Annual Report and Financial Statements
31 December 2021
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
1
CONTENTS
Chairman’s Statement to the Members 2
Chief Executive Officer’s Review 5
Directors’ Report 9
Statement of Compliance with the Principles of Good Corporate Governance 25
Remuneration Report 35
Company Information 39
Financial Statements:
Statements of Financial Position 41
Income Statements 43
Statements of Comprehensive Income 44
Statements of Changes in Equity 45
Statements of Cash Flows 49
Notes to the Financial Statements 50
Additional Regulatory Disclosures 166
Five Year Summaries 198
Independent Auditor’s Report to the Shareholders of Lombard Bank Malta p.l.c.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
2
Chairman’s Statement to the Members
The performance of the Lombard Bank Group in 2021 was again conditioned by a difficult operating
environment largely associated with the persistence of the COVID-19 pandemic and its economic repercussions.
For Lombard Bank Malta p.l.c. (the Bank) the main sources of pressure on income streams were continuing low
to negative interest rates and further increases in operating costs. These were partly offset by a substantial
reversal of provisions on the loan book, which had a positive effect on the final results. The Bank’s subsidiary,
MaltaPost p.l.c., meanwhile continued to face logistical difficulties due to the pandemic and experienced
generally higher costs, leading to reduced profitability. In the circumstances, the Group’s pre-tax profit of €12.6
million, a year-to-year increase of 22%, must be considered a satisfactory outcome.
For the Bank, net interest income, the largest revenue source by far, resumed its upward trend in 2021 as
interest earned on loans and advances rose more than that paid to depositors: the former reflected a sustained
demand for credit even though average lending rates eased further, as well as higher earnings on the securities
portfolio; the latter resulted from a combination of an expanded deposit base and largely unchanged average
interest rates. A return to a rising trend also occurred in net fees and commission income, including from our
card, wealth management and investment services operations. While all these revenue sources made a positive
contribution to earnings, the Bank’s total operating income, at €26.7 million, fell short of the previous year’s
level which however had included a sizeable one-off inflow.
Operating expenses meanwhile grew further mainly reflecting the cost of attracting and retaining professional
expertise in a competitive labour market and the need to invest in new technologies and systems to meet the
growing expectations of customers and the demands of regulators. In particular, the Bank introduced an
automated anti-money laundering transaction monitoring platform, several upgrades to core networking
devices, including additional protection against cyberattacks and biometric authentication systems for online
card payments.
At the same time, the prudent stance we took at the peak of the pandemic with regard to provisions against
credit exposures, together with the improved outlook for the Maltese economy and judicious management of
our loan book, meant that no further exceptional provisions were necessary in 2021. As a result, the Bank’s
profit before tax increased by 32% to €12.2 million, in line with the Board’s objective. This represented a return
on equity of 6.2% and boosted shareholders’ funds to a new peak of €132 million. The Board believes that these
encouraging results confirm the resilience of the Bank’s low-risk business model and has recommended, subject
to regulatory approval, a gross dividend of 3 cent per share as well as a bonus issue of 1 share for every 75
shares held.
Despite the uncertainty created by the pandemic, the Bank’s fundamentals remained strong. Customer
confidence was maintained with deposits and lending increasing in tandem such that the relevant ratio was
unchanged at a prudent level of 65.7%. The total capital ratio and the liquidity coverage ratio were both well
above the statutory minimum levels at 16.2% and 225.3%, respectively while the leverage ratio, at 11.1%, was
three-and-a-half times the required level. These solid financial buffers suggest that the Bank has the potential to
maintain its growth momentum while keeping within the bounds of the Board’s risk appetite.
During 2021 the Bank was faced with additional demands on its human and financial resources due to regulatory
and compliance reporting obligations and other related decisions. Among the latter was the unexpected
imposition at short notice of higher regulatory capital buffers, which has limited our ability to fully satisfy
customer loan demand. Another development whose full impact cannot yet be measured was the decision of
the FATF to place Malta on their Grey List. One early consequence was to induce some correspondent banks to
terminate their relationships with local banks. At Lombard, our international banking business has experienced a
recent decline.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
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Chairman’s Statement to the Members (continued)
The Bank adapted to this challenging operating environment on different levels. The quality of the loan book
continued to improve, particularly through a further reduction in the proportion of so-called Non-Performing
Exposures close to the target level set for 2022, in spite of the uncertain economic climate. Another
development that has served to mitigate credit risk was the notable increase in household and personal lending
in line with our diversification strategy. The strong take up of home loans was particularly welcome since this is a
low-risk loan category and also makes a relatively small claim on the Bank’s capital base.
During the year the Board also continued to oversee the implementation of the Business Plan 2020-2022 which
defines the Bank’s strategic priorities. A major focus has been the furtherance of ongoing projects in such
business areas as home loans, credit cards and investment services designed to grow their contribution to
operating income. Another priority has been the further strengthening of the Bank’s governance, risk
management and compliance functions. This included the creation of new professional development
opportunities at all levels of the Bank, including the Board, the introduction of new policies and controls and the
automation of several work processes. A challenge in this regard continues to be the limited availability in the
market of specialised expertise. A third prong of the Business Plan is the expansion of our physical network in
order to bring Lombard’s services and products to a wider customer base. Further properties were acquired for
this purpose in prime locations and some existing branches were upgraded. Work in all these areas will continue
during the current year.
The year under review has also created challenges for the Bank’s subsidiary, MaltaPost p.l.c., deriving mainly
from the pandemic. Supply chain disruptions due to reduced air connectivity and a further decline in letter mail
volumes combined with the lowest postal tariff rates in the EU all affected revenue flows. Labour and
operational costs meanwhile continued to increase, particularly to finance infrastructure projects and the
extension of the post office network, all designed to deliver a more efficient customer service and generate
more income. As a result the company registered a small decline in pre-tax profits to €2.35 million.
Going forward, while the Bank’s time-tested business model based on intermediation between savers and
borrowers to finance viable economic activity promises to continue creating shareholder value, the Board is
aware of the need to embrace change in the pursuit of long-term sustainability. An important challenge having
capital-absorbing implications is the forthcoming introduction of new Basel III standards focussed on asset risk-
weighting, particularly involving exposures secured by real estate and equity holdings. Another standard that will
impact the manner in which our business is conducted relates to the evolving Environmental, Social &
Governance (ESG) requirements. The Bank will continue to follow developments closely so as to ensure that
relevant aspects are incorporated in its risk management framework. ESG workshops are planned for 2022 with
assistance from external consultants. An ESG action plan will ensure effective implementation. A further change
on the horizon promises to be the end of the ECB’s current accommodative monetary policy and the
unpredictable effects of higher interest rates on business cash flows, particularly in conjunction with the
economic fallout of the heightened geopolitical tensions in Europe.
