of that group and measurable economic conditions which may influence future cash flows from the assessed
loans. Management uses estimates based on historical loss experience for assets with credit risk characteristics similar to those of the
assessed group when forecasting future cash flows. The exercise of judgement is an inherent aspect in assessing provisions required
and is applied in determing the underlying value of collateral held and the period over which collateral or other projected cashflows are
expected to be realised. For collective provisioning estimation uncertainty is mainly around the application of probability of default to
loans with similar credit risk characteristics. The methodology and assumptions for estimating the amount and timing of future cash
flows are reviewed regularly in the light of actual loss experience.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 71

Notes to the financial statements 31 December 2017 (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

1.24.2 Portfolio valuation

The Group measures portfolios of financial assets and financial liabilities on the basis of net exposures to market risks, then it applies
judgement in determining appropriate portfolio-level adjustments such as bid-ask spreads. Such adjustments are derived from observable
bid-ask spreads for similar instruments and adjusted for factors specific to the portfolio. Similarly, when the Group measures portfolios of
financial assets and financial liabilities on the basis of net exposure to the credit risk of a particular counterparty, then it takes into account
any existing arrangements that mitigate the credit risk exposure - e.g. master netting agreements with the counterparty.

1.24.3 Fair value of financial instruments not quoted in active markets

The fair value of financial instruments that are not quoted in active markets is determined by using valuation techniques. Periodically,
the Group calibrates these valuation techniques and tests them for validity. Where possible the valuation techniques used by the Group
make use of observable data and incorporate all factors that market participants would consider in setting a price and are consistent
with accepted economic methodologies for pricing financial instruments. Management is required to make certain assumptions and
estimates in arriving at an appropriate fair value, based on available observable market data. A change in assumptions could affect
the reported fair value of these financial instruments. Further disclosures are provided in note 39.

1.24.4 Impairment losses on held-to-maturity investments and on available-for-sale investments

In the case of financial assets that are either classified as held-to-maturity investments or as available-for-sale investments, objective
evidence of impairment includes observable data about the following loss events, as applicable – significant financial difficulty of
the issuer (or counterparty), a breach of contract, it becoming probable that the borrower will enter bankruptcy or other financial
reorganisation, the disappearance of an active market for that financial asset because of financial difficulties or observable data
indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial
recognition of those assets. In addition to the above loss events, objective evidence of impairment for an investment in an equity
instrument includes information about significant changes with an adverse effect that have taken place in the technological,
market, economic or legal environment in which the issuer operates or a significant or prolonged decline in the fair value below
its cost. The determination of these loss events is based on the analysis of the amortised cost amount against the fair value of the
individual security to assess whether declines in value are indicative of impairment.

1.24.5 Fair value of land and buildings

The fair value of the Group's and the Bank's land and buildings is determined by using valuation techniques as further disclosed in
Note 21. In arriving at an estimate of fair value at the end of the reporting period, the Group and the Bank make use of significant
unobservable inputs. A change in such inputs could affect the reported fair value of these land and buildings.

1.24.6 Classification of facilities as forborne

Management follows the European Banking Authority technical standard in identifying performing/non-performing exposures and
in determining forborne exposures. Judgement is exercised in determining whether the modification of the original terms of a facility
are granted, because of financial difficulties, which would result in the exposure being classified as forborne.

1.24.7 Provisions and contingent liabilities

In the ordinary course of operations, the Group faces loss contingencies that may result in the recognition of a liability. Management
periodically assesses these issues based on information available and assessments from internal and/or external legal counsel.

The Group is currently involved in various claims and legal proceedings arising out of its normal business operations. Periodically,
the status of each significant loss contingency is reviewed to assess the potential financial exposure. If the potential loss from
any claim or legal proceeding is considered probable and the amount can be reasonably estimated, a liability for the estimated
loss is provided for. Due to the uncertainties inherent in such matters, provisions are based on the best information available at
the reporting date. As additional information becomes available, the potential liability related to pending claims and litigation is
reassessed and, if required, estimates are revised. Such revisions in the estimates of the potential liabilities could have a material
impact on results of operations and the financial position of the Group. Where an individual provision is material, the fact that
a provision has been made would be stated and quantified, except to the extent that it would be seriously prejudicial if such
disclosure is provided. Any provision recognised does not constitute any admission of wrongdoing or legal liability.
 Bank of Valletta p.l.c.
72 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
2. INTEREST AND SIMILAR INCOME

On loans and advances to banks 1,892 2,128 1,892 2,128

On loans and advances to customers 197,105 158,211 197,105 158,211

198,997 160,339 198,997 160,339

On debt and other fixed income instruments

- available-for-sale 9,316 10,945 9,316 10,945
- held-to-maturity 61,966 48,016 61,966 48,016
- fair value through profit or loss 5,741 6,873 5,741 6,873

77,023 65,834 77,023 65,834

Amortisation of discounts and premiums

- available-for-sale (2,481) (2,463) (2,481) (2,463)
- held-to-maturity (14,345) (9,308) (14,345) (9,308)
(16,826) (11,771) (16,826) (11,771)

Net interest income on debt and other fixed income instruments 60,197 54,063 60,197 54,063

259,194 214,402 259,194 214,402

3. INTEREST EXPENSE

On amounts owed to banks 11,622 8,481 11,622 8,481

On interest rate swaps 7,510 7,372 7,510 7,372
On amounts owed to customers 26,625 30,984 26,625 30,984
On debt securities in issue 5,449 4,359 5,449 4,359
On subordinated liabilities 12,426 8,758 12,426 8,758
Negative interest on loans to banks, treasury bills and balances 12,615 5,619 12,615 5,619
with Central Bank of Malta

76,247 65,573 76,247 65,573

4. NET FEE AND COMMISSION INCOME

On loans and advances, similar activities and local business 41,320 31,678 41,320 31,678
On life assurance, fund management and similar activities 27,682 21,641 16,482 13,460
On other activities 17,287 12,766 17,287 12,766

86,289 66,085 75,089 57,904

5. TRADING PROFITS

Net income on foreign exchange activities 23,752 20,327 23,803 20,341

Fair value movements and net gains on sale of financial
instruments at fair value through profit or loss (1,462) 4,397 (1,465) 4,383

22,290 24,724 22,338 24,724

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 73

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000

6. N
 ET GAIN ON INVESTMENTS
AND HEDGING INSTRUMENTS

Available-for-sale assets
- net gain on disposal 7,443 9,263 7,443 9,263
- net revaluation (loss)/gain attributable to hedged risk (8,432) 2,877 (8,432) 2,877
(989) 12,140 (989) 12,140
Derivative financial instruments
- net gain/(loss) on derivative financial instruments held for hedging 8,011 (3,094) 8,011 (3,094)

7,022 9,046 7,022 9,046

Gain on Visa transaction - 27,511 - 27,511

Gain on Visa transaction arose on the disposal of the Bank's membership interest in Visa Europe. In June 2016 Visa Inc. completed
the acquisition of Visa Europe. This transaction resulted in a receipt of an upfront cash consideration, preference shares and a
deferred cash payment. The total income on this transaction, recognised in profit for the year 2016, amounted to €27.5 million. The
preference shares have been recognised at the value provided to all holders by Visa and adjusted by a haircut of 50%, to reflect
litigation and liquidity risks.

The Group The Bank

2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
7. EMPLOYEE COMPENSATION AND BENEFITS

Employee compensation and benefits

- wages and salaries 66,130 53,435 62,986 51,402
- social security costs 4,121 3,218 4,022 3,119
- retirement benefits 3,663 3,397 3,663 3,397
- other staff costs 5,836 4,118 5,836 4,118
79,750 64,168 76,507 62,036

The Group The Bank

2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
No. of No. of No. of No. of
persons persons persons persons

The average number of employees are analysed as follows:

Managerial 515 521 493 501
Supervisory and clerical 1,055 949 1,006 906
Others 43 48 40 43

1,613 1,518 1,539 1,450

 Bank of Valletta p.l.c.
74 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
8. NET IMPAIRMENT REVERSAL/(LOSSES)

Loans and advances to customers

- specific allowances 38,667 53,323 38,667 53,323
- collective allowances 3,251 1,579 3,251 1,579
- bad debts written off 13,311 52,581 13,311 52,581
55,229 107,483 55,229 107,483
Reversals of write-downs:
Investments and other assets
- specific allowances - (107) - (102)

Loans and advances to customers

- specific allowances (51,861) (77,629) (51,861) (77,629)
- collective allowances (1,984) (4,681) (1,984) (4,681)
- bad debts recovered (7,611) (1,924) (7,611) (1,924)
(61,456) (84,234) (61,456) (84,234)

Net impairment (reversals)/losses (6,227) 23,142 (6,227) 23,147

During the financial year ended 30 September 2016 a number of long outstanding non-performance exposures, which were mostly
provided for, were written off. As a result, the allowances held in respect of those exposures were duly reversed. The exercise
continued during 2017.

The Group The Bank

2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
9. PROFIT BEFORE TAX

Profit before tax is stated after charging:

Total remuneration payable to the external auditors of the

parent company
- the audit of financial statements 378 210 348 186
- other assurance services 115 143 111 138
- tax advisory services 5 15 3 9
- other non-audit services 70 48 70 48
568 416 532 381

Directors’ emoluments
- fees 412 276 412 276
- directors’ salaries as full-time bank employees 282 55 282 55
694 331 694 331

Compensation to other key management personnel

is analysed as follows:
- other fees 73 39 - -
- short term employee benefits 901 632 901 632
974 671 901 632
Total remuneration for directors and other key management
1,668 1,002 1,595 963
personnel
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 75

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank

2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
10. INCOME TAX EXPENSE

Current
- for the period 46,149 31,677 47,091 31,729
- over provision in prior years - (1,307) - (1,307)
Deferred 9,089 20,338 9,089 20,338

55,238 50,708 56,180 50,760

The charge for income tax is based on the taxable profit for
the period at a rate of 35%. The income tax expense and
the product of accounting profit multiplied by the statutory
domestic income tax rate are reconciled as follows:

Profit before tax 174,736 145,906 165,024 144,943

Tax at the applicable rate of 35% 61,158 51,067 57,758 50,730

Tax effect of:
Exempt and untaxed dividends (56) (117) (2,460) (1,044)
Share of results of equity-accounted investees (6,750) (1,306) - -
Withholding tax on property sales 26 173 26 173
Depreciation on premises 503 303 503 303
Non-deductable expenses 416 821 416 821
Investment holdings - 21 - 21
Actuarial losses on defined benefit plans (36) 1,060 (36) 1,060
Over provision in prior years - (1,307) - (1,307)
Other differences (23) (7) (27) 3

Income tax expense 55,238 50,708 56,180 50,760

The Group The Bank

2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
cents per cents per cents per cents per
share share share share
11. EARNINGS PER SHARE

Earnings per share 27c1 21c6 24c7 21c5

The earnings per share for the Group and the Bank have been calculated on the profits attributable to shareholders of the Group and
the Bank, as shown in the statements of profit or loss, divided by the weighted average number of shares in issue. The calculation of
the earnings per share for all periods presented was adjusted retrospectively in view of the increase in the number of ordinary shares
outstanding as a result of both the bonus issue and rights issue of shares, as disclosed in note 31.

Earnings per share was calculated on profit attributable to shareholders of the Group €119,498,000 (2016: €94,742,000) and the
Bank €108,844,000 (2016: €94,183,000) divided by 440,692,054 weighted average number of shares for the period as at 31
December 2017 (2016: 438,805,970 shares).
 Bank of Valletta p.l.c.
76 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

12. DIVIDENDS

The amount of dividends recognised as distributions to equity holders during the period, and the related amount per share, are as follows:

The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
cents per cents per €000 €000
share share

Gross of income tax

- prior year’s final paid 7.9 7.3 33,228 30,600
- interim paid 4.5 3.6 18,900 15,249

12.4 10.9 52,128 45,849

Net of income tax

- prior year’s final paid 5.1 4.7 21,598 19,890
- interim paid 2.9 2.4 12,285 9,912

8.0 7.1 33,883 29,802

The calculation of the dividend per share for all periods presented was adjusted retrospectively in view of the increase in the number
of ordinary shares outstanding as a result of the bonus issue of shares, as disclosed in note 31, but excluding the increase in number
of shares from the rights issue which occurred after distribution of the above dividends.

For tax purposes, the dividend is being paid out of profits taxed at 35% (2016: 35%).

In respect of the current period, the directors propose that a final gross ordinary dividend of €0.08 per share amounting to €42.0
million (net ordinary dividend of €0.052 per share - €27.3 million) be paid to shareholders. This dividend is subject to approval by
shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed
dividend is payable to all shareholders on the register of members on 10 April 2018.

Note The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
13. BALANCES WITH CENTRAL BANK OF MALTA,
TREASURY BILLS AND CASH

Balances with Central Bank of Malta 99,032 87,779 99,032 87,779

Malta Government Treasury Bills 4,503 39,017 4,503 39,017
Cash 36 56,149 44,254 56,149 44,254

159,684 171,050 159,684 171,050

Balances with the Central Bank of Malta include Reserve Deposit amounting to €99.0 million (2016: €87.8 million) in respect of both
the Group and the Bank, in terms of Regulation (EC) No. 1745/2003 of the European Central Bank. Balances with Central Bank of
Malta and Malta Government Treasury Bills are subject to negative interest rates.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 77

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
14. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH
PROFIT OR LOSS

Financial assets at fair value through profit or loss

Financial assets classified as held for trading:

Derivative financial instruments 7,490 5,365 7,490 5,365

Financial assets designated at fair value through profit or loss:

Debt and other fixed income instruments 111,417 186,015 111,417 186,015
Equity and other non-fixed income instruments 64,811 79,734 63,836 78,596
Loans and advances to customers (note 17) 142,573 121,316 142,573 121,316
318,801 387,065 317,826 385,927

326,291 392,430 325,316 391,292

Financial liabilities at fair value through profit or loss

Financial liabilities classified as held for trading:

Derivative financial instruments 11,957 20,327 11,957 20,327

14.1 Debt and other fixed income instruments

Issued by public bodies

- local general government 33,680 56,238 33,680 56,238
- foreign general government 30,660 34,199 30,660 34,199
64,340 90,437 64,340 90,437
Issued by other issuers
- local banks 1,890 4,508 1,890 4,508
- foreign banks 26,922 49,289 26,922 49,289
- foreign other 15,437 33,206 15,437 33,206
- local other 2,828 8,575 2,828 8,575
47,077 95,578 47,077 95,578
111,417 186,015 111,417 186,015
Listing status
- listed on Malta Stock Exchange 38,398 69,321 38,398 69,321
- listed elsewhere 72,888 113,399 72,888 113,399
- foreign unlisted 131 3,295 131 3,295
111,417 186,015 111,417 186,015

Summary of movements during the period:

At the beginning of the period 186,015 275,935 186,015 275,935
Acquisitions 821 7,710 821 7,710
Disposals (69,790) (95,821) (69,790) (95,821)
Movement in fair value (4,076) (1,742) (4,076) (1,742)
Exchange adjustment (1,553) (67) (1,553) (67)
At the end of the period 111,417 186,015 111,417 186,015
 Bank of Valletta p.l.c.
78 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

14. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)

The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
14.2 Equity and other non-fixed income instruments

Issued by other issuers

- local banks 6,148 12,936 6,148 12,936
- foreign banks 14,362 14,527 14,362 14,527
- foreign other 24,479 26,576 24,479 26,576
- local other 19,822 25,695 18,847 24,557
64,811 79,734 63,836 78,596
Listing status
- listed on Malta Stock Exchange 25,974 38,634 24,999 37,496
- listed elsewhere 13,617 16,306 13,617 16,306
- foreign unlisted 25,220 24,794 25,220 24,794
64,811 79,734 63,836 78,596
Summary of movements during the period:
At the beginning of the period 79,734 77,210 78,596 75,246
Acquisitions 6,423 1,550 6,422 1,550
Disposals (22,266) (2,853) (22,102) (2,027)
Movement in fair value 1,345 4,527 1,345 4,527
Exchange adjustment (425) (700) (425) (700)
At the end of the period 64,811 79,734 63,836 78,596

14.3 Derivative financial instruments

Fair value of assets 7,490 5,365 7,490 5,365

Fair value of liabilities 11,957 20,327 11,957 20,327

The above comprise over-the-counter forward exchange contracts and interest rate swaps that have not been designated as
hedging instruments stated at fair value with notional amounts analysed with remaining life as follows :

- less than 3 months 520,938 546,091 520,938 546,091

- between 3 months and 1 year 41,790 67,599 41,790 67,599
- more than 1 year 171,866 192,015 171,866 192,015

734,594 805,705 734,594 805,705

 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 79

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
15. INVESTMENTS

Debt and other fixed income instruments

- available-for-sale 139,328 272,243 139,328 272,243
- held-to-maturity 3,229,915 3,460,446 3,229,915 3,460,446

Equity and other non-fixed income instruments

- available-for-sale 5,298 3,583 5,298 3,583

3,374,541 3,736,272 3,374,541 3,736,272

Investments with a nominal value of €122.2 million (2016: €74.1 million) have been pledged against the provision of credit lines by
the Central Bank of Malta.
The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
15.1 Debt and other fixed income instruments available-for-sale

Issued by public bodies

- local general government 66,080 179,461 66,080 179,461
- local public sector 73,248 88,805 73,248 88,805

Issued by other issuers

- foreign banks - 3,977 - 3,977
139,328 272,243 139,328 272,243
Listing status
- listed on Malta Stock Exchange 139,328 268,266 139,328 268,266
- foreign unlisted - 3,977 - 3,977
139,328 272,243 139,328 272,243
Summary of movements during the year:

