Independent auditor’s report
To the Shareholders of BNF Bank p.l.c.
Report on the audit of the financial statements
Our opinion
In our opinion:
● The financial statements give a true and fair view of the financial position of BNF Bank p.l.c. (the Bank) as at 31 December 2024, and of the Bank’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU; and
● The financial statements have been prepared in accordance with the requirements of the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386).
Our opinion is consistent with our additional report to the Audit Committee.
What we have audited
BNF Bank p.l.c.’s financial statements comprise:
● the statement of financial position as at 31 December 2024;
● the income statement and statement of comprehensive income for the year then ended;
● the statement of changes in equity for the year then ended;
● the statement of cash flows for the year then ended; and
● the notes to the financial statements, comprising material accounting policy information and other explanatory information.
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 Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Bank in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) together with the ethical requirements of the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) that are relevant to our audit of the financial statements in Malta. We have fulfilled our other ethical responsibilities in accordance with these Codes.
To the best of our knowledge and belief, we declare that non-audit services that we have provided to the Bank are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).
The non-audit services that we have provided to the Bank, in the period from 1 January 2024 to 31 December 2024, are disclosed in note 15 to the financial statements.
Our audit approach
Overview
|
Materiality |
Overall materiality: €1,100,000, which represents approximately 1% of net assets |
|
Key audit matter |
Credit loss allowances in respect of loans and advances to customers of the Bank |
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Bank, the accounting processes and controls, and the industry in which the Bank operates.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
|
Overall materiality |
USD1,100,000 |
|
How we determined it |
Approximately 1% of net assets |
|
Rationale for the materiality benchmark applied |
We chose net assets as the benchmark since, in our view, the actual return attributable to the equity holders is heavily dependent on the adequacy of the Bank’s capitalisation in view of the regulatory restrictions arising on dividend distributions, while also being a generally accepted benchmark. In this respect, we considered net assets to be more reflective of the financial position and financial performance of the Bank. We chose 1% which is within the range of quantitative materiality thresholds that we consider acceptable. |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €110,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
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. 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.
|
Key audit matter |
How our audit addressed the key audit matter |
|
Credit loss allowances in respect of loans and advances to customers of the Bank
Credit loss allowances in respect of loans and advances to customers represent management’s best estimate of expected credit losses (‘ECLs’) within the loan portfolios at the statement of financial position date. The development of the models designed to estimate ECLs on loans measured at amortised cost in accordance with the requirements of IFRS 9 requires a considerable level of judgement since the determination of ECLs is subject to a high degree of estimation uncertainty. Credit loss allowances relating to all loans and advances in the Bank’s Corporate, Retail and International portfolios are determined at an instrument level. In general, the Bank calculates ECLs by multiplying three main components: probability of default (PD), loss given default (LGD) and exposure at default (EAD): i. Probability of default (“PD”): the likelihood of a borrower defaulting on its financial obligation either over the next 12 months or over the remaining lifetime of the obligation. ii. Loss given default (“LGD”): the expected losses taking into account, among other attributes, the mitigating effect of collateral value (if any) at the time it is expected to be realised and the time value of money. The LGD modelling methodology utilises historical experience, which might result in limitations in its reliability to appropriately estimate ECLs especially during periods characterised by unprecedented economic conditions such as those currently experienced as a result of global inflationary pressures and the emerging risks induced by the geopolitical turmoil and the prevalent economic volatility have resulted in supply chain disruptions and significant inflationary pressures. iii. Exposure at default (“EAD”): the expected exposure in the event of a default (including any expected drawdowns of committed facilities). When applicable, the Bank also applies overlays based on expert judgement where management’s view is that the calculated ECLs based on these key inputs do not fully capture the risks within the Bank’s loan portfolios. For both non-defaulted (Stage 1 and 2) and defaulted (Stage 3) exposures within the Corporate and Retail portfolios, the Bank uses internally developed statistical models. For non-defaulted (Stages 1 and 2) exposures, PDs are estimated using historical model development data based on the Bank’s own experience as available at the reporting date. For exposures secured by immovable properties, LGDs are driven by the adjusted loan-to-value ratio of the individual facilities and takes into account other assumptions, including market value haircuts (which includes costs to sell), time to sell and the impact of discounting the collateral from the date of realisation back to the date of default. The maximum period considered when measuring ECLs is the maximum contractual period over which the Bank is exposed to credit risk. In respect of the International portfolio, the Bank uses PDs and LGDs developed by an external vendor, which are developed by reference to the risk and financial profile of comparable borrowers with similar characteristics in terms of size, industry