Facing these challenges while continuing to respond to customers’ changing needs will require more investment
in appropriate technologies and specialised human resources. As we proceed along the chosen growth path, the
preservation of stakeholders’ assets and the creation of value will remain a guiding principle. While innovative
solutions will be sought, however, we will maintain our selective approach to onboarding depositors and
borrowers and avoid exposure to economic sectors that have proved to be inherently risky.
The Board will continue to engage in a dialogue with the regulator also with a view to arriving at a meaningful
application of the principle of proportionality in recognition of the size and non-complex business model of the
Bank.
The Board experienced the sad loss of one of its non-executive members Michael Zammit who passed away
while in office in February 2022. During his years in office Mr Zammit shared with the Board his extensive
knowledge and experience of business in Malta. On behalf of the Board, I express appreciation for his
commitment and the valuable contribution he made to the Bank.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
4
Chairman’s Statement to the Members (continued)
In conclusion, on behalf of the Board I would like to thank the Bank’s staff and management team, ably led by
the Chief Executive Officer, Joseph Said, whose professional competence and dedication made the past year’s
encouraging results possible in spite of the disruption caused by the pandemic. I would also like to thank you the
Bank’s shareholders for your steadfast support and all our customers for their continued loyalty.
Signed on behalf of the Bank's Board of Directors on 20 April 2022 by Michael C. Bonello (Chairman) as per the
Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and
Financial Statements 2021.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
5
Chief Executive Officer’s Review
The results for the financial year ended 31 December 2021 of the Lombard Bank Group combine the financial
performance of Lombard Bank Malta p.l.c. together with its subsidiary and associate companies.
Summary Overview
Despite that the year continued to be dominated by challenging conditions, not least due to the uncertainties
resulting from the COVID-19 pandemic, the performance of the Group proved to be resilient.
Notwithstanding the stiff competition across the whole spectrum of banking services, we stood firm in refusing
to involve ourselves in those areas which could potentially distract us from our straightforward, prudent and
conservative business model.
We developed new contacts in retail credit, while in commercial lending our relationships with existing
customers remained strong. Improved forward-looking macroeconomic indicators brought about reversals in
impairment provisioning when compared to the significant adverse forward-looking metrics as at the end of
2020.
Work on resolution of legacy Non-Performing Loans continued with the NPL stock maintained within the targets
set. Prudent management of the loan book and sensible collateral positions ensured new Non-Performing Loans
remained within acceptable margins.
Our transaction banking activities were below levels of previous years, mainly due to alternative and competing
payment methods and reduced volumes following the grey-listing of Malta.
In our Investments activity, we launched advisory and discretionary services, with both gaining traction as
customers chose to avail themselves of our services. Our asset management company and SICAV were
authorised by the Malta Financial Services Authority and we now are assessing alternative approaches to adding
our own UCITS funds to our suite of products.
We were enrolled as a Tied Insurance Intermediary for long-term insurance business products for IVALIFE
Insurance Limited. The insurance products we have been authorised to distribute supplement the service
offerings in Retail Lending and Investments activities.
Regulatory engagements were several and focused on areas across the Bank’s operational, risk and governance
structures, processes and controls. In this regard, considerable resources, time and effort continued to be
directed towards ensuring strict compliance with regulatory requirements.
MaltaPost also faced a challenging year, with the continued difficulties caused by supply chain disruptions, as
well as the continued decline of Letter Mail volumes and consequent reduction of respective income streams.
Postal tariffs remain among the lowest in Europe and a tariff revision is necessary to address the loss-making
postal services provided under the Universal Service Obligation. In this regard MaltaPost was in continuous
engagement with the Malta Communications Authority so as to implement pricing revisions. As to MaltaPost’s
involvement in the general and life insurance sector, more time is required to allow these activities to mature to
a point where they start contributing positively to the income streams of our subsidiary. For the financial year
ended September 2021, MaltaPost realised a pre-tax profit for the year of €2.35 million, a decrease of 15% over
the previous year.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
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Chief Executive Officer’s Review (continued)
Review of Financial Performance
Group Profit before Tax for the 2021 FY stood at €12.64 million, an increase of 22%.
Loans and Advances to Customers rose by 4% reaching €642.89 million. This portfolio was the main driver
behind the 4% increase in Interest Receivable and Similar Income on Loans and Advances which now stand at
€23.83 million. Interest Expense saw a 2% increase resulting from increased volume of Amounts Owed to
Customers, which reached €977.14 million. Net Interest Income when compared to 2020 also increased by 4%
to €19.56 million.
Net Fee and Commission Income improved by 10% to reach €5.21 million, supported by new lines of business
which started to show a positive trend.
Group Employee Compensation and Benefits increased by 7% to €24.4 million, a reflection of the tight labour
market and the need to maintain competitive and suitable compensation to Group staff. The Bank’s Cost
Efficiency Ratio was 60.8% (FYE 2020: 52.4%) while that of the Group stood at 81.9% (FYE 2020: 75.8%). While
operating costs remained well under control, increased fees and costs associated with obligations to satisfy
regulatory requirements and the enhancement of Compliance capabilities all contributed to increasing the cost
base.
The Bank’s Impairment Allowances as determined by International Financial Reporting Standard 9 (IFRS 9) for
the year ended 31 December 2021 stood at €26.16 million. Consequently, the change in ‘Expected Credit Losses’
(ECL) resulted in a net impairment reversal of €1.46 million compared to a charge of €3.97 million in the previous
year. At the reporting date, though the level of risk in the lending portfolio increased, the quality of the Bank’s
financial assets remains sound.
Liquidity and Own Funds
Over the years, the Bank relied on a diversified liquidity funding base which has proven to be relatively stable.
Advances to Deposits Ratio stood at 65.8% compared to 66.0% same period last year.
Total Assets stood at €1,175.39 million (2020: €1,130.96 million), while Equity Attributable to the Shareholders
of the Bank rose by 9.0% to €137.3 million. Net Asset Value (NAV) per share stood at €3.07 (2020: €2.85). Group
Earnings per Share (EPS) increased to 16.8 cents. Return on Assets (ROA) stood at 0.7% (2020: 0.6%) while post
tax Return on Equity (ROE) was 5.7% (2020: 5.4%).
Treasury Management
In determining the placement of funds, our main objective remained that of capital protection. We therefore
stood by our prudent approach of investing the bulk of our liquidity in the local economy mainly by way of
holdings in Government of Malta securities and in entities listed on the Malta Stock Exchange. The portfolio in
quality foreign bonds was retained at constant nominal values.
International money market placements with authorised counterparties remained selective, though practically
always in short tenors.