At the beginning of the period 272,243 257,453 272,243 257,453

Acquisitions - 150,745 - 150,745
Disposals (60,300) (130,842) (60,300) (130,842)
Redeemed (51,753) (12,094) (51,753) (12,094)
Amortisation (2,481) (2,463) (2,481) (2,463)
Movement in fair value (16,456) 1,780 (16,456) 1,780
Profit on disposal 3,093 7,365 3,093 7,365
Exchange adjustment (5,018) 299 (5,018) 299
At the end of the period 139,328 272,243 139,328 272,243
 Bank of Valletta p.l.c.
80 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

15. INVESTMENTS (continued)
The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
15.2 Debt and other fixed income instruments held-to-maturity
Issued by public bodies
- local general government 496,692 484,791 496,692 484,791
- foreign general government 511,941 671,749 511,941 671,749
1,008,633 1,156,540 1,008,633 1,156,540
Issued by other issuers
- foreign banks 1,580,844 1,653,880 1,580,844 1,653,880
- foreign other 640,438 650,026 640,438 650,026
2,221,282 2,303,906 2,221,282 2,303,906
3,229,915 3,460,446 3,229,915 3,460,446
Listing status
- listed on Malta Stock Exchange 496,692 484,791 496,692 484,791
- listed elsewhere 2,097,351 2,252,717 2,097,351 2,252,717
- foreign unlisted 635,872 722,938 635,872 722,938
3,229,915 3,460,446 3,229,915 3,460,446

At 31 December 2017, the fair value of held-to-maturity securities, without deducting transaction costs, amounted to €3,269.3
million (2016: €3,511.4 million).
The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
Summary of movements during the period:
At the beginning of the period 3,460,446 3,117,808 3,460,446 3,117,808
Acquisitions 897,650 1,106,801 897,650 1,106,801
Redemptions (1,043,837) (726,248) (1,043,837) (726,248)
Amortisation (14,345) (9,308) (14,345) (9,308)
Loss on early redemptions 43 - 43 -
Exchange adjustment (70,042) (28,607) (70,042) (28,607)
At the end of the period 3,229,915 3,460,446 3,229,915 3,460,446

15.3 Equity and other non-fixed income instruments available-for-sale

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
Issued by other issuers
- foreign other 5,298 3,583 5,298 3,583
5,298 3,583 5,298 3,583
Listing status
- foreign listed 5,298 3,583 5,298 3,583
5,298 3,583 5,298 3,583
Summary of movements during the period:
At the beginning of the period 3,583 1,044 3,583 1,044
Shares acquired under Visa transaction - 3,583 - 3,583
Disposals - (1,044) - (1,044)
Movement in fair value 1,715 - 1,715 -
At the end of the period 5,298 3,583 5,298 3,583
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 81

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
16. LOANS AND ADVANCES TO BANKS

Repayable on call and at short notice 345,193 181,645 345,193 181,645

Term placements with Central Bank of Malta 2,906,971 1,619,029 2,906,971 1,619,029
Term placements with other banks 173,716 283,450 173,716 283,450
Cheques in course of collection 5,503 14,315 5,503 14,315
3,431,383 2,098,439 3,431,383 2,098,439

Following amendments to the Depositor Compensation Scheme (DCS) Regulations (Regulation (27)(2) of the DCS Regulations,
2015), Banks can opt to pledge securities instead of deposits with Central Bank of Malta. In this respect, no balances with Central
Bank of Malta have been pledged in favour of the Depositor Compensation Scheme as at 31 December 2017 (2016: €9.1million).
This resulted in an increase in securities pledged in favour of the Scheme as reported in Note 15.

Balances with a value of €27.3 million (2016: €40.4 million) were held as collateral against derivative contracts.

Balances held with Central Bank of Malta and with other banks are subject to negative interest rates.

The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
17. LOANS AND ADVANCES TO CUSTOMERS

Repayable on call and at short notice 524,993 504,272 524,993 504,272

Term loans and advances 3,803,239 3,683,096 3,803,239 3,683,096

4,328,232 4,187,368 4,328,232 4,187,368

Less impairment losses (166,200) (185,712) (166,200) (185,712)

Net loans and advances at amortised cost 4,162,032 4,001,656 4,162,032 4,001,656

Loans and advances designated at fair value through

profit or loss (note 14) 142,573 121,316 142,573 121,316
Total loans and advances 4,304,605 4,122,972 4,304,605 4,122,972

Impairment losses
- individually assessed allowances 149,998 170,776 149,998 170,777
- collective allowances 16,202 14,936 16,202 14,935
166,200 185,712 166,200 185,712

The balance of individually assessed allowances at the reporting date includes €46.0 million (2016: €53.6million) in respect of interest
in suspense which has been netted off against interest receivable.

During the financial years ending 31 December 2017 and 2016 a number of long outstanding non performance exposures, which
were mostly provided for, were written off. As a result, the allowances held in respect of those exposures were duly reversed.
 Bank of Valletta p.l.c.
82 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
15 months 12 months 15 months 12 months
to Dec 2017 to Sep 2016 to Dec 2017 to Sep 2016
€000 €000 €000 €000
18. INVESTMENTS IN EQUITY-ACCOUNTED INVESTEES

At the beginning of the period 97,041 96,904 52,870 52,870

Share of results, net of tax 19,287 3,730 - -
Dividend received (6,867) (3,593) - -
At the end of the period 109,461 97,041 52,870 52,870

Amounts include:
Local listed 28,857 24,483 22,304 22,304
Local unlisted 80,604 72,558 30,566 30,566
109,461 97,041 52,870 52,870

On the historical cost basis, shares in equity-accounted investees of the Group, would have been included at a cost of €52.9 million
(2016: €52.9 million).

The fair value of the equity-accounted investees' that is publicly quoted amounted to €50.9 million at 31 December 2017 (2016:
€60.0 million).

The fair value measurement is a Level 1 input.

Equity Interest Class Incorporated Nature of

in Business
2017 2016
Name of company % %

Mapfre Middlesea p.l.c. 31.08 31.08 Ordinary Malta Insurance

MSV Life p.l.c.* 50.00 50.00 Ordinary Malta Life Assurance

Group’s share of results

2017 2016
Name of company €000 €000

Mapfre Middlesea p.l.c. 5,468 333

MSV Life p.l.c. 13,819 3,397
19,287 3,730

*A further 15.54% (2016:15.54%) is held indirectly via another equity accounted investee. Although the Bank has an effective participating
interest of 65.54% (2016: 65.54%), it does not exercise control over the financial and operating decisions of the entity as it only has the right
for equal representation on the Board of Directors of the company together with the other shareholders. Furthermore, as from 1 October 2011
the Bank is deemed to exercise significant influence on MSV Life p.l.c. as opposed to joint control as a result of a shareholders' agreement
which gives the other shareholder control and as from financial year 2012 it is being treated as an equity accounted investee.

The financial statements of the equity-accounted investees are prepared to 31 December. Due to the change in financial year end from
September 2017 to December 2017 the share of results of equity-accounted investees for FY17 comprise the Group's share of profits
and the Group's share of the movement in the valuation of the in-force business of the entities, for the eighteen month period July 2016 to
December 2017. The share of results of equity-accounted investees for FY16 comprise the Group's share of profits and the Group's share
of the movement in the valuation of the in-force business of the entities, for the twelve month period June 2015 to June 2016. 

The registered addresses of the above undertakings are as follows:

Mapfre Middlesea p.l.c. Middlesea House, Floriana FRN 1442, Malta

MSV Life p.l.c. The Mall, Mall Street, Floriana FRN 1470, Malta
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 83

Notes to the financial statements 31 December 2017 (continued)

18. INVESTMENTS IN EQUITY-ACCOUNTED INVESTEES (continued)

Summarised financial information extracted from the published preliminary statement of annual results as at 31 December 2017
(2016: as at 30 June 2016) in respect of the equity-accounted investees:

Equity-accounted Equity-accounted
investees investees
2017 2016
€000 €000

Total assets 2,214,752 1,899,580

Total liabilities 2,041,272 1,741,420
Revenues 379,690 170,891
Results for the period 13,521 4,020

The Group
2017 2016
€000 €000

Share of net assets of equity-accounted investees 109,461 97,041

Share of results of equity-accounted investees 19,287 3,730

The share of results of equity-accounted investees comprise the Group's share of profits and the Group's share of the movement in
the valuation of the in-force business of the entities, for the eighteen month period June 2016 to December 2017.

The judgements made by the equity-accounted investees and the key sources of estimation uncertainties are disclosed below:

Estimate of in-force business

Assumptions
The value of in-force business is determined by the directors of the equity-accounted investee based on the advice of the entity's
consulting actuaries. The valuation represents the discounted value of projected future transfers to shareholders from policies in force
at the period end, after making provision for taxation. In determining this valuation, assumptions relating to future mortality, persistence
and levels of expenses are based on experience of the type of business concerned. Gross investment returns assumed vary depending
upon the mix of investments held by the entity and expected market conditions. The value depends on assumptions made regarding
future economic and demographic experience. The impact of the change of the present value of in-force (PVIF) accounts was 23% of
the result for the period. The PVIF represents 35% of the carrying value of the investments in equity-accounted investees.

This valuation assumes a spread of 1% (2016: 1%) between the weighted average projected investment return and the risk adjusted
discount factor applied of 6.5% (2016: 6.5%). The calculation also assumes lapse rates varying from 0.5% to 8% per annum (2016:
0.5% to 8% per annum) and an expense inflation rate of 3.5% (2016: 3.5%).

Changes in assumptions
Assumptions are reviewed on an annual basis to reflect the development of experience and to improve on the reliability of the
estimation process.

Ultimate liability arising from claims made under insurance contracts

There are several sources of uncertainty that need to be considered in the estimate of the liability that the equity-accounted investees
will ultimately pay for such claims. In particular insurance risks including exposure to liability can span over more than one accounting
year, and this increases the uncertainty surrounding the estimate for final settlement.

In calculating the estimated cost of unpaid claims, the equity-accounted investees uses a combination of estimation techniques,
based partly on known information at period end, partly on statistical analysis of historical experience and on actuarial valuations
carried out by an independant external actuary.
 Bank of Valletta p.l.c.
84 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

19. INVESTMENTS IN SUBSIDIARY COMPANIES

Equity interest Class Incorporated in Nature of Business

2017 2016
Name of company % %

BOV Asset Management Limited 100 100 Ordinary Malta Fund Management
BOV Fund Services Limited 100 100 Ordinary Malta Fund Administration

The Bank
2017 2016
Name of company €000 €000

BOV Asset Management Limited 5,481 5,481

BOV Fund Services Limited 749 749
6,230 6,230

The registered address of the above unlisted undertakings is as follows:

BOV Asset Management Limited 58, Zachary Street, Valletta VLT1130
BOV Fund Services Limited 58, Zachary Street, Valletta VLT1130

All subsidiaries prepared their financial statements to the same date, 31 December.
In August 2016, the Group acquired an additional 40% interest in BOV Asset Management Limited for a cash consideration of €5 million.
The Group:
- derecognised a Non-controlling interest of €954,000, comprising of Non-Controlling Interest to date of acquisition less dividends paid
to the Non-controlling interest;
- recognised a decrease of €4,046,000 in Retained Earnings.

The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
20. INTANGIBLE ASSETS
Software
Cost
1 October 29,650 25,561 29,650 25,561
Additions 20,114 4,089 20,114 4,089
31 December 2017 / 30 September 2016 49,764 29,650 49,764 29,650

Accumulated amortisation
1 October 16,378 12,839 16,378 12,839
Charge for the period 4,933 3,539 4,933 3,539
31 December 2017 / 30 September 2016 21,311 16,378 21,311 16,378
Carrying amount at 31 December / 30 September 28,453 13,272 28,453 13,272

Future capital expenditure:

- contracted but not provided for in the financial statements 14,188 112 14,188 112
- authorised by the directors but not contracted 15,758 1,199 15,758 1,199
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 85

Notes to the financial statements 31 December 2017 (continued)

21. PROPERTY AND EQUIPMENT IT
infrastructure
Land and and
buildings equipment Other Total
Note €000 €000 €000 €000
The Group
Cost or valuation
30 September 2015 88,395 20,604 28,402 137,401
Additions 931 2,211 880 4,022
Disposals (532) - - (532)
Revaluation 960 - - 960

30 September 2016 89,754 22,815 29,282 141,851

Additions 2,445 9,067 1,715 13,227
Reclassification from Assets held for realisation 40 7,501 - - 7,501
Assets retired from active use - - 20 20
Revaluation 2,005 - - 2,005
31 December 2017 101,705 31,882 31,017 164,604

Accumulated depreciation
30 September 2015 13,652 13,391 20,557 47,600
Provision for the year 865 2,597 1,506 4,968
Disposals (291) - - (291)

30 September 2016 14,226 15,988 22,063 52,277

Provision for the period 1,437 3,938 1,710 7,085
Accumulated depreciation on assets retired from active use - - 20 20
31 December 2017 15,663 19,926 23,793 59,382

Carrying amount at:

30 September 2015 74,743 7,213 7,845 89,801
30 September 2016 75,528 6,827 7,219 89,574
31 December 2017 86,042 11,956 7,224 105,222

The Bank
Cost or valuation
30 September 2015 88,356 19,960 26,884 135,200
Additions 931 2,211 839 3,981
Disposals (532) - - (532)
Revaluation 960 - - 960
30 September 2016 89,715 22,171 27,723 139,609
Additions 2,445 9,067 1,613 13,125
Reclassification from Assets held for realisation 7,501 - - 7,501
Revaluation 2,005 - - 2,005

31 December 2017 101,666 31,238 29,336 162,240

Accumulated depreciation
30 September 2015 13,559 12,568 19,422 45,549
Provision for the year 865 2,597 1,437 4,899
Disposals (291) - - (291)

30 September 2016 14,133 15,165 20,859 50,157

Provision for the period 1,437 3,938 1,660 7,035
31 December 2017 15,570 19,103 22,519 57,192

Carrying amount at:

30 September 2015 74,797 7,392 7,462 89,651
30 September 2016 75,582 7,006 6,864 89,452
31 December 2017 86,096 12,135 6,817 105,048
 Bank of Valletta p.l.c.
86 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

21. PROPERTY AND EQUIPMENT (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000

Carrying amount of land and buildings occupied for own use 86,042 75,528 86,096 75,582

Future capital expenditure:

- contracted but not provided for in the financial statements 4,886 3,465 4,886 3,465
- authorised by the directors but not contracted for 15,874 2,555 15,874 2,555

Land and buildings are revalued by professionally qualified architects in accordance with the policy documented in Note 1. The
carrying amounts of land and buildings that would have been included in the financial statements had these assets been carried at
cost less accumulated depreciation are:
2017: Group and Bank €44.8 million (2016: Group and Bank €43.8 million).

Property valuations are mainly valued using the 'comparative investment approach' whereby market value is arrived at by capitalising
at an appropriate yield rate, the annual income produced, should the property be leased out to third parties. The income is arrived
at by analysing a number of estate agent listings for comparative properties and determining a mean rental value rate. The valuation
techniques were consistent with those applied for the year ended 30 September 2016. Revaluations are carried out during the year
and, as at 31 December 2017, there were no material changes from date of valuation.

Property fair value measurement is classified as Level 3. Significant unobservable inputs used in the valuation of these properties
is the rental income for office space and the percentage capitalisation rate which indicates the multiplier relationship between Net
Rental Income and Property Value. Further details about these significant inputs are summarised in the table below:

Significant unobservable input Narrative sensitivity

Buildings in Commercial Area Price per square metre, ranging from The higher the price per square metre
EUR 52/sqm to EUR 865/sqm the higher the fair value

Capitalisation rate, ranging from The higher the capitalisation rate

5% to 8% the lower the fair value

Buildings in Residential Area Price per square metre, ranging from The higher the price per square metre
EUR 10/sqm to EUR 293/sqm the higher the fair value

Capitalisation rate, ranging from The higher the capitalisation rate

5.25% to 6% the lower the fair value
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 87

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
22. DEFERRED TAX

Deferred taxation is analysed as follows:

Net deferred tax asset arising on:

Fair value movement of financial instruments (1,793) (4,221) (1,793) (4,221)
Impairment losses 58,298 66,947 58,298 66,947
Allowance for employee benefits 7,111 6,960 7,111 6,960
Excess of capital allowances over depreciation (5,469) (4,563) (5,469) (4,563)
Defined benefit plans 2,070 2,075 2,070 2,075
Other temporary differences - (10) - (10)

60,217 67,188 60,217 67,188

Deferred tax liability arising on:
Property revaluation 4,519 4,318 4,519 4,318

The Group and the Bank

At Recognised Recognised At 31
1 October in profit or in equity December
2016 loss 2017
€000 €000 €000 €000
Movement in temporary differences relating to:
Fair value movement of financial instruments (4,221) 315 2,113 (1,793)
Impairment losses 66,947 (8,649) - 58,298
Allowance for employee benefits 6,960 151 - 7,111
Excess of capital allowances over depreciation (4,563) (906) - (5,469)
Defined benefit plans 2,075 - (5) 2,070
Property revaluation (4,318) - (201) (4,519)
Other temporary differences (10) 10 - -

62,870 (9,079) 1,907 55,698

The Group and the Bank

At Recognised Recognised At 30
1 October in profit or in equity September
2015 loss 2016
€000 €000 €000 €000
Movement in temporary differences relating to:
Fair value movement of financial instruments (4,605) - 384 (4,221)
Impairment allowances 85,384 (18,437) - 66,947
Allowance for employee benefits 8,825 (1,865) - 6,960
Excess of capital allowances over depreciation (4,529) (34) - (4,563)
Defined benefit plans 1,567 - 508 2,075
Property revaluation (4,382) 20 44 (4,318)
Other temporary differences 12 (22) - (10)

82,272 (20,338) 936 62,870

The Group’s deferred tax assets and liabilities on the statement of financial position have not been off-set to the extent that there is
no legally enforceable right of set-off with the tax authorities.
 Bank of Valletta p.l.c.
88 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
23. PREPAYMENTS AND ACCRUED INCOME
Accrued income 33,144 18,788 33,144 18,788
Prepayments 6,241 4,289 7,173 3,909
39,385 23,077 40,317 22,697

24. AMOUNTS OWED TO BANKS

Term deposits 119,734 118,202 119,734 118,202

Repayable on demand 72,462 131,953 72,462 131,953
192,196 250,155 192,196 250,155

25. AMOUNTS OWED TO CUSTOMERS

Term deposits 1,750,910 2,084,220 1,750,910 2,084,220

Repayable on demand 8,349,715 7,100,297 8,351,254 7,103,720
10,100,625 9,184,517 10,102,164 9,187,940

26. DEBT SECURITIES IN ISSUE

4.80% Euro debt securities 55,400 55,400 55,400 55,400

4.25% Euro debt securities 40,000 40,000 40,000 40,000
95,400 95,400 95,400 95,400

The 4.8% Euro unsubordinated bonds are redeemable at par on 27 August 2018 and are listed on the Malta Stock Exchange. The
fair value of these unsecured bonds as at 31 December 2017 is €56.0 million (2016: €58.1 million).