and financial soundness. Internal credit risk management practices are used to determine when a default has occurred, considering quantitative and qualitative factors where appropriate. Judgement is required to determine when a default has occurred and then to estimate the expected future cash flows related to defaulted (Stage 3) exposures which are dependent on parameters or assumptions such as the valuation of collateral (including forced sale discounts and assumed realisation period) or forecasted operating cash flows. The Bank is required to assess multiple scenarios in this respect, which scenarios will have probabilities attached. For individually significant defaulted (Stage 3) exposures, discounted cashflow models are utilised in order to estimate ECLs. Under IFRS 9, the Bank is required to formulate and incorporate multiple forward-looking economic conditions, reflecting management’s view of potential future economic variables and environments, into the ECL estimates. A number of macro-economic scenarios based on the selected macro-economic variables are considered to capture non-linearity across credit portfolios. The complexity attributable to this factor requires management to develop multiple macroeconomic scenarios involving the use of significant judgements. The macroeconomic environment induced by the geopolitical developments driven by ongoing Russia – Ukraine and Middle East conflicts have significantly affected macroeconomic factors such as the gross domestic product (GDP), unemployment, average gross salary, real estate price growth and interest rates, increasing the uncertainty around judgements made in determining the severity and likelihood of macroeconomic forecasts across the different economic scenarios used in ECL models. Overly sensitive ECL modelled outcomes can be observed when current conditions fall outside the range of historical experience. In this respect, the selection of macroeconomic variables applied to modelled PDs as well as the methodology used to calibrate the sensitivity of PDs to changes in macroeconomic conditions require a significant level of expert judgement. Data used in the impairment calculation is sourced from a number of systems, including systems that are not necessarily used for the preparation of accounting records. The ECL models are based on a general-purpose application which requires extensive manual handling of data. This increases risk around the accuracy and completeness of data used to determine assumptions and to operate the ECL models. In some cases, data is unavailable and reasonable alternatives have been applied to allow calculations to be performed. Since the estimation of ECLs is subjective in nature and inherently judgemental, the Bank’s application of the IFRS 9 impairment requirements is deemed to be an area of focus, especially in the context of the macroeconomic conditions being experienced, which have significantly increased the level of estimation uncertainty around the calculation of credit loss allowances. We focused on credit loss allowances due to the subjective nature of specific data inputs into the calculation and the subjective judgements involved in both timing of recognition of impairment and the estimation of the size of any such impairment. Accordingly, summarising the key areas relevant to the Bank’s measurement of ECLs would include: Allocation of assets to Stage 1, 2 or 3 using criteria in accordance to IFRS 9; Accounting interpretation and modelling assumptions used to build models that calculate the ECL; Completeness and accuracy of data used to calculate ECL; Inputs and assumptions used to estimate the impact of multiple macroeconomic scenarios; and Measurement of individually assessed provisions including the assessment of multiple scenarios. Relevant references in the Annual Report: · Accounting policy: Note 2.6; · Credit risk: Note 3.2; · Accounting estimates and judgements: Note 4; · Note on Loans and advances to customers: Note 9; and · Note on Credit impairment losses Note 33. |
During our audit of the financial statements for the year ended 31 December 2024, we continued to focus on the key drivers of the estimation of ECLs, and the continuing appropriateness of management’s assumptions. Discussions with the Audit Committee and Management included: · the policies and methodologies used by the Bank in respect of computing ECLs on loans and advances; · inputs, assumptions and adjustments to ECLs, in particular changes to risk factors and other inputs within the Bank’s models, including the computation of the historical PDs and how this can be enhanced; · the application of macro-economic scenarios, particularly in the context of the geopolitical uncertainties driven by the ongoing military conflicts between Russia and Ukraine and in the Middle East; and · considerations around post model adjustments, including the partial release which was accounted for during the year ended 31 December 2024, and estimation uncertainty involved in determining ECLs on the basis of historical experience. With respect to ECL models utilised by the Bank, the continued appropriateness of the modelling policy and methodology used was independently assessed by reference to the requirements of IFRS 9. ECL calculation for non-defaulted loan exposures We understood and critically assessed the models used for ECL estimation for both Corporate, Retail and International portfolios. Since modelling assumptions and parameters for the retail and corporate portfolios are based on historic data, we assessed whether historical experience was representative of the current level of credit risk within the portfolios. With respect to the International portfolio, we assessed the methodology applied by the external vendor in the process of determining the key assumptions and parameters. The appropriateness of management’s judgements was also independently considered in respect of the calculation methodologies, calibration of PDs and LGDs, segmentation and selection of macroeconomic variables and post-model overlays. Procedures performed in respect of non-defaulted loans included: · Performing an overall assessment of the ECL provision levels by stage to determine if they were reasonable considering the Bank’s portfolios, risk profile, credit risk management practices and the macroeconomic environment. · Testing of a sample