As expected, the grey-listing of Malta impacted our correspondent banking activity. Such counterparty
relationships are key to ensuring continued access to international currency and money markets via a network of
overseas banks. Some counterparties exited Malta altogether as a jurisdiction, resulting therefore in their
terminating relationships also with us. We held several presentations with various overseas banks explaining our
risk appetite for business and also the measures we have in place to ensure that our systems and processes were
sufficiently robust to combat financial crime effectively.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
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Chief Executive Officer’s Review (continued)
Risk Management
Risk-taking is an integral aspect of a Bank’s intermediation activity and as a result a whole range of financial and
non-financial risks need to be managed. This involves, to varying degrees, knowingly accepting and managing
such risks. In this regard the Bank continues to implement an Enterprise-wide Risk Management Framework that
involves a comprehensive and coordinated approach to identify, monitor and measure potential risks and
subsequently mitigate these risks to within the limits of the Bank’s own risk appetite. The management and
control of risk is encompassed within approved policies and procedures that are integrated in the decision-
making processes. Our overall risk management framework lays out this foundation and seeks to maximise
return on assets while safeguarding depositors’ funds at all times - always in compliance with statutory
requirements and within the risk tolerance limits approved by the Board of Directors.
The Risk Management Function reports to the Audit & Risk Committee and Board of Directors and provides a
detailed insight into the Bank’s risk management environment and situation of tolerance limits as per our Risk
Appetite Statement. During the year, the Risk Appetite Statement was reviewed and updated to reflect current
views on respective risks and to provide further granularity to the measurement processes.
Solvency requirements show that the Bank’s ‘Pillar I’ Total Capital Ratio (‘TCR’) at the end of 2021 stood at 16.2%
increasing from 15.8% the previous year. The Bank continues to maintain a strong capital position and is fully
compliant with regulatory capital requirements. The leverage ratio, that is monitored and reported to the Board
regularly, stood at 11.1% which is more than 3 times the minimum regulatory requirement of 3%.
Key liquidity metrics such as the Liquidity Coverage Ratio (‘LCR’), the Net Stable Funding Ratio (‘NSFR’) and the
Loan-to-Deposit Ratio are constantly monitored and regularly reported to the Board. The Bank ensures that it
remains sufficiently liquid at all times and in line with its risk appetite. At the end of 2021, these key metrics
stood at 225.3%, 148.4% and 65.7% respectively and well within our risk appetite.
Also, our Internal Capital Adequacy Assessment Process (ICAAP) is reviewed annually and robust stress testing is
regularly carried out on Capital and Liquidity to assess the Bank’s resilience to extreme but plausible shocks.
Human Resources
The logistical difficulties presented by the Pandemic resulted in about 50% of staff members working remotely
on a roster basis as necessary. This allowed the Bank to operate seamlessly with all branches remaining open for
service even during lockdown periods. The commitment and support of those staff members whose work
required them to be present at the office is recognised and much appreciated. Also duly acknowledged are the
efforts of all staff members to remain safe at the office and outside, and to work diligently and to the highest
standards at all times.
Competition for talent remained stiff with our recruitment programme remaining open throughout the year so
as to fill vacancies in all areas. The challenge is not limited to merely attracting competent persons of the
required skills and competencies but also to retain staff. We remain committed to offer a work environment that
meets with the priorities and aspirations of staff, whether these be related to career progression or work-life
balance goals.
We provided learning opportunities for staff members to improve their skills and technical qualities.
The staff complement at the Bank stood at 205 as at the end of 2021 while that of the Group reached 1,004. Our
staff remains key in the achievement of results and the success of the Group.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
8
Chief Executive Officer’s Review (continued)
Projects
Investment in technology was made in three main areas: renovation of core elements of the infrastructure,
meeting the specific needs of certain business lines and improving capabilities in regulatory reporting and
financial crime compliance.
In January 2021 our new branch in Attard opened for business, receiving positive feedback from customers. We
are confident that a larger part of the community in the area will experience the convenience of our service
offerings at this branch. Meanwhile we acquired other properties, in line with our objective of selectively
extending our geographic footprint so as to give us representation in those localities that we know would
welcome our presence. We continue to believe that in the Maltese market, a physical presence is important,
more so by those customers who value the personalised service offered by Lombard Bank. Renovation of
property acquired will be staged in a manner which allows for a smooth assimilation of the activity into the
Bank’s operations.
We continued with our Melita gold bullion coin issue in conjunction with the Central Bank of Malta. The 2021
coin was struck in four denominations, with this issue being well received and sold out soon after it became
available. Besides being of interest to local collectors, the issue attracted the interest of overseas collectors.
Also, jointly with the Central Bank of Malta we issued the first Melita silver bullion coin, weighing ten ounces.
Our subsidiary MaltaPost proceeded with its project of introducing battery-operated vehicles, with its fleet
reaching a total of 54 such vehicles, thereby reducing reliance on the use of vehicles powered by fossil fuels.
Community Involvement
Our commitment to actively support the local community and to place emphasis on assisting socially meaningful
projects continued throughout the year. We do so in various ways, including proposals aimed at preserving and
enhancing heritage and extending assistance to staff members who on their own initiative support worthy
causes.
Outlook
A positive set of results, a healthy brand and sound fundamentals encourage us to face the coming year with
optimism. However, prospects much depend on the resilience of the economic recovery and the general
operating environment. Other challenges may also arise from likely increases in euro interest rates and the
disruption that these may cause once transmitted to the real economy.
We remain committed to our obligations in respect of the environment, social responsibilities as well as matters
concerning good governance. In the coming year these issues will be given focus and the manner in which any
resulting changes may impact our business model, if at all, needs to be suitably determined.
Meeting with these challenges will require further investment in technology and human resources - which we
are determined to address accordingly. We therefore enter 2022 with enthusiasm and determination supported
by a solid set of results, healthy ratios, a strong balance sheet, a loyal customer base and a fine team of staff
members.
Signed on behalf of the Bank's Board of Directors on 20 April 2022 by Joseph Said (Chief Executive Officer) as per
the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and
Financial Statements 2021.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
9
Directors’ Report
The Group
The Lombard Bank Group (the Group) consists of Lombard Bank Malta p.l.c .
Lombard Capital Asset Management Limited, Lombard Select SICAV p.l.c. and the MaltaPost p.l.c. Group.
Principal Activities
Review of Performance
An overview of the development in the Bank’s business and that of its subsidiaries during the year under review
together with an indication of likely future developments may be found in the ‘Chief Executive Officer’s Review
of Operations’ of this Annual Report.
Group profit before tax for the financial year ended 31 December 2021 amounted to €12.6 million (2020: €10.4
million). Profit attributable to equity holders of the Bank was €7.5 million (2020: €6.6 million).
Net interest income at €19.6 million was 3.6% higher than the previous year. Increase in credit activity
compensated for pressure on interest rates especially in treasury operations. New lines of business contributed
to an increase of 10.0% in net fee and commission income.