The 4.25% Euro unsubordinated bonds are redeemable at par on 17 May 2019 and are listed on the Malta Stock Exchange. The fair
value of these unsecured bonds as at 31 December 2017 is €41.5 million (2016: €40.9 million).
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 89

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
27. OTHER LIABILITIES

Post employment and termination liabilities (see note 35) 26,229 25,813 26,229 25,813
Cash collateral for commitments 50,912 33,252 50,912 33,252
Deposits from companies in formation 3,520 3,498 3,520 3,498
Bills payable 39,511 41,401 39,511 41,401
Accruals and deferred income 26,158 22,256 26,158 22,256
Payment orders outwards 16,532 23,026 16,532 23,026
Other 34,889 21,272 34,566 21,087
197,751 170,518 197,428 170,333

28. ACCRUALS AND DEFERRED INCOME

Accrued interest 12,451 16,215 11,958 15,802

29. DERIVATIVES DESIGNATED FOR HEDGE ACCOUNTING

Derivative financial instruments designated as fair value hedges 12,053 20,649 12,053 20,649

The notional amount of the over-the-counter interest rate swaps stated above at fair value, amount to €59.2m (FY16: €63.2m). The
remaining life of these instruments is more than 1 year .

30. SUBORDINATED LIABILITIES

5.35% Euro subordinated unsecured bonds 50,000 50,000 50,000 50,000

4.80% Euro subordinated unsecured bonds 70,000 70,000 70,000 70,000
3.50% Euro subordinated unsecured bonds 111,591 111,591 111,591 111,591
231,591 231,591 231,591 231,591

The 5.35% Euro subordinated bonds are redeemable at par on 15 June 2019 and are listed on the Malta Stock Exchange. The fair
value of these unsecured bonds as at 31 December 2017 is €51.4 million (2016: €52.6 million).

The 4.8% Euro subordinated bonds are redeemable at par on 15 March 2020 and are listed on the Malta Stock Exchange. The fair
value of these unsecured bonds as at 31 December 2017 is €72.2 million (2016: €73.5 million).

The 3.5% Euro subordinated bonds are redeemable at par on 8 August 2030 and are listed on the Malta Stock Exchange. The fair
value of these unsecured bonds as at 31 December 2017 is €111.8 million (2016: €109.4 million).

The Bank
2017 2016

31. SHARE CAPITAL AND SHARE PREMIUM €000 €000

Share capital
Authorised:
1,000,000,000 Ordinary shares of €1.00 each 1,000,000 500,000
(2016: 500,000,000 Ordinary shares of €1.00 each)

Issued and paid up:

525,000,000 Ordinary shares of €1.00 each fully paid 525,000 390,000
(2016: 390,000,000 Ordinary shares of €1.00 each fully paid)
 Bank of Valletta p.l.c.
90 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

31. SHARE CAPITAL AND SHARE PREMIUM (continued)
During this financial year the Bank increased its authorised share capital from €500 million to €1 billion as approved by its shareholders
during the Extraordinary General Meeting held on 27 July 2017.
On 16 January 2017 the Bank made a bonus issue of 30 million fully paid ordinary shares of a nominal value of €1.00 per share,
representing one bonus share for every 13 shares held, thereby increasing the issued share capital from 390 million shares to 420
million shares, resulting in a paid up capital of €420 million. Furthermore, pursuant to Company Announcement No 325, the Bank
announced that 105,000,000 new ordinary shares, resulting from the Rights Issue, have been admitted to the Official List and
commenced trading with effect from 22 December 2017.
On 15 January 2016 the Bank made a bonus issue of 30 million fully paid ordinary shares of a nominal value of €1.00 per share,
representing one bonus share for every 12 shares held, thereby increasing the issued share capital from 360 million shares to 390
million shares, resulting in a paid up capital of €390 million.
The Bank
2017 2016

Share Premium €000 €000

Share Premium 45,427 988

During this financial year, as a result of the rights issue mentioned above, share premium account increased by 0.43c per share, for
the 105,000,000 new ordinary shares, net of share issue expenses.

32. OTHER RESERVES

Retained Earnings
Retained earnings represent the profits retained over the years and primarily comprise the profit attributable to equity holders after
deducting dividends paid and transfers to share capital in respect of bonus issues. This reserve includes the amount held in respect
of General Banking Reserves.
General Banking Reserves
The revised Banking Rule 09 requires banks in Malta to hold additional reserves for general banking risks against non-performing
loans. This reserve is required to be funded from planned dividend. As at the reporting date this reserve amounts to €4.7 million.
Revaluation Reserves
Revaluation reserves represent fair value movements on land and buildings and available-for-sale investments, net of tax, which are
recognised in Other Comprehensive Income.

The Group The Bank

€000 €000
On land and buildings:
1 October 2015 26,629 26,598
Property revaluation 960 960
Deferred tax and effect of changes in property tax rates 44 44
Release of surplus on sale of property, net of tax (174) (174)
30 September 2016 27,459 27,428
Property revaluation 2,005 2,005
Deferred tax and effect of changes in property tax rates (201) (201)
31 December 2017 29,263 29,232

On available-for-sale investments:
1 October 2015 8,588 8,507
Fair value adjustments 33,777 33,777
Transfer to profit or loss on disposal (34,876) (34,876)
Deferred tax 384 384
30 September 2016 7,873 7,792
Fair value adjustments 1,379 1,379
Transfer to profit or loss on disposal (7,443) (7,443)
Deferred tax 2,122 2,122
31 December 2017 3,931 3,850
Total 33,194 33,082
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 91

Notes to the financial statements 31 December 2017 (continued)

The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
33. CONTINGENT LIABILITIES AND SIGNIFICANT CLAIMS

Acceptances and endorsements 3,191 2,502 3,191 2,502

Guarantees 223,625 209,209 223,625 209,209
Provision for default on forward contracts 7,133 1,356 7,133 1,356
Other contingent liabilities 19,902 12,340 19,902 12,340
253,851 225,407 253,851 225,407

Contingent liabilities
Contingent liabilities are backed by corresponding obligations from third parties.
Bank of Valletta is party to legal proceedings arising out of its normal business operations. Matters arising from a set of similar
circumstances can give rise to either a provision or a contingent liability, depending on the relevant facts and circumstances. The
recognition of provisions and contingents in relation to such matters involves critical accounting estimates and judgments and is
determined in accordance with the relevant accounting policies described in Note 1 (1.24.7).
It is not practicable to provide an aggregate estimate  of potential liability for the Bank’s legal proceedings as a class of contingent liabilities.
 
Significant claims
On the basis of legal opinions, the Bank has concluded that it has a strong legal position on these claims and, accordingly, no
provisions are required.

Deiulemar Trust
In November 2014, court action was instituted against the Bank by the curator of a failed group while under the trust of the Bank, by
virtue of which a claim of €363 million was made.  While the case has not as yet started to be heard, over the last three years there
were various actions by the curator, the latest  being a request for a precautionary warrant of seizure, in respect of which the Italian
court has reserved its decision. The amount of the claim does not necessarily reflect Bank of Valletta’s potential financial exposure if
a ruling were to be made against it on this matter.

La Valette Multi Manager Property Fund (LVMMPF)

Proceedings in front of the Office of the Arbiter for Financial Services (OAFS) were instituted by a number of investors in the defunct
La Valette Multi Manager Property Fund against Financial Service Providers (FSPs), namely the Bank, the fund manager (a subsidiary
of the BOV Group) and the SICAV. On 23 February 2018, the arbiter found in favour of the claimants and ordered the FSPs, in
solidum between them, to pay the complainants the sum of €3.4 million, together with legal interest from the date when each
complainant filed his claim before OAFS up to date of effective payment and also together with legal costs. On 14 March 2018, the
Group filed an appeal before the Court of Appeal (Inferior Jurisdiction) from the afore mentioned decision.
 
Falcon Fund SICAV
The Bank has received a claim from Hammaeskiold & Co as legal representatives of the Swedish Pension Agency (SPA), being the
sole investor in the Falcon Fund SICAV (FFS). The damages claimed to be have been suffered by SPA amount to at least SEK 740
million (€ 75 million). While no court proceedings have been yet been initiated, SPA has indicated their intention to do so. The amount
of the claim does not necessarily reflect Bank of Valletta’s potential financial exposure if a ruling were to be made against it on this
matter.
The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000
34. COMMITMENTS

Documentary credits 87,707 110,671 87,707 110,671

Undrawn formal standby facilities, credit facilities
and other commitments to lend 1,746,399 1,467,135 1,746,399 1,467,135
Capital expenditure contracted but not
provided for in the financial statements 19,074 3,577 19,074 3,577
Commitments to financial institutions 5,011 8,773 5,011 8,773
1,858,191 1,590,156 1,858,191 1,590,156
 Bank of Valletta p.l.c.
92 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

35. POST EMPLOYMENT AND TERMINATION LIABILITIES

The Group’s and the Bank’s major post-employment benefit plan (the “plan”) applies to eligible individuals. The benefits provided
to the individuals in terms of the plan are computed on a specified formula which takes into consideration, amongst other things,
the employees’ salary on retirement and the pension entitlement in terms of Maltese law. The provision is computed in accordance
with the accounting policy for post-employment benefit plans.
This provision represents the Group’s and the Bank’s obligation
(i) discounted to the net present value at the rate which has been determined by reference to market yields at the end of the
reporting period on Malta government bonds (the Directors consider this to be an appropriate proxy to a high quality
corporate bond),
(ii) after considering the life expectancy of such employees based on the latest publicly available mortality tables,
(iii) the expected terminal salaries, and
(iv) the Bank’s expectations of the employees’ retirement date.
The Group and the Bank also operate an early retirement scheme whereby accepted applicants are given a lump sum payment
of three times their terminal salary, or are paid two thirds of their terminal salary on a monthly basis until reaching retirement age.
Furthermore, the Group and the Bank makes payments to certain eligible employees in consideration of the liquidation of a defunct
pension scheme.  

The movement in the plans may be analysed as follows:

The Group and the Bank
Post Employment and Termination Liabilities 2017 2016
€000 €000
Present value at 1 October 25,813 26,666

Payments effected (3,232) (5,698)

Recognised in profit or loss:

- Interest expense (98) 448
- Service cost - 3
- Terminal benefits 3,761 2,946

Remeasurement of actuarial gains and losses recognised in other comprehensive income resulting from:
- Experience adjustments (79) (94)
- Changes in financial assumptions (109) 1,398
- Changes in demographic assumptions 173 144

Present value at 31 December 26,229 25,813

The year-end obligation in relation to the plan is mainly in relation to retired employees.

The plan exposes the Group and the Bank to the following main risks:
(i) interest risk, since a decrease in market yields will increase the plan liability
(ii) longevity risk, since an increase in the life expectancy of the plan participants will increase the plan liability.
 
The significant actuarial assumptions applied by the Group and the Bank in respect of the plan were as follows:

The Group and the Bank

2017 2016
Discount rates 0.4% 0.4%

Life expectancy (years):

Males 78 78
Females 83 83
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 93

Notes to the financial statements 31 December 2017 (continued)

The Group and the Bank are providing sensitivity analysis in connection with each significant actuarial assumption applied in respect
of the plan. These analysis are prepared as of the end of the reporting period, showing how the liability would have been affected
by hypothetical changes in the relevant actuarial assumptions that were reasonably possible at that date, while holding all other
assumptions constant. The analysis presented below are for illustrative purposes only and may not be representative of the actual
change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another. In
presenting the sensitivity analysis, the present value of the obligation has been calculated using the projected unit credit method at
the end of the reporting period. The amounts generated from the analysis represent forward-looking estimates and hence, actual
results in the future may differ materially from those projected results. In accordance with the transitional provisions in the revised IAS
19, the Group and the Bank have not disclosed comparative information in this respect.
 
- If the discount rate is 100 basis points higher (lower) with all other assumptions held constant, the defined benefit obligation
decreases by €1.3m (increases by €1.3m)
- If the life expectancy increases (decreases) by two years for both men and women with all other assumptions held constant,
the defined benefit obligation increases by €3.4m (decreases by €3.4m).
 
The weighted average duration of the liability in respect of the plan at 31 December 2017 is 9.5 years (2016 :10 years).

36. NOTES TO THE CASH FLOW STATEMENTS Note The Group The Bank
2017 2016 2017 2016
€000 €000 €000 €000

Cash 13 56,149 44,254 56,149 44,254

Treasury bills (with original maturity of less than 3 months) - 39,017 - 39,017
Money at call and short notice 3,414,190 1,896,720 3,414,190 1,896,720
Amounts owed to banks (191,732) (131,953) (191,732) (131,953)

Cash and cash equivalents included in the cash flow 3,278,607 1,848,038 3,278,607 1,848,038
statement
Balances with contractual maturity of more than 3 months 32,485 83,517 32,485 83,517
3,311,092 1,931,555 3,311,092 1,931,555
Equivalent items reported in the statement of financial position:
Balances with Central Bank of Malta, Treasury bills
and cash (excluding Reserve Deposit) 71,905 83,271 71,905 83,271
Loans and advances to banks 3,431,383 2,098,439 3,431,383 2,098,439
Amounts owed to banks (192,196) (250,155) (192,196) (250,155)
3,311,092 1,931,555 3,311,092 1,931,555

37. RELATED PARTY TRANSACTIONS

During the current and the prior year, the Group and the Bank entered into transactions during the course of their normal business,
with equity-accounted investees, subsidiaries, the Government of Malta ("The Government") (which has a 25.23% holding in the
Bank), Government related entities, key management personnel, and other related parties. Government related entities are those
where, in the opinion of the Bank, the Government is either deemed to exercise control, that is, it has the power to govern the
financial and operating policies of the entity or linked to the Government but not controlled by the Government.

Key management personnel includes the Chairman, Directors, the members of the Management Board and their respective spouses,
spousal equivalent and dependents. Other related parties are those companies over which the key management personnel hold
control or significant influence (directorship).

Transactions with related parties are made on an arm's length basis.