of exposures to independently review the borrower’s financial performance and ability to meet loan repayments and assess the appropriateness of the credit rating assigned by management, taking into consideration the impact of the current macroeconomic environment on the repayment capabilities of the sampled borrowers. · Challenging the criteria used to allocate an exposure to stage 1, 2 or 3 in accordance with IFRS 9 and testing exposures in stage 1, 2 and 3 to verify that they were allocated to the appropriate stage. · Testing the completeness and accuracy of the critical data utilised within the models for the year-end ECL calculations. · Risk based testing of models, including testing of the assumptions, inputs and formulas used in ECL models on a sample basis and also through the performance of back-testing procedures on key variables and parameters. · Validation of the controls employed by the Bank to monitor the valuation of real estate which serves as a security for the loans and advances to customers it originates. · Reviewing the multiple macro-economic variables and scenarios to assess their reasonableness, also through back-testing of key assumptions and forecasts. Specifically for exposures within the international portfolio, we obtained comfort around the monitoring performed by the Bank’s first and second lines of defence, through controls procedures. Based on the evidence obtained, we found the model assumptions, data used within the models, model calculations and overlays to be reasonable, and our testing did not highlight material differences. ECL calculation for defaulted loan exposures For defaulted exposures within the loan portfolio, the appropriateness of the methodology and policy used to calculate ECL was independently assessed. We understood and evaluated the processes for identifying default events within loan portfolios, as well as the impairment assessment processes. Substantive procedures were performed in respect of identification of defaults as follows: · Assessed critically the criteria used by management for identifying borrowers whose financial performance is expected to be particularly susceptible to the potential impact of economic pressures being experienced and for determining whether a UTP/default event had occurred by testing a sample of loans to challenge whether default events had actually occurred and to assess whether default events had been identified by management in a timely manner. · Selected a risk-based sample of performing loans which had not been identified by management as potentially defaulted, to form our own judgement as to whether that was appropriate and to further challenge whether all relevant events had been identified by management. Substantive procedures were performed on defaulted exposures in respect of the estimation of the size of the respective ECL provisions, as follows: · Reviewed the credit files of a selected sample of loans to understand the latest developments and the basis of measuring the ECL provisions and considered whether key judgements were appropriate taking cognisance of the current macroeconomic environment. · Challenged the severity of the different scenarios applied within the ECL calculation for the exposures in the sample, particularly in respect of the extent to which they consider the potential impact of the current macroeconomic environment. · On a sample basis, tested key inputs and reperformed the impairment calculation used to derive expected cashflows under different scenarios. · Assessed the appropriateness of a sample of property valuations securing impaired loans, through the use of valuation experts. In the case of some impairment provisions, we formed a different view from that of management, but in our view the differences were within a reasonable range of outcomes. |
Other information
The directors are responsible for the other information. The other information comprises all of the information in the Annual Report (but does not include the financial statements and our auditor’s report thereon).
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon except as explicitly stated within the Report on other legal and regulatory requirements.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above 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.
Responsibilities of the directors and those charged with governance for the financial statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs as adopted by the EU and the requirements of the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386), and for such internal control as the directors 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 Bank’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 Bank or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditor’s 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 auditor’s 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.
● 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 Bank’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 Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s 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 auditor’s report. However, future events or conditions may cause the Bank 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.
We communicate with those charged with governance 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.
We also provide those charged with governance 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, actions taken to eliminate threats or safeguards applied.
From the matters communicated with those charged with governance, 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 auditor’s 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.
Report on other legal and regulatory requirements
Report on compliance with the requirements of the European Single Electronic Format Regulatory Technical Standard (the “ESEF RTS”), by reference to Capital Markets Rule 5.55.6
We have undertaken a reasonable assurance engagement in accordance with the requirements of Directive 6 issued by the Accountancy Board in terms of the Accountancy Profession Act (Cap. 281) - the Accountancy Profession (European Single Electronic Format) Assurance Directive (“the ESEF Directive 6”) on the Annual Financial Report of BNF Bank p.l.c. for the year ended 31 December 2024, entirely prepared in a single electronic reporting format.