Net loans and advances to customers increased by 3.5% to €642.9 million. Customer deposits increased by 3.8%
to €977.1 million. Group post tax return on equity for 2021 was 5.7% (2020: 5.4%). Group total assets increased
to €1,175.4 million (2020: €1,131.0 million). Total capital ratio at 16.2% (2020: 15.8%) exceeded the minimum
regulatory requirements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
10
Directors’ Report (continued)
Bank cost efficiency ratio at 60.8% (2020: 52.4%) was mainly a reflection of human resource expenses as well as
increased regulatory compliance costs.
A reversal of €1.5 million was made for ‘Expected Credit Losses’ (ECL) as determined by International Financial
Reporting Standard 9 (IFRS 9) compared to a charge of €4.0 million in the previous year.
In a year of continued and significant disruption arising from the spread of the COVID-19 pandemic, MaltaPost
p.l.c. managed lower profitability as increased costs were not recovered through increases in either volumes or
price. As traditional postal volumes continued to drop, other non-postal income arose from document
management services, bill collection, financial services and insurance.
Equity attributable to equity holders of the Bank grew by a further 9.0% to €137.3 million. Group net asset value
(NAV) per share stood at €3.07 (2020: €2.85). Group earnings per share (EPS) increased to 16.8 cents.
Profits after taxation of €7.9 million and €7.8 million for the Group and the Bank, respectively were registered
for the twelve months ended 31 December 2021.
Based on the above, as was the case for 2020, a gross dividend of 3 cent per nominal 25 cent share (net dividend
of 1.95 cent for a total amount of € 872,956) for the twelve months ended 31 December 2021 is being proposed
for approval by shareholders at the 2022 Annual General Meeting, subject to regulatory approval.
Furthermore, a bonus share issue of one (1) share for every seventy five (75) shares held is being proposed by
the Board of Directors. The bonus issue will be funded by a capitalisation of reserves amounting to €149,000.
Resolutions to this effect will be proposed to the 2022 Annual General Meeting, subject to regulatory approval.
Board of Directors and Senior Management
The composition of the Bank’s Board of Directors and Senior Management is shown in the section on ‘Company
Information’ on page 39 of this Annual Report and further information is given in the ‘Statement of Compliance
with the Principles of Good Corporate Governance’.
Risk Management
The Financial Risk Management note to the Financial Statements (note 2), illustrates the process of how the
Group identifies and manages its risks and uncertainties. The main categories of risk described in this note are
credit risk, market risk, liquidity risk and operational risk. The same note includes extensive detail of the
processes undertaken by the Bank to manage these risks.
The Directors are required by the Companies Act, 1995 to prepare financial statements which give a true and fair
view of the state of affairs of the Group and the parent company as at the end of each reporting period and of
the profit or loss for that period.
Statement of Directors’ Responsibilities for the Financial Statements
In preparing the financial statements, the Directors are responsible for:
• ensuring that the financial statements have been drawn up in accordance with International Financial
Reporting Standards as adopted by the EU;
• selecting and applying appropriate accounting policies;
• making accounting estimates that are reasonable in the circumstances; and
• ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to
presume that the Group and the parent company will continue in business as a going concern.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
11
Directors’ Report (continued)
The Directors are also responsible for designing, implementing and maintaining such internal controls as they
deem necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error, and that comply with the Companies Act, 1995 and the Banking Act, 1994. They
are also responsible for safeguarding the assets of the Group and the parent company and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
The financial statements of the Bank for the year ended 31 December 2021 are included in this Annual Report
and made available on the Bank’s website. The Directors are responsible for the maintenance and integrity of
the Annual Report on the website in view of their responsibility for the controls over, and the security of, the
website. Access to information published on the Bank’s website is available in other countries and jurisdictions
where legislation governing the preparation and dissemination of financial statements may differ from
requirements or practice in Malta.
Statement of the Directors pursuant to Capital Markets Rule 5.68
The Directors confirm that, to the best of their knowledge:
• the financial statements give a true and fair view of the financial position of the Bank as at 31 December
2021, and of its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards as adopted by the EU; and
• the Annual Report includes a fair review of the development and performance of the business and the
position of the Bank, together with a description of the principal risks and uncertainties that they faced.
Investment Services Rules for Investment Service Providers
In accordance with Rule R1-2.2.3 of the Investment Services Rules for Investment Service Providers regulated by
the Malta Financial Services Authority, licence holders are required to disclose any regulatory breaches of the
Rules or other regulatory requirements in this Annual Report. The Directors confirm that during the reporting
period, there were no breaches of the Investment Services Rules or other regulatory requirements, which were
subject to an administrative penalty or other regulatory sanction other than those in the public domain.
Information provided in accordance with Capital Markets Rule 5.70.1
There were no material contracts to which the Bank, or any of its subsidiaries were a party, and in which any one
of the Bank’s Directors was directly or indirectly interested, except for transactions disclosed in the notes to the
financial statements.
Going Concern
In compliance with Capital Markets Rule 5.62 and after having duly considered the Bank’s performance, the
Directors declare that they expect the Bank will continue to operate as a going concern for the foreseeable
future.
Capital Markets Rules – Disclosures
In terms of Capital Markets Rule 5.64, the Directors are required to disclose the following information.
As at the Annual General Meeting held on 28 May 2021, the authorised share capital of the Bank was
€20,000,000 made up of 80,000,000 ordinary shares of a nominal value of 25 cent each. As at that date the
issued and fully paid-up share capital of the Bank was €11,044,479 divided into 44,177,914 ordinary shares of a
nominal value of 25 cent each, all of one class.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
12
Directors’ Report (continued)
Following the approval by the Bank’s shareholders at the above-mentioned 2021 Annual General Meeting, the
amount of €147,262 from the Bank’s Retained Earnings Account was capitalised for the purpose of issuing
589,047 fully paid ordinary shares of a nominal value of €0.25 per share representing 1 bonus share for every 75
shares held allotted to the eligible members appearing on the Bank’s Register of Members as at close of trading
on the Malta Stock Exchange on 23 June 2021. Following this allotment, and as at 31 December 2021, the Issued
and fully paid-up Share Capital of the Bank increased to €11,191,740.25 divided into 44,766,961 ordinary shares
of a nominal value of 25 cent each, all of one class.
Amendments to the Memorandum and Articles of Association of the Bank are effected in conformity with the
provisions in the Companies Act, 1995. Furthermore, in terms of the Articles of Association:
• Directors may be authorised by the Bank to issue shares subject to the provisions of the Memorandum and
Articles of Association and the Companies Act;
• Directors may decline to register the transfer of a share (not being a fully paid share) to a person of whom
they do not approve;
• Directors may decline to recognise any instrument of transfer, unless accompanied by the necessary
evidence;
• no registration of transfers of shares shall be made and no new particulars shall be entered in the register of
members when the register is closed for inspection; and
• the Bank may, from time to time, by extraordinary resolution reduce the share capital, any Capital Reserve
Fund, or any Share Premium Account in any manner.