The Bank also entered into related party transactions on an arm's length basis with its subsidiaries and equity-accounted investees.
Transactions between the Bank and its subsidiaries have been eliminated on consolidation.
 Bank of Valletta p.l.c.
94 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)

The amounts due to or from related parties are settled in cash and the amount of related party transactions and outstanding
balances at the reporting date are disclosed below:
2017 2016
15 months 12 months
to Dec 2017 to Sep 2016
The Group Related Total Related party Total
party activity/ transactions activity/
transactions balance Re-Stated balance
% of % of
€000 €000 total €000 €000 total
Interest and similar income:
- on loans and advances, balances with
Central Bank of Malta and treasury bills
Equity-accounted investees - -
The Government 2,182 1,934
Government related entities 18,305 14,953
Key management personnel 66 4
Other related parties 119 376
20,672 198,997 10% 17,267 160,339 11%
Interest and similar income:
- on debt and other fixed income instruments
The Government 23,031 60,197 38% 26,322 54,063 49%

Interest expense
Equity-accounted investees 641 1,073
The Government 11,878 4,676
Government related entities 320 199
Key management personnel 38 11
Other related parties - 4
12,877 76,247 17% 5,963 65,573 9%
Fee and commission income
Equity-accounted investees 7,291 5,895
The Government 208 157
Government related entities 452 327
Key management personnel 5 2
Other related parties 15 10
7,971 98,787 8% 6,391 75,021 9%
Employee compensation and benefits
Key management personnel 1,668 79,750 2% 1,002 64,168 2%

General administrative expenses

Equity-accounted investees 135 123
Key management personnel 39 38
Other related parties 4 199
178 59,463 0% 360 40,103 1%
Movement in impairment allowances
The Government (11) (20)
Government related entities (730) 1,789
Key management personnel - -
Other related parties (5) (398)
(746) (6,227) 12% 1,371 23,249 6%
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 95

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)
2017 2016
15 months 12 months
to Dec 2017 to Sep 2016
Related party Total activity/ Related party Total activity/
balances balance balances balance
Re-stated
€000 €000 % of €000 €000 % of
total total
Balances with Central Bank of Malta,
treasury bills and cash
The Government 103,535 159,684 65% 126,796 171,050 74%

Financial assets at fair value through

profit or loss
The Government 33,680 326,291 10% 56,238 392,430 14%

Investments
The Government 562,772 3,374,541 17% 664,252 3,736,272 18%

Loans and advances to customers

Equity-accounted investees - -
The Government 58,273 47,517
Government related entities 429,657 433,738
Key management personnel 3,530 1,512
Other related parties 1,955 5,393
493,415 4,162,032 12% 488,160 4,001,656 12%
Loans and advances to banks
The Government 2,906,971 3,431,383 85% 1,619,029 2,098,439 77%

Impairment allowances
The Government (135) (146)
Government related entities (11,078) (11,808)
Key management personnel - -
Other related parties (15) (20)
(11,228) (166,200) 7% (11,974) (185,712) 6%
Amounts owed to customers
Equity-accounted investees 218,070 229,000
The Government 218,844 313,735
Government related entities 105,252 94,795
Key management personnel 4,789 2,112
Other related parties 3,817 6,036
550,772 10,100,625 5% 645,678 9,184,517 7%
Total Assets less Liabilities
Equity-accounted investees (218,070) (229,000)
The Government 3,446,252 2,199,951
Government related entities 313,327 327,135
Key management personnel (1,259) (601)
Other related parties (1,877) (663)
3,538,373 2,296,822

Commitments
Equity-accounted investees 396 378
The Government 48,075 13,900
Government related entities 111,689 106,712
Key management personnel 683 492
Other related parties 1,126 9,248
161,969 1,858,191 9% 130,730 1,590,156 8%
 Bank of Valletta p.l.c.
96 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)
2017 2016
15 months 12 months
to Dec 2017 to Sep 2016
The Bank Related Total Related party Total
party activity/ transactions activity/
transactions balance Re-Stated balance
% of % of
€000 €000 total €000 €000 total
Interest and similar income:
- on loans and advances, balances with
Central Bank of Malta and treasury bills
The Government 2,182 1,934
Government related entities 18,305 14,953
Key management personnel 10 4
Other related parties 97 186
20,594 198,997 10% 17,077 160,339 11%
Interest and similar income:
- on debt and other fixed income instruments
The Government 23,031 60,197 38% 26,322 54,063 49%

Interest expense
Equity-accounted investees 641 1,073
Subsidiaries 2 -
The Government 11,878 4,676
Government related entities 320 199
Key management personnel 38 9
Other related parties - 3
12,879 76,247 17% 5,960 65,573 9%
Fee and commission income
Equity-accounted investees 7,291 5,895
Subsidiaries 2,654 2,860
The Government 208 157
Government related entities 452 327
Key management personnel 3 2
Other related parties 2 9
10,610 87,587 12% 9,250 66,840 14%
Dividend income
Equity-accounted investees 6,869 4,103
Subsidiaries 8,888 3,631
15,757 17,682 89% 7,734 9,635 80%

Employee compensation and benefits

Key management personnel 1,595 76,507 2% 963 62,036 2%

General administrative expenses

Equity-accounted investees 135 123
Key management personnel 31 37
Other related parties 4 199
170 57,806 0% 359 39,085 1%
Movement in impairment allowances
The Government (11) (20)
Government related entities (730) 1,789
Key management personnel - -
Other related parties 11 (417)
(730) (6,227) 12% 1,352 23,249 6%
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 97

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)
2017 2016
15 months 12 months
to Dec 2017 to Sep 2016
The Bank Related Total Related party Total
party activity/ transactions activity/
transactions balance Re-Stated balance
% of % of
€000 €000 total €000 €000 total
Balances with Central Bank of Malta,
treasury bills and cash
The Government 103,535 159,684 65% 126,796 171,050 74%

Financial assets at fair value through profit or loss

The Government 33,680 325,316 10% 56,238 391,292 14%

Investments
The Government 562,772 3,374,541 17% 664,252 3,736,272 18%

Loans and advances to customers

The Government 58,273 47,517
Government related entities 429,657 433,738
Key management personnel 2,321 1,330
Other related parties 1,729 186
491,980 4,162,032 12% 482,771 4,001,656 12%
Loans and advances to banks
Equity-accounted investees
The Government
Government related entities
Key management personnel
Other related parties
The Government 2,906,971 3,431,383 85% 1,619,029 2,098,439 77%
Impairment allowances
The Government (135) (146)
Government related entities (11,078) (11,808)
Key management personnel - -
Other related parties (12) (1)
(11,225) (166,200) 7% (11,955) (185,712) 6%

Other assets
Subsidiaries 172 5,872 3% 319 4,809 7%

Amounts owed to customers

Equity-accounted investees 218,070 229,000
Subsidiaries 1,539 3,423
The Government 218,844 313,735
Government related entities 105,252 94,795
Key management personnel 3,968 1,885
Other related parties 443 4,297
548,116 10,102,164 5% 647,135 9,187,940 7%
 Bank of Valletta p.l.c.
98 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)
2017 2016
15 months 12 months
to Dec 2017 to Sep 2016
The Bank Related Total Related party Total
party activity/ transactions activity/
transactions balance Re-Stated balance
% of % of
€000 €000 total €000 €000 total
Total Assets less Liabilities
Equity-accounted investees (218,070) (229,000)
Subsidiaries (1,367) (3,423)
The Government 3,446,252 2,199,951
Government related entities 313,327 327,135
Key management personnel (1,647) (555)
Other related parties 1,274 (4,112)
3,539,769 2,289,996

Commitments
Equity-accounted investees 396 378
The Government 48,075 13,900
Government related entities 111,689 106,712
Key management personnel 521 427
Other related parties 1,045 5,543
161,726 1,858,191 9% 126,960 1,590,156 8%

The Group The Bank

2017 2016 2017 2016
€000 €000 €000 €000
All outstanding balances are secured except for the
following:
Loans and advances to customers:
- Key management personnel 144 21 132 11
- Other related parties 159 5 - 5
303 26 132 16
Details of guarantees received are disclosed below:
Loans and advances to customers:
- Amounts guaranteed by The Government 485,278 528,441 485,278 528,441
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 99

Notes to the financial statements 31 December 2017 (continued)

37. RELATED PARTY TRANSACTIONS (continued)

Loans to and commitments on behalf of directors and other key management personnel (including connected persons):

The Group The Bank

Loans and Loans and

advances Commitments advances Commitments
€000 €000 €000 €000

Directors
At 1 October 2015 230 349 139 326
Additions 444 87 342 39
674 436 481 365
Less reductions/repayments (186) (240) (175) (234)

At 30 September 2016 488 196 306 131

Additions 1,634 210 496 91
2,122 406 802 222
Less reductions/repayments (153) (73) (42) (52)

At 31 December 2017 1,969 333 760 170

Other key management personnel

At 1 October 2015 534 382 534 382
Additions 640 47 640 47
1,174 429 1,174 429
Less reductions/repayments (150) (133) (150) (133)

At 30 September 2016 1,024 296 1,024 296

Additions 691 194 691 194
1,715 490 1,715 490
Less reductions/repayments (154) (139) (154) (139)
At 31 December 2017 1,561 351 1,561 351

The above facilities do not involve more than the normal risk of repayment or present other unfavourable features and were made in
the ordinary course of business on substantially the same terms as for comparable transactions with persons of a similar standing,
or where applicable, other employees.
 Bank of Valletta p.l.c.
100 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

38. SEGMENTAL INFORMATION BY CLASSES OF BUSINESS
The Group's reportable segments are shown in the table below. This segment information covers a fifteen month period from
1 October 2016 to 31 December 2017. The comparative period is the twelve months from 1 October 2015 to 30 September 2016.
Interest income is the main revenue generating activity for all segments. The customer-oriented segments also have income derived
from fees and commissions and earnings arising on foreign exchange transactions.
Personal Banking
& Wealth Corporate Proprietary Liquidity Total
Management Banking Investments Management Reportable Segments
Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
Net interest income 80,951 59,274 101,486 81,113 50,543 42,771 (50,033) (34,329) 182,947 148,829
Net fee and commission
income 55,245 43,040 22,241 16,169 619 841 8,184 6,035 86,289 66,085
Trading income 636 315 14,953 13,549 7,023 9,111 8,162 6,463 30,774 29,438
(Loss)/Gain from financial
assets at FVTPL - - - - (1,462) 4,332 - - (1,462) 4,332
Gain on Visa transaction - - - - - 27,511 - - - 27,511

Other income - - - - 1,925 1,901 - - 1,925 1,901

Depreciation/amortisation (6,699) (4,638) (1,962) (1,347) (55) (63) (3,322) (2,459) (12,038) (8,507)
Other costs (69,105) (53,150) (21,864) (16,162) (5,541) (3,605) (42,703) (31,354) (139,213) (104,271)
878 13,318 5,349 (36,562) - 102 - - 6,227 (23,142)
Impairment (losses)/reversal - - - - - - - - - -

Operating profit before

share of results of equity-
accounted investees 61,906 58,159 120,203 56,760 53,052 82,901 (79,712) (55,644) 155,449 142,176
Group share of results
after tax of equity-
accounted investees - - - - 19,287 3,730 - - 19,287 3,730
Group profit before
taxation for the fifteen
months 174,736 145,906
Personal Banking
& Wealth Corporate Proprietary Liquidity Total
Management Banking Investments Management Reportable Segments
Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16 Dec-17 Sep-16
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
ASSETS
Total assets 2,123,830 2,015,064 2,263,501 2,177,843 3,599,146 4,060,626 3,591,017 2,269,431 11,577,494 10,522,964
Property and equipment
and Intangible assets - - - - 100,334 94,735 - - 100,334 94,735
Additions to property and
equipment
and intangible assets - - - - 33,341 8,111 - - 33,341 8,111
Carrying value of equity-
accounted investees - - - - 109,461 97,041 - - 109,461 97,041
Total Assets 11,820,630 10,722,851

LIABILITIES
Total liabilities 2,236,426 2,046,091 2,681,112 2,371,755 3,747,437 4,161,701 2,193,568 1,414,143 10,858,543 9,993,690

The revenue which is reported above represents revenue generated from external customers. There were no inter-segment sales during
the period (2016: nil).
The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 1. Segment's
operating profit represents the profit earned by each segment.
There are no material activities which are carried out outside Malta.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 101

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT

39.1 Use of financial instruments

By their nature, the Group's activities are principally related to the use of financial instruments including derivatives. The Group
accepts deposits from customers at both fixed and floating rates and for various periods, and seeks to earn interest margins by
investing these funds in high-quality assets. The Group seeks to increase these margins by consolidating short-term funds and
lending for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due.

The Group also seeks to increase its interest margins through lending to commercial and retail borrowers with a range of credit
standings. Such exposures involve both on-balance sheet loans and advances, as well as guarantees and other commitments such
as performance and other bonds and letters of credit.

The Board places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions.
Foreign exchange and interest rate exposures are normally offset by entering into counterbalancing positions, thereby controlling the
variability in the net cash amounts required to liquidate market positions.

Given that the difference between the Group and the Bank balances in respect of financial instruments, and the corresponding effect
on the income statement and reserves in respect thereof, are not material, references in this note to the Group are to be construed
as references to the Bank, unless otherwise stated.

The principal areas of financial risk are detailed below:

39.2 Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation.

Financial assets which could potentially expose the Group to credit risk, mainly include balances with Central Bank of Malta, treasury bills
and cash, derivative financial assets, debt and other fixed income instruments, and loans and advances to banks and customers.

39.2.1 Credit risk management and exposure

(i) Loans and advances

The purpose of credit risk management is to keep credit risk exposure to a permissible level relative to capital, to maintain the
soundness of assets, and to ensure returns commensurate with risk. This leads to a loan portfolio that achieves high returns on
capital and assets.

Credit risk is managed and controlled throughout the Bank on the basis of established credit processes, and within a framework of
credit policy and delegated authorities based on responsibility, skill and experience.

Credit grading and monitoring systems are in place to accommodate the early identification and management of deterioration in loan
quality. In addition, the credit management process is underpinned by an independent system of credit review.

Credit risk analysis is carried out on two levels: the single name; and the bank’s lending portfolio review. The Bank uses a number of
tools to limit its exposure to undue credit risk. These include the application of:

• High-level credit policies designed to ensure a balanced and managed approach to the identification and mitigation of credit
risk;
• Lending guidelines defining the responsibilities of lending officers that seek to provide a disciplined and focused benchmark for
credit decisions;
• Independent reviews of credit exposures;
• Sector caps, encompassing both industry and specific product types, to communicate the Board’s risk appetite for specific
types of business;
• Establishment and maintenance of large exposures and provisioning policies in accordance with regulatory reporting
requirements;
• Communication and provision of general guidance on all credit-related risk issues, including regulatory changes to promote
consistent and best practice throughout the Bank.
 Bank of Valletta p.l.c.
102 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.1 Credit risk management and exposure (continued)

Where possible the Bank aims to reduce and control risk concentrations. Broadly stated, concentration results when the Bank has
a high level of exposure to a single or related group of borrowers, credit exposures secured by a single security, or credit exposures
with common characteristics within an industry, such that adverse developments in this exposure would be damaging to the Bank.

Given the size and nature of the domestic financial sector and the local economy, the Bank is exposed to concentration risk in its credit
business. The Bank has systems in place to identify material concentrations in the loan portfolio, and to ensure adherence to prudential
limits set by the Board of Directors and/or the regulators to single borrowers or groups of related borrowers and other significant risk
concentrations. The CEO and the Board of Directors are regularly informed on the concentration of the Bank’s portfolio.

The following industry concentrations in connection with loans and advances to banks and customers are considered significant:

The Group
2017 2016
€000 €000

Agriculture 6,060 7,497

Fishing 27,172 3,716
Mining and quarrying 2,111 4,100
Manufacturing 171,995 125,793
Electricity, gas, steam and air conditioning supply 126,230 139,482
Water supply, sewerage waste management and remediation activities 19,862 22,680
Construction 211,342 242,383
Wholesale and retail trade 348,212 370,721
Transportation and storage 236,829 275,410
Accommodation and food service activities 254,182 221,999
Information and communication 33,251 23,417
Financial and insurance activities 446,877 407,120
Real estate activities 247,008 262,998
Professional, scientific and technical activities 22,975 24,943
Administrative and support service activities 50,600 45,774
Public administration and defence, compulsory social security 29,995 14,222
Education 15,266 13,192
Human health and social work activities 35,907 20,168
Arts, entertainment and recreation 29,389 36,182
Other services activities 18,072 17,139
Households and individuals 2,137,470 2,029,748
Loans and advances to customers 4,470,805 4,308,684

Loans and advances to banks 3,431,383 2,098,439

7,902,188 6,407,123

(ii) Other financial assets

The credit risk in respect of other financial assets is mitigated through limits set in the Treasury Management Policy. The Bank assigns
limits on the level of credit risk undertaken in relation to any single counterparty or sovereign exposure in accordance with external
ratings based on Fitch’s ratings or on those of other major rating agencies.

Changes in credit ratings are monitored on a daily basis and are subject to frequent review, when considered necessary. The limits
on the level of credit risk are reviewed consistently and approved by the Board of Directors at regular intervals. Actual exposures are
monitored against limits on an on going basis. The Bank enters into security transactions only with such authorised counterparties
and it invests only in securities or paper with credit quality within specific parameters stated in the Treasury Management Policy.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 103

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.1 Credit risk management and exposure (continued)

(ii) Other financial assets (continued)

The level of concentration in respect of other significant financial assets is disclosed in the remaining notes to the financial statements.

Maximum exposure
The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the
maximum exposure to credit risk without taking account of the value of any collateral obtained, except as disclosed below:

Financial guarantees
The maximum exposure to credit risk is the full amount that the Group would have to pay if the guarantees are called upon.

Loan commitments
The maximum exposure to credit risk arising on loan commitments and other credit related commitments that are irrevocable over
the life of the respective facilities is the full amount of the committed facilities.

Collateral and other credit enhancements

Credit risk mitigation is one of the key elements of the Group’s credit policy. This includes the requirement to obtain collateral,
depending on the nature of the proposal, as set out in the Bank’s policies and procedures. The nature and level of collateral required
depends on a number of factors, including, but not limited to the amount of the exposure, the type of facility provided, the term of the
facility, the amount of the counterparty’s contribution and an evaluation of the level of the credit risk or probability of default involved.

Security values are reviewed on a regular basis and are also re-assessed at time of default if it is found that the carrying value of the
collateral item could have materially changed since last valuation. The Bank calculates the value of collateral as the market value
less a haircut, with the latter representing a conservative estimate of the costs to sell and the potential loss of value in a forced sale
scenario. For financial instruments, haircuts are calculated according to the risk profile of each individual security and depend on a
number of variables including price volatility and liquidity/marketability of the instrument.

The table below shows the financial effect and main types of collateral held against the Group’s customer loan exposures:

The Group Undrawn
As at 31 December 2017 credit facilities
Loans and and other
advances to commitments
customers to lend
€000 €000
Loans collateralised by:
Prime bank guarantees 1,464 572
Cash or quasi cash 152,259 59,476
Guarantees and/or letters of comfort issued by the Malta Government,
the Central Bank of Malta or public agencies 509,939 199,192
Residential property 1,804,873 705,020
Commercial property 1,032,465 403,302
Personal guarantees and others 232,148 90,681
3,733,148 1,458,243
 Bank of Valletta p.l.c.
104 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.1 Credit risk management and exposure (continued)

(ii) Other financial assets (continued)

Undrawn
credit facilities
Loans and and other
advances to commitments
The Group customers to lend
As at 30 September 2016 €000 €000
Loans collateralised by:
Prime bank guarantees 1,058 358
Cash or quasi cash 123,619 41,804
Guarantees and/or letters of comfort issued by the Malta Government,
the Central Bank of Malta or public agencies 526,269 177,965
Residential property 1,675,477 566,588
Commercial property 1,053,599 356,291
Personal guarantees and others 177,557 60,044
3,557,579 1,203,050

Residential lending

The table below stratifies credit exposures, covered by residential property, to retail customers by ranges of loan-to-value ('LTV'). LTV
is calculated as the ratio of the gross amount of loan or the amount committed for loan commitments to the value of the collateral.
The gross amounts exclude any impairment allowances. The valuation of the collateral excludes any adjustments for obtaining and
selling the collateral. The value of the collateral for these loans is based on the collateral value at origination updated based on
changes in house price indices.