Responsibilities of the directors
The directors are responsible for the preparation of the Annual Financial Report, including the financial statements, by reference to Capital Markets Rule 5.56A, in accordance with the requirements of the ESEF RTS.
Our responsibilities
Our responsibility is to obtain reasonable assurance about whether the Annual Financial Report, including the financial statements, complies in all material respects with the ESEF RTS based on the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the requirements of ESEF Directive 6.
Our procedures included:
● Obtaining an understanding of the entity's financial reporting process, including the preparation of the Annual Financial Report in XHTML format.
● Examining whether the Annual Financial Report has been prepared in XHTML format.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Annual Financial Report for the year ended 31 December 2024 has been prepared in XHTML format in all material respects.
Other reporting requirements
The Annual Financial Report and Financial Statements 2024 contains other areas required by legislation or regulation on which we are required to report. The Directors are responsible for these other areas.
The table below sets out these areas presented within the Annual Financial Report, our related responsibilities and reporting, in addition to our responsibilities and reporting reflected in the Other information section of our report. Except as outlined in the table, we have not provided an audit opinion or any form of assurance.
|
Area of the Annual Report 2024 and the related Directors’ responsibilities |
Our responsibilities |
Our reporting |
|
Directors’ Report The Maltese Companies Act (Cap. 386) requires the directors to prepare a Directors’ report, which includes the contents required by Article 177 of the Act and the Sixth Schedule to the Act. |
We are required to consider whether the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
We are also required to express an opinion as to whether the Directors’ report has been prepared in accordance with the applicable legal requirements.
In addition, we are required to state whether, in the light of the knowledge and understanding of the Bank and its environment obtained in the course of our audit, we have identified any material misstatements in the Directors’ report, and if so to give an indication of the nature of any such misstatements.
|
In our opinion: ● the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ● the Directors’ report has been prepared in accordance with the Maltese Companies Act (Cap. 386).
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section.
|
|
Statement of Compliance with the Principles of Good Corporate Governance The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare and include in the Annual Financial Report a Statement of Compliance with the Code of Principles of Good Corporate Governance within Appendix 5.1 to Chapter 5 of the Capital Markets Rules. The Statement’s required minimum contents are determined by reference to Capital Markets Rule 5.97. The Statement provides explanations as to how the Bank has complied with the provisions of the Code, presenting the extent to which the Bank has adopted the Code and the effective measures that the Board has taken to ensure compliance throughout the accounting period with those Principles. |
We are required to report on the Statement of Compliance by expressing an opinion as to whether, in light of the knowledge and understanding of the Bank and its environment obtained in the course of the audit, we have identified any material misstatements with respect to the information referred to in Capital Markets Rules 5.97.4 and 5.97.5, giving an indication of the nature of any such misstatements. We are also required to assess whether the Statement of Compliance includes all the other information required to be presented as per Capital Markets Rule 5.97. We are not required to, and we do not, consider whether the Board’s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the Bank’s corporate governance procedures or its risk and control procedures.
|
In our opinion, the Statement of Compliance has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority. We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section. |
|
|
Other matters prescribed by the Maltese Banking Act (Cap. 371) In terms of the requirements of the Maltese Banking Act (Cap. 371), we are also required to report whether: ● 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 of those books; ● the Bank’s financial statements are in agreement with the books of account; in our opinion, and to the best of our knowledge and according to the explanations given to us, the financial statements give the information required by any law which may from time to time be in force in the manner so required.
|
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 of those books; the Bank’s financial statements are in agreement with the books of account; and to the best of our knowledge and according to the explanations given to us, the financial statements give the information required by any law in force in the manner so required.
|
|
|
Other matters on which we are required to report by exception We also have responsibilities under the Maltese Companies Act (Cap. 386) to report to you if, in our opinion adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us. We also have responsibilities under the Capital Markets Rules to review the statement made by the directors that the business is a going concern together with supporting assumptions or qualifications as necessary.
|
We have nothing to report to you in respect of these responsibilities. |
Other matter – use of this report
Our report, including the opinions, has been prepared for and only for the Bank’s shareholders as a body in accordance with Article 179 of the Maltese Companies Act (Cap. 386) and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior written consent.
Appointment
We were first appointed as auditors of the Bank on 25 July 2014.Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 11 years.
Michael Formosa
Principal
For and on behalf of
PricewaterhouseCoopers
78, Mill Street
Zone 5, Central Business District
Qormi
Malta
28 April 2025