Currently there are no matters that require disclosures in relation to:
• holders of any securities with special rights;
• employee share schemes;
• restrictions on voting rights or relevant agreements thereto; or
• significant agreements to which the Bank is a party and which take effect, alter or terminate upon a change
of control of the Bank.
The Remuneration Report on page 35 refers to the financial contributions towards retirement gratuities that the
Board of Directors approves from time to time. The same Board had previously resolved that a retirement
gratuity be eventually paid on an ex gratia basis to the Chief Executive Officer on his retirement.
The rules governing the changes in Board membership are contained in the ‘Statement of Compliance with the
Principles of Good Corporate Governance’.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
13
Directors’ Report (continued)
Shareholders holding five per cent (5%) or more of the share capital of the Bank:
Shares in Lombard Bank Malta p.l.c.
31 December 2021
31 March 2022
National Development & Social Fund (NDSF)
49.01%
49.01%
Virtu Holdings Ltd
9.89%
9.89%
LifeStar Insurance p.l.c.
5.59%
5.59%
First Gemini p.l.c.
5.31%
5.31%
Directors’ Interest in Group Companies
Joseph Said, who is a Director of the Bank, is also a Director of the following companies that have a shareholding
in the Group as follows:
Shares in Lombard
Bank Malta p.l.c.
at 31 December 2021*
Shares in MaltaPost p.l.c.
at 31 December 2021*
Safaco Ltd
42,751
44,745
First Gemini p.l.c.
2,375,389
36,341
*There were no changes from 31 December 2021 to 31 March 2022.
In addition Joseph Said holds preference shares in Safaco Ltd.
Audit & Risk Committee
The Audit & Risk Committee is composed of non-executive Directors and is intended to ensure effective internal
controls, compliance and accountability. The Committee also acts to ensure that high ethical standards are
maintained, as explained in the ‘Statement of Compliance with the Principles of Good Corporate Governance’ in
another section of this Annual Report.
Auditors
PricewaterhouseCoopers have expressed their willingness to continue in office as auditors of the Bank and a
resolution proposing their reappointment will be put at the forthcoming Annual General Meeting.
Events occurring after the end of the accounting period
There were no significant events affecting the Bank or any of its subsidiary undertakings which have occurred
after 31 December 2021.
Non-Financial Statement
The Companies Act requires that a non-financial statement be included in this report containing information on
the Group’s development, performance, position and impact of its activity, relating to, as a minimum,
environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters and
this in the form of particular disclosures on certain aspects.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
14
Directors’ Report (continued)
1. Business Model
The Bank is a Malta-based bank and for financial stability purposes is considered by the Central Bank of Malta
as a core domestic bank, catering mostly for the local economy, and therefore actively supporting economic
actors in their activities. The lending activity of the Bank consists mainly of Commercial and Retail Lending.
Commercial Lending is largely characterised by loan facilities to the commercial sector with short to medium
term maturities. Retail Lending consists mainly of home loan facilities with medium to long term maturities.
Asset diversification strategy is intended to increase the resilience of the Bank’s loan book and its lending
capacity. The Bank was enrolled as a Tied Insurance Intermediary for long term insurance business and can
therefore provide its Home Loan customers with a more comprehensive service offering. Lending is funded
by a diversified deposit base and underpinned by solid capital and liquidity ratios. The Bank has never relied,
and does not intend to rely, on the interbank market for its funding requirements, and retains ample liquidity
from its retail operations. This approach to business underpins the Bank’s image and facilitates pricing
decisions. In this respect the Bank seeks to progress slowly, prudently yet surely, as evidenced by the quality
of its assets and relationships. The Bank follows risk review processes to ensure that business is in line with
its risk appetite frameworks and its compliance standards, which themselves are also reviewed periodically in
light of regulatory developments and emerging risks. The Bank continues seeking to expand its product and
services portfolio into the retail market. In this regard, the Bank has taken steps to widen its investment
service offerings by manufacturing its own UCITS funds, and for this reason incorporated its own SICAV and
fund manager, Lombard Select SICAV p.l.c. and Lombard Asset Management Limited respectively, both duly
licensed by the Malta Financial Services Authority.
The Bank’s business model is based on building stakeholder value by delivering financial services and
solutions in a prudent manner and by setting the highest standards in professional behaviour and
implementing the highest standards of compliance. The Bank’s competitive strengths are in its unique
business operating model, its conservative outlook towards risk and its robust fundamentals. The
characteristics of its business model give the Bank a competitive advantage, enabling it to continue to deliver
value to all its stakeholders in a challenging environment which remains highly competitive and increasingly
regulated. The Bank’s brand, which stands for the provision of personalised and tailored financial services,
remains strong.
The Bank’s subsidiary, MaltaPost p.l.c. (MaltaPost) is Malta’s leading postal services company, being the sole
licensed Universal Service Provider of postal services on the Maltese Islands in terms of the Postal Services
Act (Chapter 254 Laws of Malta) and under the terms of the Universal Postal Union Convention and
Constitution on behalf of the Government of Malta. It has a network of 42 Post Offices and 25 Sub-Post
Offices around Malta and Gozo providing an extensive range of postal and financial services.
Postal services remain characterised by a decline in Letter Mail volumes and in the corresponding income.
MaltaPost continues to pursue its diversification into logistics, document management, insurance and
financial services. In insurance, MaltaPost has a 25% shareholding in IVALIFE Insurance Limited, a company
licensed to conduct long-term business of insurance and a 49% shareholding in PostaInsure Agency Limited,
an insurance agency for MAPFRE Middlesea p.l.c. Document management services are offered through a fully
owned subsidiary, Tanseana Limited. While MaltaPost remains committed to be the trusted postal and
logistics operator offering a comprehensive product portfolio, these investments in non-postal sectors are
intended to supplement income streams from the core activity.
As evident from the above disclosures, there were no notable changes to the core business strategies and
business models of Group entities. The pandemic has not had an impact on the validity of the Group’s
business models, though consequent to the adverse impact that the pandemic has had on economic growth
in Malta, as indeed worldwide, it is expected that the Group will face pressures on income streams in times
ahead.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
15
Directors’ Report (continued)
2. Anti-Corruption and Bribery Matters
The Group has a zero tolerance policy to bribery and corruption, financial crime and breaches of the relative
laws and regulations. The Group developed and maintains robust policies designed to prevent and detect
potential bribery and corruption in the form of an Anti-Bribery and Corruption (ABC) Policy and
Whistleblowing Policy.