Residential lending and commitments for residential lending

2017 2016
€000 €000

Less than 25% 166,444 160,354

25% to 50% 504,234 488,236
51% to 75% 815,181 758,454
76% to 90% 1,040,848 1,028,534
2,526,707 2,435,578

Settlement Risk
The Group’s activity may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due
to failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed. Settlement risk in
respect of security transactions is mitigated through settlement limits assigned to counterparties based on external credit ratings or
by effecting payment on a delivery versus payment (DVP) basis.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 105

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.2 Credit Quality

(i) Debt securities and other bills by rating agency (Fitch) designation

Balances with Loans and
CBM and Advances to
Treasury Bills Debt Securities Banks Derivatives Total
The Group €000 €000 €000 €000 €000
As at 31 December 2017
AAA - 255,936 25,075 - 281,011
AA- to AA+ - 588,077 20,149 422 608,648
A- to A+ 103,535 2,294,539 3,229,427 5,068 5,632,569
BBB- to BBB+ - 314,611 133,953 542 449,106
Lower than BBB- - 17,781 7,187 - 24,968
Unrated - 9,716 15,592 1,458 26,766
103,535 3,480,660 3,431,383 7,490 7,023,068

As at 30 September 2016
AAA - 346,790 26,141 35 372,966
AA- to AA+ - 747,210 90,039 540 837,789
A- to A+ - 1,560,560 294,672 3,070 1,858,302
BBB- to BBB+ 126,796 1,264,144 1,669,374 145 3,060,459
Unrated - - 18,213 1,575 19,788
126,796 3,918,704 2,098,439 5,365 6,149,304

(ii) Loans and advances to customers analysed into performing and non-performing exposures

The Group
Total Gross/Forborne Exposures of which of which
Total Forborne Total Forborne
2017 2017 2016 2016
€000 €000 €000 €000

Performing
Neither past due nor impaired 4,156,498 35,863 3,965,323 47,003
Past due < 90 days, but not impaired 32,088 1,242 38,796 454
4,188,586 37,105 4,004,119 47,457
Non performing
Past due > 90 days, but not impaired 96,720 39,212 92,040 49,157
Impaired 185,499 91,553 212,525 113,208
282,219 130,765 304,565 162,365
Total Gross/Forborne Exposures 4,470,805 167,870 4,308,684 209,822
 Bank of Valletta p.l.c.
106 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.2 Credit Quality (continued)

(ii) Loans and advances to customers analysed into performing and non-performing exposures (continued)

Impairment Allowances on Total/Forborne Exposures The Group

of which of which
Total Forborne Total Forborne
2017 2017 2016 2016
€000 €000 €000 €000
Performing
Neither past due nor impaired 32,092 2,312 34,414 3,092
Past due < 90 days, but not impaired 1,196 87 2,250 36
33,288 2,399 36,664 3,128
Non performing
Past due > 90 days, but not impaired 31,261 8,398 34,131 10,654
Impaired 101,651 54,746 114,917 63,610
132,912 63,144 149,048 74,264
Total Impairment Allowances 166,200 65,543 185,712 77,392

Net Carrying Amounts of Total/Forborne Exposures

Performing
Neither past due nor impaired 4,124,406 33,551 3,930,908 43,911
Past due < 90 days, but not impaired 30,894 1,154 36,545 418
4,155,300 34,705 3,967,453 44,329
Non performing
Past due > 90 days, but not impaired 65,458 30,814 57,909 38,503
Impaired 83,847 36,807 97,610 49,598
149,305 67,621 155,519 88,101
Total Net Carrying Amounts 4,304,605 102,326 4,122,972 132,430

Interest income recognised during the period ended 31 December 2017 in respect of forborne assets amounted to €8.8 million
(2016: €11.6 million).

The tables above analyse the loan book into performing and non-performing exposures together with the related allowances.
Impairment allowances comprise both collective and specific.

Gross Forborne Exposures Modification in Modification in

Terms Refinancing Terms Refinancing
2017 2017 2016 2016
€000 €000 €000 €000
Performing
Personal 3,483 338 3,652 577
Business 31,560 1,724 42,413 815
35,043 2,062 46,065 1,392

Non performing
Personal 27,166 654 31,494 446
Business 99,357 3,588 129,987 438
126,523 4,242 161,481 884
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 107

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.2 Credit Quality (continued)

(iii) Loans and advances to customers by internal rating based on the Banking directives/rules
Loans & Advances
2017 2016
€000 €000
Neither past due nor impaired:
Regular 3,896,165 3,634,542
Watch list 233,081 288,758
Sub-Standard 27,252 42,023
4,156,498 3,965,323

The neither past due nor impaired balances include performing forborne facilities.

Past due but not impaired:

Past due up to 29 days 14,281 16,120
Past due 30 - 59 days 12,833 17,020
Past due 60 - 89 days 4,974 5,656
32,088 38,796

A financial asset is past due when a counterparty has failed to make a payment when contractually due.

Individually impaired gross loans by segment:

Personal 36,766 40,532
Business 148,733 171,993
185,499 212,525

Impaired facilities are those credit facilities with payments of interest and/or capital overdue by 90 days or more or where the Group
has reasons to doubt the eventual recoverability of funds.

Collateral for impaired loans

As detailed above, a variety of types of collateral are accepted including property, securities, cash, guarantees and insurance.

(iv) Movement in forbearance activity during the period

Loans & Advances
2017 2016
€000 €000
1 October 209,822 296,869
Additions 15,907 26,154
Retired from forborne (57,859) (113,201)
31 December / 30 September 167,870 209,822
 Bank of Valletta p.l.c.
108 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.3 Movement in allowance accounts for loans and advances to customers

The Group
Individually Collective Individually Collective
assessed allowances assessed allowances
allowances allowances
2017 2017 2016 2016
€000 €000 €000 €000
Change in allowances for uncollectability:
At 1 October 170,776 14,936 220,272 18,038

Additions 55,134 3,251 69,074 1,579

Reversals (75,912) (1,985) (118,570) (4,681)
(20,778) 1,266 (49,496) (3,102)
At 31 December / 30 September 149,998 16,202 170,776 14,936

39.2.4 Debt securities

Sovereign Debt

Sovereign risk refers to the risk that a government may default on its obligations, and includes refinancing risk related to the inability
to raise capital to repay maturing bonds. The Group monitors sovereign risks through sovereign credit ratings issued by credit rating
agencies which include Fitch, Moody’s, and S&P. The Treasury Management Policy seeks to mitigate sovereign risk, whether directly
or indirectly through exposures to corporate and financial institutions domiciled therein, through investment limits assigned on the
basis of the long-term credit rating of such sovereigns. This is further supplemented by in depth economic reviews undertaken
periodically and assessments of the fiscal, economic and socio-political aspects upon which such limits are accordingly aligned.

The tables below analyse debt securities by sector, classification and residency.

The Group and The Bank

Sector Fair Value through

Held-to-maturity Available-for-sale Profit or Loss
€000 €000 €000
2017
15 months
Banks 1,580,843 - 28,811
Government 1,008,633 66,079 64,340
Public - 73,249 -
Others 640,439 - 18,266
3,229,915 139,328 111,417
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 109

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.2.4 Debt securities (continued)

Sovereign Debt (continued)

The Group and The Bank
Fair Value through
Held-to-maturity Available-for-sale Profit or Loss
€000 €000 €000
2016
12 months
Banks 1,653,880 3,977 53,797
Government 1,156,540 179,461 90,437
Public - 88,805 -
Others 650,026 - 41,781
3,460,446 272,243 186,015

The Group and The Bank

Residency Fair Value through

Held-to-maturity Available-for-sale Profit or Loss
€000 €000 €000
2017
15 months
Malta 496,691 139,328 38,398
Monetary Union member states 1,029,653 - 39,090
Rest of the world 1,703,571 - 33,929
3,229,915 139,328 111,417

2016
12 months
Malta 484,791 268,266 69,321
Monetary Union member states 1,058,278 - 53,798
Rest of the world 1,917,377 3,977 62,896
3,460,446 272,243 186,015

39.3 Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments.
Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value. The Group monitors and manages
this risk by maintaining sufficient cash and, where possible, financial assets for which there is a liquid market and that are readily
saleable to meet liquidity needs. The Group is exposed to daily calls on its available cash resources from overnight deposits, current
and call deposits, maturing term deposits, loan drawdowns, guarantees and from margin and other calls on cash-settled derivatives.
In order to ensure that maturing funds are always available to meet expected demand for cash, the Board sets parameters within
which maturities of assets and liabilities may be mismatched. Unmatched positions potentially enhance profitability, but also increase
the risk of losses. In addition, the Group manages its risk to a shortage of funds by monitoring forecast and actual cashflows, by
monitoring the availability of raising funds to meet commitments associated with financial instruments and by holding financial assets
which are expected to generate cash inflows that will be available to meet cash outflows on liabilities.

The table below analyses Group financial liabilities into relevant maturity groupings, based on the remaining period at the reporting date
to the contractual maturity date. The balances in this table will not agree directly to the balances in the statement of financial position
as the table incorporates all cash flows, on an undiscounted basis, related to both principal as well as those associated with all future
coupon payments. Furthermore, loan commitments do not meet the criteria for recognition in the statement of financial position.

Financial liabilities at fair value through profit or loss and derivatives designated for hedge accounting, disclosed below, represent
amounts for which net cash flows are exchanged.
 Bank of Valletta p.l.c.
110 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

The Group Due Due

Due between between Gross
within 3 & 12 1&5 Due after nominal Carrying
3 months months years 5 years outflow amount
At 31 December 2017 €000 €000 €000 €000 €000 €000

Financial liabilities at fair value through 1,390 2,475 7,517 2,952 14,334 11,957
profit or loss
Amounts owed to banks 192,591 8 - - 192,599 192,196
Amounts owed to customers 8,894,632 976,064 306,336 3,139 10,180,171 10,100,625
Debt securities in issue 1,330 58,430 40,850 - 100,610 95,400
Subordinated liabilities 3,633 6,308 142,000 142,836 294,777 231,591
Derivatives designated for hedge accounting 593 1,312 6,004 7,450 15,359 12,053
Other financial liabilities 180,812 4,747 9,598 10,470 205,627 214,721
9,274,981 1,049,344 512,305 166,847 11,003,477 10,858,543

Loan commitments 1,746,399

At 30 September 2016
Financial liabilities at fair value through 2,053 3,617 11,154 8,503 25,327 20,327
profit or loss
Amounts owed to banks 246,465 24 753 - 247,242 250,155
Amounts owed to customers 7,725,817 1,195,034 287,916 2,781 9,211,548 9,184,517
Debt securities in issue 850 3,509 101,459 - 105,818 95,400
Subordinated liabilities 1,338 4,698 136,768 146,742 289,546 231,591
Derivatives designated for hedge accounting 1,364 1,949 7,866 10,856 22,035 20,649
Other financial liabilities 174,230 5,935 7,864 14,741 202,770 191,051
8,152,117 1,214,766 553,780 183,623 10,104,286 9,993,690

Loan commitments 1,467,135

Assets available to meet these liabilities, and to cover outstanding commitments, include balances with Central Bank of Malta,
treasury bills and cash, cheques in course of collection, loans to banks and to customers and marketable securities and undrawn
credit lines.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 111

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

The table below analyses the assets and liabilities that are recognised in the statement of financial position into relevant maturity
groupings, based on the remaining period at the reporting date to their contractual maturity date.

The Group Between Between

Less than 3 months 1 and More than Carrying
3 months and 1 year 5 years 5 years Other amount
€000 €000 €000 €000 €000 €000
At 31 December 2017
Assets

Balances with Central Bank of Malta,

treasury bills and cash 4,503 - - - 155,181 159,684
Financial assets at fair value through profit
or loss
- Debt and other fixed income instruments 8,248 16,422 71,422 15,325 - 111,417
- Equity and other non-fixed income
instruments - - - - 64,811 64,811
- Loans and advances - - - 142,573 - 142,573
- Derivative financial instruments 6,889 472 87 42 - 7,490
Investments
-D
 ebt and other fixed income financial
instruments
- available-for-sale - - 48,635 90,693 - 139,328
- held-to-maturity 158,210 620,614 2,338,395 112,696 - 3,229,915
- Equity and other non-fixed income
instruments
- available-for-sale - - - - 5,298 5,298
Loans and advances to banks 3,411,769 12,001 - - 7,613 3,431,383
Loans and advances to customers 538,307 44,084 365,246 3,214,395 - 4,162,032
Investments in equity-accounted investees - - - - 109,461 109,461
Other assets - - - - 257,238 257,238
4,127,926 693,593 2,823,785 3,575,724 599,602 11,820,630

Liabilities and Equity

Financial liabilities at fair value through profit

or loss 4,035 1,682 3,223 3,017 - 11,957
Amounts owed to banks 154,544 37,652 - - - 192,196
Amounts owed to customers 8,857,595 957,285 285,745 - - 10,100,625
Debt securities in issue - 55,400 40,000 - - 95,400
Other liabilities - - - - 214,721 214,721
Derivatives designated for hedge accounting - - 379 11,674 - 12,053
Subordinated liabilities - - 120,000 111,591 - 231,591
Equity holders of the Bank - - - - 962,087 962,087
9,016,174 1,052,019 449,347 126,282 1,176,808 11,820,630
 Bank of Valletta p.l.c.
112 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

The Group Between

3 months Between
Less than and 1 1 and More than Carrying
3 months year 5 years 5 years Other amount
At 30 September 2016 €000 €000 €000 €000 €000 €000

Assets

Balances with Central Bank of Malta,

treasury bills and cash 39,017 - - - 132,033 171,050
Financial assets at fair value through profit
or loss
- Debt and other fixed income instruments 9,924 26,424 124,890 24,777 - 186,015
- Equity and other non-fixed income - - - - 79,734 79,734
instruments
- Loans and advances - - - 121,316 - 121,316
- Derivative financial instruments 3,472 610 1,283 - - 5,365
Investments
- Debt and other fixed income financial
instruments
- available-for-sale 48,387 3,977 36,229 183,650 - 272,243
- held-to-maturity 171,798 562,940 2,533,287 192,421 - 3,460,446
- Equity and other non-fixed income
instruments
- available-for-sale - - - - 3,583 3,583
Loans and advances to banks 2,000,527 82,000 - - 15,912 2,098,439
Loans and advances to customers 517,983 125,253 345,240 3,013,180 - 4,001,656
Investments in equity-accounted investees - - - - 97,041 97,041
Other assets - - - - 225,963 225,963
2,791,108 801,204 3,040,929 3,535,344 554,266 10,722,851

Liabilities and Equity

Financial liabilities at fair value through

profit or loss 2,860 371 5,813 11,283 - 20,327
Amounts owed to banks 142,322 103,225 4,608 - - 250,155
Amounts owed to customers 7,731,659 1,184,350 264,949 89 - 9,181,047
Debt securities in issue - - 95,400 - - 95,400
Other liabilities - - - - 194,521 194,521
Derivatives designated for hedge accounting - - 616 20,033 - 20,649
Subordinated liabilities - - 120,000 111,591 - 231,591
Equity holders of the Bank - - - - 729,161 729,161
7,876,841 1,287,946 491,386 142,996 923,682 10,722,851
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 113

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

The Bank
Between Between
Less than 3 months 1 and More than Carrying
3 months and 1 year 5 years 5 years Other Amount
At 31 December 2017 €000 €000 €000 €000 €000 €000

Assets

Balances with Central Bank of Malta, treasury

bills and cash 4,503 - - - 155,181 159,684
Financial assets at fair value through profit or loss
-D
 ebt and other fixed income instruments 8,248 16,422 71,422 15,325 - 111,417
- Equity and other non-fixed income instruments - - - - 63,836 63,836
- Loans and advances - - - 142,573 - 142,573
- Derivative financial instruments 6,889 472 87 42 - 7,490
Investments
- Debt and other fixed income financial
instruments
- available-for-sale - - 48,635 90,693 - 139,328
- held-to-maturity 158,210 620,614 2,338,395 112,696 - 3,229,915
- Equity and other non-fixed income
instruments
- available-for-sale - - - - 5,298 5,298
Loans and advances to banks 3,411,768 12,001 - - 7,614 3,431,383
Loans and advances to customers 538,307 44,084 365,246 3,214,395 - 4,162,032
Investments in equity-accounted investees
and subsidiaries - - - - 59,100 59,100
Other assets - - - - 255,258 255,258
4,127,925 693,593 2,823,785 3,575,724 546,287 11,767,314

Liabilities and Equity

Financial liabilities at fair value through profit or loss 4,035 1,682 3,223 3,017 - 11,957
Amounts owed to banks 154,543 37,653 - - - 192,196
Amounts owed to customers 8,859,134 957,285 285,745 - - 10,102,164
Debt securities in issue - 55,400 40,000 - - 95,400
Other liabilities - - - - 213,905 213,905
Derivatives designated for hedge accounting - - 379 11,674 - 12,053
Subordinated liabilities - - 120,000 111,591 - 231,591
Equity holders of the Bank - - - - 908,048 908,048
9,017,712 1,052,020 449,347 126,282 1,121,953 11,767,314
 Bank of Valletta p.l.c.
114 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

The Bank
Less Between Between
than 3 months 1 and More than Carrying
3 months and 1 year 5 years 5 years Other amount
At 30 September 2016 €000 €000 €000 €000 €000 €000

Assets

Balances with Central Bank of Malta, treasury

bills and cash 39,017 - - - 132,033 171,050
Financial assets at fair value through profit or loss
- Debt and other fixed income instruments 9,924 26,424 124,890 24,777 - 186,015
- Equity and other non-fixed income - - - - 78,596 78,596
instruments
- Loans and advances - - - 121,316 - 121,316
- Derivative financial instruments 3,472 610 1,283 - - 5,365
Investments
- Debt and other fixed income financial
instruments
- available-for-sale 48,387 3,977 36,229 183,650 - 272,243
- held-to-maturity 171,798 562,940 2,533,287 192,421 - 3,460,446
- Equity and other non-fixed income
instruments
- available-for-sale - - - - 3,583 3,583
Loans and advances to banks 2,000,528 82,000 - - 15,911 2,098,439
Loans and advances to customers 517,984 125,253 345,240 3,013,179 - 4,001,656
Investments in equity-accounted investees - - - - 59,100 59,100
and subsidiaries
Other assets - - - - 224,482 224,482
2,791,110 801,204 3,040,929 3,535,343 513,705 10,682,291

Liabilities and Equity

Financial liabilities at fair value through profit

or loss 2,860 371 5,813 11,283 - 20,327
Amounts owed to banks 142,321 103,226 4,608 - - 250,155
Amounts owed to customers 7,735,082 1,184,350 264,949 89 - 9,184,470
Debt securities in issue - - 95,400 - - 95,400
Other liabilities - - - - 193,923 193,923
Derivatives designated for hedge accounting - - 616 20,033 - 20,649
Subordinated liabilities - - 120,000 111,591 - 231,591
Equity holders of the Bank - - - - 685,776 685,776
7,880,263 1,287,947 491,386 142,996 879,699 10,682,291
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 115

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

Banking Rule 07 transposing the provisions of the EBA Guidelines on Disclosures of Encumbered and Unencumbered Assets (EBA/
GL/2014/03) requires disclosure on asset encumbrance. The Group is in compliance with the contents thereof.