The implementation of these policies is by means of processes, procedures and respective controls, which
are embedded in the Group’s structures and manuals in order to ensure that staff members act responsibly
within the work place and outside. Guidelines and instructions regarding ABC and Whistleblowing are
applicable and available to all staff members. All staff members, including Directors and, where relevant,
associated persons are required to comply with the principles outlined. The Group supports a ‘speak-up
attitude’ to encourage reporting of concerns relating to what might appear to be suspected illegal, unethical
or otherwise improper acts or their concealment. The same standards are expected from any third parties
providing services for or on behalf of the Group. Staff members who fail to comply with the Group’s policies
and standards may face disciplinary action, up to and including dismissal or termination of employment.
Training sessions keep staff members abreast of their obligations at all times.
The Risk Management and Compliance functions exercise oversight over the implementation of respective
Policies, the former by including ABC in risk assessments and the latter by ensuring constant standards of
compliance. The Risk, Internal Audit and Compliance functions also work together to ensure the proper
functioning of these policies. Matters arising, if any, out of the adoption of these policies are reported by the
Compliance function in its reports to the Audit & Risk Committee and Board of Directors. Policies are
reviewed annually, or more often as required, by the relative business and internal control functions with
suitable recommendations, as is necessary, made to the Audit & Risk Committee and the Board of Directors.
During the year under review, there were no reported cases on the basis of the abovementioned policies and
therefore no necessary investigations.
3. Social and employee-related matters
Social and employee matters are given full attention by the Group. The Group’s human capital is a key
resource for the carrying out of business. The ability to attract and retain human resources of the right skill-
mix and experience condition to a large extent the Group’s performance. The risk of not attracting or
retaining the appropriate quality staff in line with the Group’s business needs is mitigated generally by the
approach to managing this resource and specifically through a number of measures. Further information on
employees may be found in the Chief Executive Officer’s Review, Human Resources on page 5 and note 31 to
the Financial Statements.
Collective Agreements are in place at the Bank and MaltaPost, setting the conditions of work and generally
regulating the employer/employee relationship. The prevailing Agreements contain a number of measures of
assistance to staff members including days of special paid leave additional to those stipulated at law, such as
Study Leave, and extended Bereavement Leave. The Group enjoys harmonious industrial relations with the
full co-operation of respective trade unions, staff members and their representatives. No industrial disputes
were registered in 2021.
Oversight of key indicators, by which human resource performance is evaluated is maintained by the Head of
the Human Resources function and reported to senior management and the Risk Management function as
appropriate for suitable action if and as required. Performance management takes into consideration
leadership competencies required by individual positions as well as the Group’s corporate values. The Group
does not place quotas on the number of staff members whose personal circumstances require them to work
on reduced hours or need to absent themselves from work for an extended period of time on Child Care
Leave or other absences related to immediate family matters. In this regard, the Group is committed to
supporting and developing family friendly measures further.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
16
Directors’ Report (continued)
The Bank also extends a number of products and services to Group staff members on favourable terms
including, among others, advantageous terms on home loans and other personal borrowing. The Group
keeps an active line of communication with staff members through circulars, branch / department staff
meetings and one-to-one meetings among others, and is committed to maintaining a working environment
where staff is valued, respected and supported to fulfil potential.
All members of staff are treated on equal terms with regard to career development and appointments and
the Group supports and practices gender equality and diversity. The Group, however, does not set specific
targets in this regard, as it firmly believes that progress is dependent largely on skill, competencies, attributes
and performance.
The Group abides by all applicable laws, rules and regulations relating to employment. While conscious of the
fact that the legal obligations are the minimum acceptable standard, the Group strives to surpass standards
in this area and continues to increase awareness among staff. The Group, for example, with about 6%, well
exceeds the obligation to have 2% of the total staff complement composed of persons with disabilities. This
reaffirms the Group’s social outlook and its commitment to create a positive impact in society. Remuneration
levels are regularly reviewed to ensure that they are in line with the Group’s Remuneration Policy. Rewards
reinforce positive conduct and promote Group culture.
Investing in learning and development equips the Group’s diverse staff complement with the knowledge and
expertise to work in line with applicable internal policies and handbooks. Training programmes are tailored
to meet with identified training needs and training facilities are in place for that training delivered in-house.
As in previous years, during 2021, Group staff members participated in several training sessions, and this,
apart from on-the-job training programmes. Training is driven by the requirement to meet identified training
needs rather than by the pursuit of specific numerical targets, which are therefore not set.
The Group maintained measures dedicated to the protection of staff members and customers alike in
response to COVID-19. Also, the Bank continued to adopt remote working schedules for those staff members
whose work duties lent themselves to teleworking - up to 50% of staff members participated on an
alternating basis. The Group followed at all times directions and guidance of the Health Authorities
concerning COVID-19 mitigation measures. In cases where premises needed to be sanitised, this was carried
out as per Health Authority recommendations.
Regarding consumer relations and protection, the Group adheres to all respective Regulatory requirements
such as, inter alia, those arising from Markets in Financial Instruments Directive II (MiFID II), as also reflected
in the MFSA Conduct of Business Rulebook, the Cross Border Payments Regulation II (CBPR II), Payment
Services Directive II (PSD II), Payment Accounts Directive (PAD) and Banking Rule BR/22 Complaints Handling
Procedures for Credit Institutions Authorised Under the Banking Act, 1994.
The Group Complaints Management policies and relevant details on respective web sites provide the
information required for a consumer to submit complaints. During 2021 the Bank had no complaints referred
to the Arbiter for Financial Services. In the case of MaltaPost, customer complaints accounted for 0.002% of
all mail items handled.
The Group does not actively push customers away from physical delivery channels. The Bank firmly believes
that in the Maltese market a physical presence remains an important element of its offering, more so in
respect of customers who expect a personalised service. Maintaining a presence in core community areas is
given importance so as to facilitate accessibility and delivery of important services to the community. Of
course, its digital banking services will continue to be enhanced and offered where / when preferred.
Please also refer to the Chief Executive Officer’s Review, Corporate Social Responsibility on page 5 and to
Principle 12 ‘Corporate Social Responsibility’ on page 31 for further information concerning social matters.
The Group is therefore satisfied with its non-financial performance in respect of social and staff related
matters.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
17
Directors’ Report (continued)
4. Health and safety
Maintaining the highest levels of health and safety and physical security of staff is of paramount importance.
As a minimum, the Group meets with all the statutory obligations set out in the Occupational Health and
Safety Authority Act, 2000. Further measures for the management of health and safety are adopted by way
of standards in Collective Agreements, appointment of Health & Safety Officers and appointment of local first
aiders and fire wardens. Regular checks of related processes and systems are carried out with outcomes
reported to the Health & Safety Officers, who will take action as and if required. Furthermore, health and
safety risk assessments are carried out to ensure that situations that may pose risks to the health and safety
of staff and others on Group premises are identified and mitigated. Occupational health awareness training is
also provided. Some Group staff benefit from personal accident insurance cover and others benefit from
private health care insurance, as well as death in service cover.
5. Human rights
The Group is aware of the importance of ensuring that human rights are upheld across its operations. In this
respect the Group carries out its business without discrimination, respecting the standards set by national
law or higher standards as applicable, such as effective information and consultation processes, particularly
where these affect the place and conditions of work. Business conduct policies are in place to support this
stance, which extend also to counterparties. The Group avoids business with counterparties operating in
economic sectors that may be linked to or present a significant risk to violation of human rights or to social
vices. Additionally, the Bank’s AML/CFT processes, inter alia, assist in the identification of the proceeds of
potential human rights abuses. Any suspicions resulting from these processes are reported to law
enforcement as per current legislative requirements. Services that promote financial inclusion have been
introduced also by way of the PostaPay&Save account which serves as a basic payment account. This account
was introduced well before this was required by regulation. The account allows persons who were previously
unable to open bank accounts to enjoy the facilities of basic payment accounts with relative services.
PostaPay&Save accounts have now been opened for more than 12,000 individuals, though about 11,000
remain active.
During the year under review, the Group did not encounter any issues, claims or reports on any human rights
related matters and / or violations. A grievance procedure is in place to provide effective remedy as and
when needed. The Group is committed to investigate any reports of human rights violations. As previously
stated, the Bank has in place a Whistleblowing Policy which covers among others, related issues. In
accordance with this Policy reports are submitted to the Heads of Risk Management and Internal Audit.
During the year ending 2021, no reports in accordance with this Policy were submitted.
Premises, including self service areas and ATMs, meet all accessibility regulations, apart from where physical
restrictions make this impossible, in which case discussions with the relevant regulatory bodies are held.
Property added to the Group’s real estate during 2021 provides full accessibility to people with disabilities.
6. Environmental Matters
The Group does not execute a formal policy relating to environmental matters given its size, scale and nature
of operations. Nonetheless, the Group is mindful of the important role it has to play to contribute towards
safeguarding the environment as much as is possible, thereby minimising the environmental impact of its
operations. Besides assisting in the reduction of costs, being environmentally friendly and taking measures to
reduce its carbon footprint fits within the overall corporate social responsibility initiatives of the Group. The
Group continues with its programme of investment aimed at reducing reliance on fossil fuel power as far as
practical and opportune.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
18
Directors’ Report (continued)
Relative initiatives included installation of PVA panels and other energy efficient installations such as modern
Heating Ventilation Air Conditioning (HVAC) systems and Light Emitting Diodes (LED) light fittings. Waste
separation facilities and recycling processes are in place and are ongoing throughout the Group.
The Group operates 54 electric vehicles replacing internal combustion motor vehicles, thereby contributing
to reducing emissions. Installation of charging points in parking areas and bicycle racks are further initiatives.
The Bank also runs a scheme, which reimburses public transport costs for most staff members so as to
encourage reduced use of private motor vehicles when commuting. The scheme effectively provides for free
public transport on work days.
Adherence to respective policies is the responsibility of operations management, while oversight is the
responsibility of Risk Management Department.
The Group continues with its efforts to preserve buildings of architectural importance now serving as modern
and functional branches/offices. ‘Restoration with respect’ continues to be the Group’s motto when
acquiring and renovating buildings of architectural heritage value, delivering them back to society in their
original splendour.
Preservation and reuse of such property reduces resources and material consumption, generates less waste
and consumes less energy than developing greenfield and / or brownfield sites.
MaltaPost runs a postal museum also in a restored building in Valletta housing a collection of artefacts
related to Malta’s postal history. Additions to the collection of artefacts are made as opportunities arise,
thereby enriching further the country’s postal heritage.
The Group’s business is mostly carried out in Malta. The Malta climate-related risks are not expected to have
a consequence on the impairment or fair value of assets, give rise to credit losses and/or potential provisions
or contingent liabilities. Therefore the impact of climate change on the financial performance is not expected
to be material. That said, like any other business the Group is however not shielded from the economic risks
of climate change, which in turn can have an impact on the financial performance.
The Bank is mindful of the evolving Environmental, Social & Governance (ESG) regulatory landscape. It
continues following developments closely so as to further determine how ESG considerations influence the
manner in which it carries out its business and the extent to which such considerations are incorporated
within its risk management framework. ESG workshops are planned for 2022 with assistance from external
consultants. An ESG action plan will also ensure effective implementation.
7. Risk Reporting
A Group enterprise-wide risk management framework provides the foundation for the risk management
reporting processes. This framework is subject to constant evaluation to ensure it meets the challenges and
requirements of the markets in which the Group operates, as also regulatory standards and industry best
practices.
The Group’s strong governance framework is supplemented by clear organisation structures and reporting
lines, and well defined procedures embedded in processes throughout the Group and is subject to ongoing
review.
The organisation structure ensures that responsibilities and duties are well-defined and known. Within the
functions defined, processes are in place to identify, monitor, manage and report risks. The processes also
include internal control mechanisms, together with appropriate administrative and accounting procedures.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
19
Directors’ Report (continued)
The Bank has a formal Risk Management Policy which provides the foundation for achieving a balance
between sound practices and profitability by applying strict internal controls and discretionary limits, and
optimising the returns thereof, in line with the Bank’s risk appetite.
The risk appetite determines the maximum risk assumed to meet business objectives. From time-to-time the
risk appetite is updated for the purposes of strategic direction after a thorough analysis of the current risk
profile. The risk appetite is reviewed by the Board at least once a year.
The main categories of risk to which the Group is exposed to are:
Capital Risk Management – This is the ability to hold sufficient capital to comply with regulatory
requirements, safeguard the Group’s ability to continue as a going concern, provide adequate returns for
shareholders and to maintain a strong capital base to support the development of the business (Notes to the
Financial Statements note 2.7; Additional Regulatory Disclosures notes 6 and 7).
Credit Risk – This is the risk of suffering loss should any of the Group’s customers, clients or market
counterparties fail to fulfil their contractual obligations to the Group. Credit risk mainly arises from customer
loans and advances, but also from exposures arising from investment activities. It constitutes the Bank’s
single largest risk in view of its significant lending and securities portfolio. To minimise credit risk, facilities
are generally adequately secured by tangible security that is reviewed periodically to ensure that the
collateral still covers the facilities (Notes to the Financial Statements note 2.3; Additional Regulatory
Disclosures note 2).