This disclosure provides details of available and unrestricted assets that could be used to support potential future funding and
collateral needs. An asset is considered as encumbered when it has been pledged as collateral against an existing liability, and as
a result is no longer available to the Group to secure funding, satisfy collateral needs or be sold to reduce the funding requirement.

This disclosure is limited to assets available for Central Bank refinancing and securities that are transferable and is not designed to
identify assets which would be available to meet the claims of creditors or to predict assets that would be available to creditors in
the event of a resolution or bankruptcy.

Asset Encumbrance
Carrying amount Fair value of Carrying amount Fair value of
of encumbered encumbered of unencumbered unencumbered
assets assets assets assets
€000 €000 €000 €000
The Group
As at 31 December 2017
Equity instruments - - 70,109 70,109
Debt securities 209,084 214,254 3,271,576 3,305,840
Loan and advances - - 7,835,019 -
Other assets - - 434,842 -
209,084 214,254 11,611,546 3,375,949

The Group
As at 30 September 2016
Equity instruments - - 83,317 83,317
Debt securities 187,360 187,360 3,731,344 3,663,690
Loan and advances - - 6,309,190 -
Other assets - - 411,640 -
187,360 187,360 10,535,491 3,747,007

The Bank
As at 31 December 2017
Equity instruments - - 69,134 69,134
Debt securities 209,084 214,254 3,271,576 3,305,840
Loan and advances - - 7,835,019 -
Other assets - - 382,501 -
209,084 214,254 11,558,230 3,374,974

The Bank
As at 30 September 2016
Equity instruments - - 82,179 82,179
Debt securities 187,360 187,360 3,731,344 3,663,690
Loan and advances - - 6,309,190 -
Other assets - - 372,218 -
187,360 187,360 10,494,931 3,745,869

The Group does not encumber any of the collateral received or any of its debt securities issued.

As at 31 December 2017 the Group and the Bank did not have any outstanding liabilities associated with encumbered assets and
collateral received.
 Bank of Valletta p.l.c.
116 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.3 Liquidity risk (continued)

Asset Encumbrance (continued)

The Group and the Bank undertake the following types of encumbrance:

(i) Pledging of debt securities against the provision of credit lines by the Central Bank of Malta; and
(ii) Pledging of balances held with the Central Bank of Malta and debt securities in favour of the Depositor Compensation Scheme.

39.4 Market risk

Market Risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. It arises in all areas of the
Group’s activities and is managed by a variety of different techniques as detailed below.

The objective of the Group is to manage and control market risk exposures in order to optimise return on risk while maintaining a
market profile consistent with the Bank’s status as a leading Bank in providing financial products and services.

The market risk appetite is articulated in the Treasury Management Policy. It is defined as the quantum and composition of market
risk that the Bank is currently exposed to and the direction in which the Bank desires to manage this risk. Market risk is managed
through limits set in the Treasury Management Policy. The Policy is reviewed by Treasury department in co-ordination with Risk
Management department and is approved by the Asset and Liability Management Committee (ALCO) and the Board of Directors.

39.4.1 Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates.

The Group is exposed to fair value interest rate risk arising from financial assets and liabilities with fixed interest rates and to cash flow
interest rate risk arising from financial assets and liabilities with floating interest rates. The Group is not directly exposed to interest rate risk on
investment in equity instruments. The Group uses interest rate swaps to hedge the interest rate risk of certain financial instruments.

The Group manages this risk by using sensitivity analysis using modified duration and interest rate repricing gaps.

For financial instruments held or issued, the Group has used techniques that measure the change in the fair value and cash flows of
the Group's financial instruments at the reporting date for hypothetical changes in the relevant market risk variables. The sensitivity
due to changes in the relevant risk variables is set out below. The amounts generated from the analysis are forward-looking estimates
of market risk assuming certain market conditions. Actual results in the future may differ materially from those projected results due
to the inherent uncertainty of global financial markets. The sensitivity analyses are for illustrative purposes only, as in practice market
rates rarely change in isolation and are likely to be interdependent.

The Bank makes use of a variety of measurement techniques including sensitivity analysis using Modified Duration and interest rate
risks on economic value and interest margin.

(i) Modified Duration

The Modified Duration is a measure of the price sensitivity to yields. By calculating the Modified Duration, the Bank estimates the
impact on Profit or Loss and Capital of changes in the market values of the securities in the treasury portfolio and of the interest rate
swaps entered into to hedge the interest rate risk of the treasury portfolio, in response to a parallel shift in yields of 100 basis points.
The Modified Duration does not represent a forecast of potential losses in the portfolio, but rather an analysis of how the market value
of the treasury portfolio may change in response to a change in interest rates.

In addition, the Bank calculates the Modified Duration on the unhedged fixed securities which are marked to market by major currencies.

As with most financial management tools, Modified Duration also has its limitations. The market value of a bond is dependent on
many variables apart from the duration calculation and rarely correlates perfectly with the duration number. With rates not moving in
parallel shifts and the yield curve constantly changing, duration can be used to determine how the market values of bonds may (but
not necessarily will) react.

2017 2016
The Group €000 €000

Modified Duration
Impact on Profit or Loss (578) (1,809)
Impact on Capital (3,656) (10,613)

The nominal amount of floating rate notes as at 31 December 2017 is €2,130.9 million (Sep 2016: €2,590.4 million).
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 117

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.4 Market risk (continued)

39.4.1 Interest rate risk (continued)

(ii) Interest rate repricing gap

The table below summarises the Group’s exposure to interest rate risk. Included in the table are Group assets and liabilities, including
derivative financial instruments which are principally used to reduce exposure to interest rate risk, categorised by repricing date.

The Group’s assets and liabilities are set to reprice as follows:

3 months 1 year or
or less less but
Up to 1 but over over Over 1
Month 1 month 3 months year Others Total
€000 €000 €000 €000 €000 €000
ASSETS

Balances with Central Bank of Malta,

treasury bills and cash 101,032 2,502 - - 56,150 159,684
Financial assets at fair value through profit
or loss
- Debt and other fixed income instruments 11,928 25,002 9,038 64,011 1,438 111,417
- Equity and other non- fixed income
instruments - - - - 64,811 64,811
- Loans and advances 142,573 - - - - 142,573
- Derivative financial instruments - - 42 - 7,448 7,490
Investments
- Debt and other fixed income financial
instruments
- available-for-sale - - - 139,328 - 139,328
- held-to-maturity 579,516 1,312,019 362,171 976,209 - 3,229,915
- Equity and other non-fixed income
instruments
- available-for-sale - - - - 5,298 5,298
Loans and advances to banks 3,065,869 2,817 12,001 - 350,696 3,431,383
Loans and advances to customers 4,015,638 574 15,612 130,208 - 4,162,032
Investments in equity-accounted
investees - - - - 109,461 109,461
Other assets - - - - 257,238 257,238
Total 2017 7,916,556 1,342,914 398,864 1,309,756 852,540 11,820,630
Total 2016 6,558,550 1,915,942 412,470 1,184,407 651,482 10,722,851

LIABILITIES and EQUITY

Financial liabilities at fair value through

profit or loss 936 2,114 4,312 - 4,595 11,957
Amounts owed to banks 79,259 40,474 - - 72,463 192,196
Amounts owed to customers 5,857,128 246,927 948,359 294,686 2,753,525 10,100,625
Debt securities in issue - - 55,400 40,000 - 95,400
Other liabilities - - - - 214,721 214,721
Derivatives designated for hedge accounting - 379 11,674 - - 12,053
Subordinated liabilities - - - 231,591 - 231,591
Equity holders of the Bank - - - - 962,087 962,087
Total 2017 5,937,323 289,894 1,019,745 566,277 4,007,391 11,820,630
Total 2016 4,995,655 464,369 1,181,766 617,595 3,463,466 10,722,851
Interest rate swaps - 2017 77,564 71,830 134,043 (283,437) -
Interest rate swaps - 2016 91,548 188,167 35,678 (315,394) -
Gap - 2017 2,056,797 1,124,850 (486,838) 460,042 -
Gap - 2016 1,654,849 1,637,542 (756,037) 254,794 -
Cumulative Gap - 2017 2,056,797 3,181,647 2,694,809 3,154,851 -
Cumulative Gap - 2016 1,654,849 3,292,391 2,536,354 2,791,148 -
 Bank of Valletta p.l.c.
118 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.4 Market risk (continued)

39.4.2 Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. The Board of Directors sets limits on the level of exposure by currency and in total, which levels are monitored daily.

The following table summarises the Group's exposure to foreign currency exchange rate risk at the reporting date. Included in the
table are the Group's assets and liabilities at carrying amounts, analysed into relevant currency groupings.

Other Total
The Group EUR USD GBP AUD Currencies
31 December 2017 €000 €000 €000 €000 €000 €000

Assets
Balances with Central Bank of Malta,
treasury bills and cash 157,059 1,089 933 86 517 159,684
Financial assets at fair value through profit or
loss
- Debt and other fixed income instruments 92,132 17,581 40 1,663 3 111,419
- Equity and other non-fixed income instruments 59,595 744 2,592 - 1,878 64,809
- Loans and advances 142,573 - - - - 142,573
- Derivative financial instruments 42 5,097 304 2,011 36 7,490
Investments
- available-for-sale 66,079 73,249 - - - 139,328
- held-to-maturity 2,037,921 697,554 231,473 184,414 78,553 3,229,915
- Equity and other non-fixed income
instruments
- available-for-sale - 5,298 - - - 5,298
Loans and advances to banks 3,040,077 89,554 90,147 19,336 192,269 3,431,383
Loans and advances to customers 4,104,307 38,036 18,726 - 963 4,162,032
Other assets 363,092 2,154 614 730 109 366,699

10,062,877 930,356 344,829 208,240 274,328 11,820,630

Liabilities and Equity
Financial liabilities at fair value through
profit or loss 6,976 3,099 526 637 719 11,957
Amounts owed to banks 50,897 126,224 7,919 1,660 5,496 192,196
Amounts owed to customers 8,742,634 744,239 330,133 61,528 222,091 10,100,625
Debt securities in issue 95,400 - - - - 95,400
Other liabilities 198,467 9,113 4,130 1,392 1,619 214,721
Derivatives designated for hedge accounting 380 11,761 (64) (24) - 12,053
Subordinated liabilities 231,591 - - - - 231,591
Equity 965,761 (4,094) 21,667 736 (21,983) 962,087

10,292,106 890,342 364,311 65,929 207,942 11,820,630

Net on balance sheet financial position 40,014 (19,482) 142,311 66,386

Notional amount of derivative instruments (42,667) (497) (141,198) (43,230)
Net open position (2,653) (19,979) 1,113 23,156
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 119

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.4 Market risk (continued)

39.4.2 Currency risk (continued)

Other
The Group EUR USD GBP AUD Currencies Total
30 September 2016 €000 €000 €000 €000 €000 €000

Assets
Balances with Central Bank of Malta, treasury
bills and cash 168,063 663 971 851 502 171,050
Financial assets at fair value through profit or loss
- Debt and other fixed income instruments 146,312 30,172 3,625 5,903 3 186,015
- Equity and other non-fixed income instruments 67,640 4,860 3,090 - 4,144 79,734
Loans and advances 121,316 - - - - 121,316
- Derivative financial instruments 676 1,707 2,140 370 472 5,365
- Investments
- available-for-sale 181,385 89,784 772 302 - 272,243
- held-to-maturity 1,916,235 1,004,014 243,621 186,601 109,975 3,460,446
- Equity and other non-fixed income
instruments
- available-for-sale - 3,583 - - - 3,583
Loans and advances to banks 1,839,274 83,533 87,787 8,435 79,410 2,098,439
Loans and advances to customers 31,179 28,753 - 1,070 4,001,656
3,940,654
Other assets 316,059 3,771 1,651 1,031 492 323,004

8,697,614 1,253,266 372,410 203,493 196,068 10,722,851

Liabilities and Equity
Financial liabilities at fair value through profit
or loss 16,595 1,677 1,572 427 56 20,327
Amounts owed to banks 95,466 143,723 5,978 1,534 3,454 250,155
Amounts owed to customers 7,776,994 864,603 328,029 75,648 135,773 9,181,047
Debt securities in issue 95,400 - - - - 95,400
Other liabilities 181,654 8,039 996 1,045 2,787 194,521
Derivatives designated for hedge accounting 616 20,131 (73) (25) - 20,649
Subordinated liabilities 231,591 - - - - 231,591
Equity 702,831 22,323 11,017 14,549 (21,559) 729,161

9,101,147 1,060,496 347,519 93,178 120,511 10,722,851

Net on balance sheet financial position 192,770 24,891 110,315 75,557

Notional amount of derivative instruments (216,983) (31,032) (125,136) (52,944)
Net open position (24,213) (6,141) (14,821) 22,613
 Bank of Valletta p.l.c.
120 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.4 Market risk (continued)

39.4.3 Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the
individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

The Group is exposed to equity price risks arising from the holding of equity instruments classified either as available for sale or at
fair value through profit or loss.

The carrying amounts of financial instruments at the reporting date which could potentially subject the Group to equity price risk are
disclosed in the notes to the financial statements.

This risk is monitored and managed by the Risk management function of the Bank, as disclosed in more detail above.

39.5 Transferred financial assets that are not derecognised in their entirety
The Group and the Bank
2017 2016
€000 €000
Debt securities classified as
- held-to-maturity 37,655 103,226

Amounts owed to banks 37,655 103,226

These transactions are covered by the TBMA/ISMA Global Repurchase Master Agreement (“the Agreement”) and involve the sale
of financial assets with a simultaneous agreement to repurchase them at a pre-determined price at a future date. The securities
sold comprise financial assets at fair value through profit and loss and investment securities. The counterparty’s liability is included
in amounts owed to banks. The Group and the Bank continue to recognise the transferred assets since all the risks and rewards of
the assets will be substantially retained in a manner that does not result in the transferred assets being derecognised for accounting
purposes.
 
Each party to a transaction is subject to the events of default listed in the Agreement. In the event that any of the events of default is/
are triggered, transactions are immediately terminated. Consequently, performance of the respective obligations of the parties with
respect to the delivery of securities, the payment of the repurchase prices for any equivalent securities and the repayment of any
cash margin shall become due and payable.

39.6 Fair value of financial instruments

The Group’s accounting policy for determining the fair value of financial instruments is described in notes 1.3, 1.19 and 1.24 to these
Financial Statements.

For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the
inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety,
which are described as follows:
 
- Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date;
- Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either
directly or indirectly. This category includes instruments valued using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation
techniques in which all significant inputs are directly or indirectly observable from market data.
- Level 3 inputs are unobservable inputs for the asset or liability. This category includes all instruments for which the valuation
technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the
instruments' valuation. This category includes instruments that are valued based on quoted prices for similar instruments' for
which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
 
For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group and the Bank
determine when transfers are deemed to have occurred between Levels in the hierarchy at the end of each reporting period.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 121

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.6 Fair value of financial instruments (continued)

Bases of valuing financial assets and liabilities measured at fair value

Fair value measurement

Level 1 Level 2 Level 3 Total
€000 €000 €000 €000
The Group
At 31 December 2017
Assets
Financial assets at fair value through profit or loss
- debt and other fixed income instruments 99,015 12,402 - 111,417
- equity and other non-fixed income instruments 36,501 23,193 5,117 64,811
- loans and advances - 142,573 - 142,573
- derivative financial instruments - 7,490 - 7,490

Investments
Debt and other fixed income instruments
- available-for-sale 66,079 73,249 - 139,328
Equity and other non-fixed income instruments
- available-for-sale - - 5,298 5,298
201,595 258,907 10,415 470,917

Liabilities
Financial liabilities at fair value through profit or loss - 11,957 - 11,957
Derivatives designated for hedge accouting - 12,053 - 12,053
- 24,010 - 24,010

The Group
At 30 September 2016
Assets
Financial assets at fair value through profit or loss
- debt and other fixed income instruments 173,065 12,950 - 186,015
- equity and other non-fixed income instruments 50,294 23,762 5,678 79,734
- loans and advances - 121,316 - 121,316
- derivative financial instruments - 5,365 - 5,365

Investments
Debt and other fixed income instruments
- available-for-sale 179,461 92,782 - 272,243
Equity and other non-fixed income instruments
- available-for-sale - - 3,583 3,583
402,820 256,175 9,261 668,256

Liabilities
Financial liabilities at fair value through profit or loss - 20,327 - 20,327
Derivatives designated for hedge accounting - 20,649 - 20,649
- 40,976 - 40,976

During the period under review financial assets at fair value through profit or loss amounting to €0.8 million were transferred from
Level 2 to Level 1 (2016: Level 1 to level 2 €14.1 million and Level 3 to Level 2 €1.1 million). The transfer from Level 1 to Level 2 was
due to securities which had observable inputs as at the same date. During the same period no change in levels was made in financial
assets classified as available-for-sale.
 Bank of Valletta p.l.c.
122 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.6 Fair value of financial instruments (continued)

Control Framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent
of the risk taker and that they are appropriately performed and reviewed by competent personnel. To this end, the determination of
fair values is a process which is performed by Financial Markets and Investments and reviewed by Finance. Finance establishes the
accounting policies and, in conjunction with Financial Markets and Investments, it establishes the procedures governing valuation, and
is responsible for ensuring that they comply with all relevant accounting standards. The valuation techniques and procedures applied
are subject to a process of due diligence, which process was duly approved by the Board and the Audit Committee and documented
accordingly.

For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs
to valuation techniques, independent price determination or validation is utilised, to the extent practicable. In inactive markets, direct
observation of a traded price may not be possible. In these circumstances, the Bank sources alternative market information to validate
the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable. The
factors which are mainly considered are the following:

- the extent to which prices may be expected to represent genuine traded or tradable prices
- the degree of similarity between financial instruments
- the degree of consistency between different sources
- the process followed by the pricing provider to derive the data
- the elapsed time between the date to which the market data relates and the end of the reporting period;
- the manner in which the data was sourced.

In determining the fair values for financial instruments measured at fair value the credit risk adjustment for the counterparty, the Bank
or both, as the case may be, is deemed to be immaterial and hence no adjustment to the fair value of financial instruments at fair value
through profit or loss was effected.

The Group calculates the credit risk adjustment by applying the probability of default of the counterparty to the expected positive
exposure to the counterparty, and multiplying the result by the loss expected in the event of default. The calculation is performed over
the life of the potential exposure.

Financial instruments at fair value through profit or loss and financial assets which are held for investment purposes as available-for-sale
are carried at their fair value.

(i) Investments - Debt and other fixed income instruments held to maturity
This category of asset is carried at amortised cost. Their fair value is disclosed separately in the respective note to the financial statements.

(ii) Loans and advances to customers

Loans and advances to customers are the largest financial asset held by the Group, and are reported net of allowances to reflect the
estimated recoverable amounts. The carrying amount of loans and advances to customers is a reasonable approximation of fair value
because these are re-priced to take into account changes in both benchmark rate and credit spreads. Their fair value measurement is
a Level 2 input.

(iii) Loans and advances to banks, balances with Central Bank and Treasury Bills
The majority of these assets reprice or mature in less than 1 year. Hence their fair value is not deemed to differ materially from their
carrying amount at the respective reporting dates.

(iv) Amounts owed to banks and customers

These liabilities are carried at amortised cost. The majority of these liabilities reprice or mature in less than 1 year. Hence their fair value is
not deemed to differ materially from their carrying amount at the respective reporting dates. Their fair value measurement is a Level 2 input.

(v) Debt securities in issue and subordinated liabilities

These liabilities are carried at amortised cost. Their fair value is disclosed separately in the respective notes to the financial statements.

(vi) Other financial liabilities

The fair value of other financial liabilities is not deemed to differ materially from their carrying amount at the respective reporting dates.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 123

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.6 Fair value of financial instruments (continued)

Bases of valuing financial assets and liabilities not measured at fair value

The following table provides an analysis of financial instruments that are not measured at fair value subsequent to initial recognition:

Fair value measurement Carrying

Level 1 Level 2 Level 3 Total Amount
€000 €000 €000 €000 €000
2017
Financial assets
Held-to-maturity investments 2,643,695 625,651 - 3,269,346 3,229,915

Financial liabilities
Debt securities in issue 97,454 - - 97,454 95,400
Subordinated liabilities 235,328 - - 235,328 231,591
332,782 - - 332,782 326,991

Fair value measurement Carrying

Level 1 Level 2 Level 3 Total Amount
€000 €000 €000 €000 €000
2016
Financial assets
Held-to-maturity investments 2,857,554 653,881 - 3,511,435 3,460,446

Financial liabilities
Debt securities in issue 99,000 - - 99,000 95,400
Subordinated liabilities 235,500 - - 235,500 231,591
334,500 - - 334,500 326,991
The reconciliation of Level 3 fair value measurements of financial instruments is disclosed below.

Fair value through Available-for-sale

profit or loss investments
Debt and Equity and Debt and Equity and Total
other fixed other non- other fixed other non-
income fixed income income fixed income
instruments instruments instruments instruments
€000 €000 €000 €000 €000
2017
Opening balance - 5,678 - 3,583 9,261
- in profit or loss - (7) - 1,715 1,708
Purchases - 3,088 - - 3,088
Sales - (3,642) - - (3,642)
Closing balance - 5,117 - 5,298 10,415
Fair value through Available-for-sale
profit or loss investments
Debt and Equity and Debt and Equity and Total
other fixed other non- other fixed other non-
income fixed income income fixed income
instruments instruments instruments instruments
€000 €000 €000 €000 €000
2016
Opening balance - 5,319 - - 5,319
- in profit or loss
Purchases - (12) - - (12)
Transfers - 1,550 - - 1,550
Sales - (1,104) - - (1,104)
Consideration - (75) - - (75)
Closing balance - - - 3,583 3,583
- 5,678 - 3,583 9,261
 Bank of Valletta p.l.c.
124 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)

39.6 Fair value of financial instruments (continued)

The unrealised gains/losses as of 31 December 2017 and 30 September 2016 were immaterial.

Consideration in Equity and other non-fixed income instruments refer to preferred stock in Visa Inc. convertible into ordinary shares.

The instruments classified within Level 3 comprise externally managed funds. Approximately 50% of the carrying amount represents
funds with underlying investments which mainly comprise properties with the remaining 50% representing a European fund which
invests in projects related to energy, climate change and infrastructure having 65% of its assets focused on new projects, with the
remaining 35% focused on replacement, modernisation and capacity enhancement. The Bank has determined that the reported
net asset value of these funds represents their fair value at the end of the reporting period. For one of the property funds, the Bank
has adjusted the reported net asset value to take cognisance of factors which resulted in a lower fair value for the fund; in respect
of another property fund, the fair value of the Bank’s interest was determined to be nil in view of the fact that the value of the Fund’s
reported liabilities approximated the value of its reported assets. The net asset value of these funds was determined using statements
or other information provided by the fund managers. The Bank considers that such valuations may rely significantly on the judgments
and estimates made by the fund managers and given the level of subjectivity involved, these are included within level 3.

39.7 Capital risk management

The Group’s capital management approach ensures a sufficient level of capitalisation to manage the risk exposures whilst supporting
business growth and providing adequate returns to the shareholders. Risk capital management does not in any way substitute risk
mitigation measures.  It is vital that the structure of limits and thresholds should be able to prevent concentrations of risk from building
up in such a way as to compromise a significant proportion of the Group’s capital resources.

On 1 January 2014 the Capital Requirements Directive (CRD) and the Capital Requirements Regulations (CRR) came into effect,
constituting the European implementation of the Basel capital and liquidity agreement of 2010. The Group has made the necessary
changes in order to ensure that it is compliant with the Pillar I capital requirements set by the CRR. Other material risks are also
allocated capital as part of the Internal Capital Adequacy Assessment Process (ICAAP) embedded in the Pillar II process. This
process helps to measure with greater risk sensitivity the amount of regulatory capital which the Group requires to cover risks
assumed in the course of its business, including risks not covered in Pillar I. The Board submitted the latest ICAAP capital document
to the JST in April 2017.

Capital management is under the direct control of the Asset and Liability Committee (ALCO). During the financial year, ALCO has
monitored the adequacy of the Group’s capital and gave strategic direction on the most efficient use of capital.

During the period under review and during the comparative period, there were no reported breaches in respect of the externally
imposed capital requirements. The Group uses the Standardised Approach for credit risk, the Basic Indicator Approach for
operational risk and the Base Method with respect to the Group's foreign exchange risk in line with CRR requirements.

The following table shows the components and basis of calculation of the Group's and the Bank's own funds.
The Group The Bank
€000 €000
Own funds

Tier 1
- Paid up capital instruments 525,000 525,000
- Share premium 45,427 45,427
- Retained earnings* 245,861 248,526
- Accumulated other comprehensive income 3,931 3,850
- Other reserves 29,263 29,232
- Funds for general banking risk 4,713 4,713
- Deductions:
Other intangible assets (28,453) (28,453)
Other transitional adjustments (6,639) (6,617)
Additional adjustments due to Article 3 CRR (44,634) (44,634)

Total Tier 1 Capital 774,469 777,044

*Retained earnings include current period profit which is subject to regulatory approval.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 125

Notes to the financial statements 31 December 2017 (continued)

39. FINANCIAL RISK MANAGEMENT (continued)
The Group The Bank
39.7 Capital risk management (continued) €000 €000

Tier 2
- Capital instruments and subordinated loans 157,016 157,016

Total Own Funds 931,485 934,060

Further information on the Group's and the Bank's capital adequacy ratios may be found in section 3.2 in the Capital and Risk
Management report, which are subject to internal verification as set out in paragraph 1.1 of that report.

39.8 Offsetting financial assets and financial liabilities

 
The derivative financial assets with a positive carrying amount and the derivative financial liabilities with a negative carrying amount
do not meet the offsetting criteria in IAS 32 and hence they are presented separately in the Statement of Financial Position. These
instruments are subject to the ISDA Master Agreement. The ISDA Master Agreement provides, amongst others, for the netting of
termination values for purposes of determining a single lump-sum termination amount upon the insolvency of a counterparty. By virtue
of the Set-off and Netting on Insolvency Act, 2003 (Chapter 459, Laws of Malta), the close-out netting provisions contained in the
ISDA Master Agreement are valid and enforceable under Maltese law. The set-off provisions under the ISDA Master Agreement can
be triggered where an event of default, credit event upon merger or any termination event has been declared.

The Bank also has in place credit support annexes “CSAs” with a number of its financial counterparties for purposes of the
collateralisation of exposures between the Bank and its counterparties. The CSA is a schedule to the ISDA Master Agreement. By
virtue of such CSAs, a party to a derivative that has an exposure to its counterpart, will post collateral to its counterpart to cover such
exposure by way of an outright title transfer of such collateral. All CSAs that the Bank has in place are of a two-way nature.

In the case of non-financial counterparties, the Bank enters into pledging collateral arrangements with the counterparties, in favour of
the Bank. Such pledging agreements are of a one-way nature, in favour of the Bank.

The Group
2017 2016
€000 €000
Derivative financial assets
Gross amounts of recognised financial assets 7,490 5,365
Net amounts of financial assets presented in the statement of financial position 7,490 5,365
Related amounts not set off in the statement of financial position:
Financial instruments (7,490) (5,365)
Net amount - -

Financial liabilities subject to offsetting, enforcable master netting arrangements and similar agreements

Derivative financial liabilities

Gross amounts of recognised financial liabilities 24,010 40,976
Net amounts of financial liabilities presented in the statement of financial position 24,010 40,976
Related amounts not set off in the statement of financial position:
Financial instruments (7,490) (5,365)
Financial collateral pledged (27,325) (40,380)
Net amount (10,805) (4,769)

40. ASSETS HELD FOR REALISATION

The assets held for realisation mainly comprise immovable properties that were held as collateral for outstanding loans, which
properties were taken into the possession of the Bank following defaults by the counterparty. The Bank’s policy is to dispose of such
assets within a reasonable timeframe from the date of classification, unless events or circumstances which are beyond the Bank’s
control extend the period to complete the sale. Such assets meet the criteria for classification as non-current assets held for sale in
accordance with IFRS 5. Assets not disposed of during the reasonable timeframe are reclassified to PPE.

During the period ended 31 December 2017, €7.5m in Assets held for realisation were reclassified to Property and equipment.
 Bank of Valletta p.l.c.
126 Annual Report & Financial Statements 2017

Notes to the financial statements 31 December 2017 (continued)

41. TRUST ACTIVITIES

The Group acts as trustee and provides trust activities that result in the holding and placing of assets on behalf of third parties. Trust
assets are not assets of the Group and therefore they are not included in its Statement of Financial Position.

Income derived from trust assets is excluded from revenue. Fees arising from the rendering of trustee services are recognised in the
Group's profit or loss.

At 31 December 2017, the total assets held by the Group on behalf of its customers amounted to €173.8 million (2016: €267.0
million).

Details on significant claims related to trusts are given in Note 33.

42. REGULATORY COMPENSATION SCHEMES

As at 31 December 2017, no balances with Central Bank of Malta have been pledged in favour of the Depositor Compensation
Scheme (refer to note 16).

In accordance with the provisions of the Investor Compensation Scheme Regulations, 2003, issued under the Investment Services
Act, 1994, licence holders are required to transfer a variable contribution to an Investor Compensation Scheme Reserve and place
the equivalent amount with a bank, pledged in favour of the Scheme. Alternatively licence holders can elect to pay the amount of
variable contribution directly to the Scheme.

Bank of Valletta p.l.c. has elected to pay the amount of the variable contribution directly to the Scheme.

Regulatory contributions amounting to €8.3 million (2016: €4.6 million), included with administrative expenses, reflect the Group's
annual obligations arising from the recent EU Directives on Deposit Guarantee Scheme and Single Resolution Fund.

43. REGISTERED OFFICE

The registered and principal office of the Bank is 58, Zachary Street, Valletta VLT1130, Malta.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 127

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c.

1 Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of Bank of Valletta p.l.c. (the “Bank” or the “Company”) and of the Group of which the
Company is the parent, which comprise the statements of financial position as at 31 December 2017, the statements of profit or loss,
profit or loss and other comprehensive income, changes in equity and cash flows for the period then ended, and notes, comprising
significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements:

(a) give a true and fair view of the financial position of the Bank and the Group as at 31 December 2017, and of their financial
performance and their cash flows for the period then ended in accordance with International Financial Reporting Standards
(“IFRS”) as adopted by the EU; and

(b) have been properly prepared in accordance with the provisions of the Companies Act, 1995 (Chapter 386, Laws of Malta) (the
“Act”) and the Banking Act, 1994 (Chapter 371, Laws of Malta) (the “Banking Act”) and, additionally, specifically in relation to
those of the Group, with the requirements of article 4 of the Regulation on the application of IFRS as adopted by the EU.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards
are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. During the
course of our audit, we maintained our independence from the Company and the Group in accordance with the International Ethics
Standards Board for Accountants’ Code of Ethics for Professional Accountants, together with the ethical requirements that are
relevant to our audit of the financial statements in accordance with the Accountancy Profession (Code of Ethics for Warrant Holders)
Directive issued in terms of the Accountancy Profession Act (Chapter 281, Laws of Malta) (“APA”), and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period (selected from those communicated to the audit committee), and include a description of the most
significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the
greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.

We summarise below the key audit matters, together with our response by way of the audit procedures we performed to address
that matter in our audit, and key observations arising with respect to such risks of material misstatement.

Impairment of loans and advances to corporate customers

Accounting policy notes 1.3.3 and 1.24.1 to the financial statements and notes 8, 17and 39.2 for further disclosures.

Loans and advances to corporate clients (Bank and Group: €2,333 million) included within the loans and advances to customers at
amortised cost caption

The Bank’s corporate portfolio is inherently more complex than its retail portfolio and therefore poses a more difficult task for the
directors to identify an impairment and the extent to which a loss should be recognised.

A loan or an advance to a corporate customer may be impaired and impairment losses (also referred to as ‘impairment allowances’
in the financial statements) are incurred by the Bank on the occurrence of a loss event that impacts the estimated future cash flows
of that loan or advance. The Bank’s process of determining (a) whether a loss event has occurred; and (b) the magnitude of the
impairment loss incurred, involves significant judgment.

Our response

We have tested the design, implementation and operating effectiveness of controls established by the Bank in determining specific
impairment calculations for the corporate loans and advances portfolio. These included:
— the controls over the sanctioning of facilities within established authorisation limits in accordance with the Bank’s credit policy;
— the automated control over downgrade of loan credit ratings upon delinquency;
— the monitoring control performed related to delinquent facilities maintained across the Bank; and
— the quarterly review of specific impairment losses recognized, performed by the Bank’s provisions’ committee.
 Bank of Valletta p.l.c.
128 Annual Report & Financial Statements 2017

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c. (continued)

We performed detailed credit reviews for a sample of exposures selected qualitatively on the basis of risk. In performing these
reviews, we:
— considered relevant internal information available used in the Bank’s assessment and, where available, external data in relation
to those exposures;
— evaluated whether those exposures were graded in line with the Bank’s credit policy;
— specifically in relation to impaired exposures, assessed impairment calculations by evaluating the appropriateness of provisioning
methodologies and policies, and, where applicable, evaluated the Bank’s extendible value of collateral by reference to specific
external data sources, where relevant; and
— evaluated the appropriateness of key assumptions used by the Bank’s provisions committee in determining the need for
additional provisions in the case of outliers.

We have no key observations to report, specific to this matter.

Significant claims

Accounting policy notes 1.14 and 1.24.7 to the financial statements and note 33 for further disclosures.

Significant claims disclosure included within the contingent liabilities and significant claims note

The Bank is exposed to various litigation and claims, some of which may potentially have a material impact on the financial statements
as a whole, and which are subject to varying degrees of complexity. More specifically, the directors have assessed the potential
financial impact of significant claims disclosed in Note 33.

The significant judgement involved is in determining whether an obligation is a present obligation or a possible one. That assessment
determines whether such obligation is recognised as a provision (on the face of the statement of financial position) or as a contingent
liability (disclosed in notes to the financial statements). The directors base their judgement on advice obtained from in-house and/
or external legal counsel.

When a liability is not recognised for a possible significant outflow, but there is more than a remote likelihood of an adverse outcome,
the related disclosure is key to understanding the risks and potential effects on the Group and the Bank.

Our response

We inspected the Bank’s litigations and claims report together with relevant legal documentation for significant claims as disclosed
in Note 33.

We considered the assessment made by the Bank’s internal legal counsel, the CEO, Chief Officer Finance, Chief Risk Officer and
the Chairman of the Board on the (i) status of such claims as well the (ii) action being taken by the Bank in relation to those claims.

Specifically for the significant claims disclosed in Note 33, we were directly provided with written opinions by and held discussions
with the Bank’s external legal counsel, and evaluated their conclusion. Additionally, we independently assessed the estimated values
of the provisions based on our enquiries of legal counsel.

Based on these procedures we evaluated the Bank’s view on the absence of a present obligation that would otherwise call for a
provision in the financial statements.

We assessed whether disclosures, in relation to the significant claims adequately disclose the potential liabilities and the significant
uncertainties that exist.

We have no key observations to report, specific to this matter.

IT Access Controls

Section 8.3 of the Capital and risk management report contained in the Annual Report (unaudited).

Information security risk disclosures included within the Capital and risk management report

A significant component of the General IT Controls environment is access controls. More specifically, ensuring authorised access to
the Bank’s applications, operating systems and data in financial reporting processes is appropriate.

The conduct of security reviews on systems that provide assurance on an on-going basis on the user access configuration and
systems security is being addressed by the Bank concurrently with other projects. The Bank’s risk management function is performing
reviews and looking at the risk register and policies but is still embedding its information security and user access reviews.

The above reviews may be impacted, at the present time, as resources are engaged in its core banking transformation programme,
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 129

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c. (continued)

the implementation of system changes in view of a new accounting standard, and numerous other projects that are imperative to
meet current operational and regulatory requirements.

As part of our audit strategy, we place reliance on a number of IT systems supporting the Bank’s operations. However, our ability
to rely on fully or partially automated controls becomes impaired when deficiencies in access controls over these systems are not
mitigated.

Our response

We tested the design, implementation and operating effectiveness of the following access controls for the systems relied upon for
financial reporting:
— creation, modification and revocation of user access rights;
— systems administrator rights;
— adherence to the Bank’s password complexity policy; and
— access to migrate application development.

Where the above tests were inconclusive, we conducted an additional retrospective review, to evaluate whether:
— system access assigned to terminated employees was used prior to access rights being revoked; and
— generic elevated system privileges were used by unauthorised personnel.

We have no key observations to report, specific to this matter.

Other matter – scope of our audit: disclosure of IFRS 9 effect

The Group is adopting IFRS 9 Financial Instruments from 1 January 2018 and has included an estimate of the financial impact
of the change in accounting standard in accordance with IAS 8 Changes in Accounting Estimates and Errors as set out in note
1.1.11.5. This disclosure notes that the estimate has been prepared under an interim control environment with models that continue
to undergo validation. While further testing of the financial impact will be performed as part of our 2018 year-end audit, we have
performed sufficient audit procedures for the purposes of assessing the disclosures made in accordance with IAS 8. Specifically we
have:
• Considered the appropriateness of key technical decisions, judgements, assumptions and elections made in determining the estimate;
• Considered key classification and measurement decisions, including business model assessments and solely payment of
principal and interest outcomes;
• Involved credit risk modelling and economics specialists in the consideration of credit risk modelling decisions and
macroeconomic variables, including forward economic guidance and generation of multiple economic scenarios, for a sample
of models used in determining the estimate; and
• Considered interim controls and governance processes related to the calculation and approval of the estimated transitional impact.

Other information

The directors are responsible for the other information which comprises:

— the Contents and General information;

— the Board of Directors & Group Company Secretary;
— the Chairman’s Statement;
— the CEO Review;
— the Corporate Responsibility;
— the Directors’ report;
— the Capital and risk management report;
— the Corporate governance statement of compliance;
— the Remuneration report;
— the Nominations report;
— the Group’s five year summary; and
— the Group Financial Highlights in US dollars,

but does not include the financial statements and our auditors’ report thereon.

Our opinion on the financial statements does not cover the other information and, other than in the case of the Directors’ Report on which
we report separately below in our ‘Opinion on the Directors’ Report’, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information, and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
 Bank of Valletta p.l.c.
130 Annual Report & Financial Statements 2017

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c. (continued)

Responsibilities of the directors for the financial statements

The directors are responsible for the preparation of financial statements that (a) give a true and fair view in accordance with IFRS as
adopted by the EU, and (b) are properly prepared in accordance with the provisions of the Act and the Banking Act, and, additionally,
specifically in relation to those of the Group, with the requirements of article 4 of the Regulation on the application of IFRS as adopted
by the EU. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Company’s and the Group’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the directors either intend to liquidate the Company and/or the Group or to cease operations, or have no realistic alternative
but to do so.

The directors are responsible for overseeing the financial reporting process.

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud, or error, and to issue an auditors’ report that includes our opinion. ‘Reasonable assurance’ is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout
the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Consider the extent of compliance with those laws and regulations that directly affect the financial statements, as part of our
procedures on the related financial statement items. For the remaining laws and regulations, we make enquiries of directors
and other management, and inspect correspondence with the regulatory authority, as well as legal correspondence. As
with fraud, there remains a higher risk of non-detection of other irregularities (whether or not these relate to an area of law directly
related to the financial statements), as these may likewise involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal controls.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s and the Group’s
internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the directors.

• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Company’s and the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Company and/or the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the audit committee regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 131

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c. (continued)

Auditors’ responsibilities for the audit of the financial statements (continued)

We also provide the audit committee with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.

From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit
of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’
report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine
that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.

2 Opinion on the Directors’ Report

The directors are responsible for preparing a directors’ report in accordance with the provisions of article 177 of the Act and other
applicable legal requirements, and is to include a statement that the Company is a going concern with supporting assumptions or
qualifications as necessary, as required by Listing Rule 5.62 issued by the Listing Authority in Malta.

We are required to consider whether the information given in the directors’ report for the accounting period for which the financial
statements are prepared is consistent with those financial statements; and, if we are of the opinion that it is not, we shall state that
fact in our report. We have nothing to report in this regard.

Pursuant to article 179(3) of the Act, other than for the non-financial information that is exclusively required to be disclosed by
paragraph 8 of the Sixth Schedule of the Act with respect to the Bank, and paragraph 11 of that Schedule with respect to the Group
(and on which we report separately below in our ‘Report on Other Legal and Regulatory Requirements’), we are also required to:

• express an opinion on whether the directors’ report has been prepared in accordance with the applicable legal requirements; and

• state whether, in the light of the knowledge and understanding of the entity and its environment obtained in the course of our
audit of the financial statements, we have identified material misstatements in the directors’ report, giving an indication of the
nature of any such misstatements.

Pursuant to Listing Rule 5.62 of the Listing Rules issued by the Listing Authority in Malta, we are required to review the directors’
statement in relation to going concern.

In such regards:

• in our opinion, the directors’ report has been prepared in accordance with the applicable legal requirements;

• we have not identified material misstatements in the directors’ report; and

• we have nothing to report in relation to the statement on going concern.

 Bank of Valletta p.l.c.
132 Annual Report & Financial Statements 2017

Independent auditors’ report to the Shareholders of Bank of Valletta p.l.c. (continued)

3 Report on Other Legal and Regulatory Requirements

Matters on which we are required to report by the Act, specific to public-interest entities

Pursuant to article 179B(1) of the Act, we report as under matters not already reported upon in our ‘Report on the Audit of the
Financial Statements’:

• we were first appointed as auditors by the shareholders on 19 June 2015, and subsequently reappointed at the Company’s
general meetings for each financial period thereafter. The period of total uninterrupted engagement is three financial periods;

• our opinion on our audit of the financial statements is consistent with the additional report to the audit committee required to
be issued by the Audit Regulation (as referred to in the Act); and

• we have not provided any of the prohibited services as set out in the APA.

Matters on which we are required to report by the Act, specific to large undertakings which are public-interest entities
and public-interest entities which are parent undertakings of a large group that (individually and on a consolidated basis,
respectively) exceed the criterion of an average number of five hundred employees during the financial year

Pursuant to article 179(3) of the Act, we report as under matters not already reported upon in our ‘Opinion on the Directors’ Report:

The Directors’ Report contains the information required by paragraph 8 of the Sixth Schedule, with respect to the Bank and
paragraph 11 of that Schedule with respect to the Group.

Matters on which we are required to report by the Banking Act and by exception by the Act

Pursuant to article 31(3)(a), (b) and (c) of the Banking Act, in our opinion:

• we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the
purpose of our audit;

• proper books of account have been kept by the Bank so far as appears from our examination thereof; and

• the Bank’s financial statements are in agreement with the books of account.

Furthermore, we have nothing to report in respect of the above matters, where the Act requires us to report to you by exception
pursuant to articles 179 (10) and (11).

Pursuant to article 31(3)(d) of the Banking Act, in our opinion and to the best of our knowledge and belief and, on the basis of the
explanations given to us, the financial statements give the information required by law in force in the manner so required.

The Principals authorised to sign on behalf of KPMG on the audit resulting in this independent auditors’ report are Noel Mizzi and
Jonathan Bingham.

Noel Mizzi Jonathan Bingham

Partner, for and on behalf of Partner, for and on behalf of
KPMG KPMG LLP
Registered Auditors, Chartered Accountants,
Portico Building, 15 Canada Square,
Marina Street, Canary Wharf,
Pietà PTA 9044, London E14 5GL,
Malta United Kingdom

23 March 2018
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 133

The Group’s five year summary - extracted from the respective audited
financial statements
A. STATEMENTS OF PROFIT OR LOSS

For the financials years
2017* 2016 2015 2014 2013
15 months 12 months 12 months 12 months 12 months
to Dec 2017 to Sep 2016 to Sep 2015 to Sep 2014 to Sep 2013
€000 €000 €000 €000 €000

Interest and similar income 259,194 214,258 215,612 212,925 222,446

Interest expense (76,247) (65,429) (70,834) (86,922) (91,432)

Net interest income 182,947 148,829 144,778 126,003 131,014

Other operating income 117,526 101,756 102,093 83,802 87,113
Gain on Visa transaction - 27,511 - - -
Other operating charges (151,251) (112,778) (108,032) (93,499) (89,138)
Net impairment losses 6,227 (23,142) (32,710) (19,431) (25,595)
Share of results of equity-accounted investees 19,287 3,730 11,786 7,227 12,384

Profit before tax 174,736 145,906 117,915 104,102 115,778

Income tax expense (55,238) (50,708) (37,971) (34,718) (36,305)
Profit for the period 119,498 95,198 79,944 69,384 79,473

Attributable to:
Equity holders of the Bank 119,498 94,742 79,378 68,945 79,055
Non-controlling interest - 456 566 439 418
119,498 95,198 79,944 69,384 79,473
Earnings per share 27c1 21c6 18c1 15c7 18c0

The earnings per share figures have been adjusted retrospectively to reflect the increase in the number of ordinary shares following
capitalisation of retained earnings and a bonus issue which occurred on 16 January 2017 and a rights issue which occurred on 31
December 2017.

*Financial year 2017 includes a fifteen month period from 1 October 2016 to 31 December 2017
 Bank of Valletta p.l.c.
134 Annual Report & Financial Statements 2017

The Group’s five year summary - extracted from the respective audited
financial statements (continued)

B. STATEMENTS OF FINANCIAL POSITION

2017 2016 2015 2014 2013
€000 €000 €000 €000 €000
ASSETS
Balances with Central Bank of Malta, treasury bills and cash 159,684 171,050 126,652 130,966 194,587
Investments and financial assets at fair value through
profit or loss 3,700,832 4,128,702 3,793,827 2,950,011 2,247,351
Loans and advances to banks 3,431,383 2,098,439 1,656,346 1,045,988 860,957
Loans and advances to customers 4,162,032 4,001,656 4,001,839 3,861,532 3,667,739
Investments in equity-accounted investees 109,461 97,041 96,904 88,553 84,880
Property and equipment 133,675 102,846 102,523 99,759 91,618
Current tax 12,034 16,061 965 - -
Deferred tax 60,217 67,188 86,654 78,550 70,205
Assets held for realisation 5,972 11,973 11,601 9,755 10,361
Other assets 5,955 4,818 2,990 7,659 5,045
Prepayments and accrued income 39,385 23,077 21,661 24,018 25,215
Total Assets 11,820,630 10,722,851 9,901,962 8,296,791 7,257,958

LIABILITIES
Financial liabilities at fair value through profit or loss and
derivatives held for hedging 24,010 40,976 60,278 81,812 62,048
Amounts owed to banks 192,196 250,155 197,760 86,579 36,040
Amounts owed to customers 10,100,625 9,181,047 8,559,731 7,119,530 6,219,666
Debt securities in issue 95,400 95,400 95,400 95,400 95,400
Current tax - - - 16,090 4,697
Deferred tax 4,519 4,318 4,382 5,100 5,003
Other liabilities 197,751 173,988 172,905 130,168 108,864
Accruals and deferred income 12,451 16,215 21,317 27,643 29,235
Subordinated liabilities 231,591 231,591 120,000 120,000 120,000
Total Liabilities 10,858,543 9,993,690 9,231,773 7,682,322 6,680,953

EQUITY

Called up share capital 525,000 390,000 360,000 330,000 300,000

Share premium account 45,427 988 988 988 988
Revaluation reserve 33,194 35,332 35,217 29,136 24,621
Retained earnings 358,466 302,841 272,713 253,245 250,735

Total Equity attributable to equity holders of the Bank 962,087 729,161 668,918 613,369 576,344
Non-controlling interest - - 1,271 1,100 661
Total Equity 962,087 729,161 670,189 614,469 577,005

Total Liabilities and Equity 11,820,630 10,722,851 9,901,962 8,296,791 7,257,958

MEMORANDUM ITEMS
Contingent liabilities 253,851 225,407 251,670 233,451 213,598
Commitments 1,858,191 1,590,156 1,612,122 1,647,091 1,190,714
 Bank of Valletta p.l.c.
Annual Report & Financial Statements 2017 135

The Group’s five year summary - extracted from the respective audited
financial statements (continued)

C. STATEMENTS OF CASH FLOWS

2017 2016 2015 2014 2013

€000 €000 €000 €000 €000

Net cash from operating activities 1,002,202 768,054 1,124,108 766,887 509,520

Cash flows from investing activities

Dividends received from equity shares 8,794 5,628 5,808 4,926 5,433
Interest received from investing securities 74,725 59,783 58,998 45,394 37,484
Acquisition of non-controlling interest - (5,000) - - -
Purchase of equity investments - - (100) (200) -
Proceeds from Visa transaction - 22,042 - - -
Proceeds from sale of equity instruments 4,350 3,043 - - -
Net increase in investment securities 258,283 (388,362) (853,476) (692,500) (379,284)
Purchase of property and equipment (33,341) (8,111) (9,132) (14,649) (10,414)
Proceeds on disposal of property and equipment - 598 - 8 -
Net cash (used in)/from investing activities 312,811 (310,379) (797,902) (657,021) (346,781)

Cash flows from financing activities

Proceeds from rights issue 149,439 - - - -
Proceeds from issue of subordinated bonds - 111,591 - - -
Dividends paid (33,883) (30,575) (29,362) (34,466) (34,516)
Net cash from/(used in) financing activities 115,556 81,016 (29,362) (34,466) (34,516)
Increase in cash and cash equivalents 1,430,569 538,691 296,844 75,400 128,223


D. PERFORMANCE EXPRESSED IN RELATION TO AVERAGE TOTAL ASSETS AND AVERAGE CAPITAL EMPLOYED

2017 2016* 2015 2014 2013
% % % % %

Operating income to total assets 2.1 2.4 2.7 2.7 3.1

Operating expenses to total assets 1.1 1.1 1.2 1.2 1.3

Profit before tax to total assets 1.2 1.1 1.3 1.3 1.6

Profit before tax to capital employed 16.5 16.9 18.4 17.5 21.1

Profit attributable to equity holders to total assets 0.8 0.7 0.9 0.9 1.1

Profit attributable to equity holders to capital employed 11.3 11.0 12.4 11.6 14.4

*Ratios exclude gain on Visa transaction.

 Bank of Valletta p.l.c.
136 Annual Report & Financial Statements 2017

Group Financial Highlights in US dollars

for the fifteen months ended
31 December 2017

The following figures were converted from Euro to US Dollars using the rate of exchange ruling on 31 December 2017. The rate used
was €1 = US$ 1.1986. This does not reflect the effect of the change in the rate of exchange since 30 September 2016 which was
€1 = US$ 1.1169.

2017 2016
US$000 US$000

Net income attributable to equity holders of the Bank 143,230 105,817

Net income per share 33c 27c

Gross dividend paid 62,481 51,209

Net dividend paid 40,612 33,286
Gross dividend per share 14c 13c

Total assets 14,168,207 11,976,352

Liquid funds 191,397 191,046
Investments and financial assets at fair value through profit or loss 4,435,817 4,611,347
Advances 9,101,467 6,813,196
Investments in equity-accounted investees 131,200 108,385

Share capital 629,265 435,591

Capital reserves 94,235 40,566
Retained earnings 429,657 338,243
Notes
Notes
Notes