Market Risk – This is associated with fluctuations in the fair value or future cash flows because of changes in
market prices. The Bank does not operate a Trading Book and hence this is limited to Interest Rate Risk,
Currency Risk and Equity Price Risk. The Bank is accordingly able to manage the interest rate terms of its
financial assets and simultaneously to effect changes to interest terms of liabilities reflecting the Bank’s
strategy together with market developments (Notes to the Financial Statements note 2.3; Additional
Regulatory Disclosures note 2).
Non-Financial Risks – These are the risk of losses resulting from the lack of skilful management or good
governance within the Bank and the inadequacy of proper control. Non-financial risks and losses arising
therefrom cover a wide spectrum of areas including financial crime, regulatory compliance, fraud, people,
systems and processes which would in turn affect income and capital. The Bank’s risk appetite, which is
determined by the Board and is one of the four pillars of its Risk Management Framework sets the general
principles for the Bank’s risk-taking activities, to raise awareness across the organisation, and to guide staff
members, who are responsible for the risks inherent in day-to-day activities, on acceptable and unacceptable
behaviour. The parameters described in the statement are implemented through the Bank’s operational
policies and procedures, monitoring metrics, and internal controls which are reviewed on an on-going basis.
Risk assessments are periodically carried out to ensure that these risks remain within the Risk Appetite.
Bearing in mind that the nature and frequency of non-financial risks materialising cannot be predicted, in
addition to the above, insurance cover is also in place to cater for operational failures. As part of the Bank’s
Capital Risk management, a capital charge for unforeseeable losses arising from these risks is also taken
(notes to the Financial Statements note 2.6; Additional Regulatory Disclosures note 5).
Compliance Risk – This is the risk of legal sanctions, material financial loss, or loss to reputation the Bank may
suffer because of failure to comply with laws, its own regulations, code of conduct, and standards of
best/good practice. The Compliance function identifies, assesses, advises, monitors and reports on the Bank’s
compliance risks. The function is also the central point through which all interaction with regulatory and
enforcement bodies are routed.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
20
Directors’ Report (continued)
Financial Crime Risk – This is the risk related to offences such as money laundering, terrorist financing, fraud,
bribery and corruption, market abuse and insider trading. The Bank through its various policies and
procedures, is committed to combating financial crime and ensuring that its products and services are not
misused for the purpose of money laundering, terrorism financing and fraud events.
Information Security Risk – This is 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 Bank has zero appetite for losses stemming from threats or malicious attacks. An Information & Cyber
Security Policy is in place which ensures that robust internal controls and adequate measures are set to
mitigate such threats. The need to continuously re-assess controls is paramount to ensure that the Bank’s
defences continue to address this risk and that losses arising from cyber events remain within its appetite.
Liquidity Risk – This is the risk arising when the Bank is unable to meet current and future payment
obligations as they fall due. Liquidity management includes the constant monitoring of liquidity ratios against
internal limits as set in the Risk Appetite Statement and regulatory requirements. During the year, the Bank
continued to hold strong liquidity positions with a Liquidity Coverage Ratio (LCR) and Net Stability Funding
Ratio (NSFR) well above regulatory minima. Through its Assets & Liabilities Committee, the Bank’s liquidity
profile is managed in such a way that cash flows and all anticipated obligations are met when due (notes to
the Financial Statements note 2.5; Additional Regulatory Disclosures note 4).
Key Performance Indicators (KPIs)
The Group has in place a set of key performance indicators (KPIs) that are set by the Board of Directors,
monitored by the Risk Management Function and regularly submitted to the Audit & Risk Committee for
continuous assessment. They are a set of quantifiable measures which ensure that material risks faced are
kept within established parameters as detailed in the Risk Appetite Statement and relevant policies. A
selection of key metrics as at 31 December 2021 are presented hereunder.
Solvency
TCR
16.2%
Liquidity
LCR
225.3%
NSFR
148.4%
Profitability
ROE
1
5.7%
1
After tax
The KPIs are reported on a regular basis in the form of a Risk scorecard. The scorecard, which takes the form
of the “traffic light” approach compares the actual metric to the objectives set. As at the end of December
2021, all KPIs were within acceptable ranges and/or tolerance limits as set within the Bank’s Risk Appetite.
EU Taxonomy KPIs
In order to achieve the targets established by the European Union of reaching net zero greenhouse gas
(‘GHG’) emissions by 2050, with an interim target of reducing GHG emissions by 55%, compared to 1990
levels, by 2030, the European Commission (‘EC’) has developed a taxonomy classification system, by virtue of
EU Regulation 2020/852, (‘the Taxonomy Regulation’ or ‘the EU Taxonomy’), which establishes the criteria
for determining whether an economic activity qualifies as environmentally sustainable.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
21
Directors’ Report (continued)
The EU Taxonomy establishes criteria in terms of six environmental objectives against which entities will be
The EU Taxonomy establishes criteria in terms of six environmental objectives against which entities will be
able to assess whether economic activities qualify as environmentally sustainable. In order to qualify as such,
an economic activity must be assessed to substantially contribute to one of these environmental objectives,
whilst doing no significant harm to the remaining objectives by reference to technical screening criteria
established in delegated acts. The economic activity is also required to meet minimum safeguards
established in the taxonomy regulation. The six environmental objectives considered by the EU taxonomy are
the following:
i. Climate change mitigation;
ii. Climate change adaptation;
iii. Sustainable use and protection of water and marine resources;
iv. Transition to a circular economy;
v. Pollution prevention and control; and
vi. Protection and restoration of biodiversity and ecosystems.
The EC subsequently adopted the Delegated Act supplementing Article 8 of the Taxonomy Regulation (‘the
Disclosures Delegated Act’) in 2021, which establishes the disclosure requirements of entities within the
scope of the Taxonomy Regulation. At this stage, this solely comprises entities subject to an obligation to
publish non-financial information pursuant to Article 19a or Article 29a of Directive 2013/34/EU (being those
entities subject to the Non-Financial Reporting Directive, ‘NFRD’).
The Disclosures Delegated Act became applicable for the first time on 1 January 2022, with respect to
financial reporting periods ended 31 December 2021, adopting a phased-in approach to the disclosure
requirements of key performance indicators. In the first year of its adoption, the Bank is only required to
disclose its proportion of exposures towards taxonomy-eligible and non-eligible activities, along with its out-
of-scope exposure in accordance with the Disclosure Delegated Act.
Identifying taxonomy-eligible economic activities will serve as a basis for eventually determining taxonomy-
alignment of such economic activities with reference to the technical screening criteria established in the
Climate Delegated Act and eventually the Environmental Delegated Act to the Taxonomy Regulation, and
subsequently the determination of the Bank’s Green Asset Ratio (‘GAR’), which it will be required to disclose
from 1 January 2024.
The following table was prepared in accordance with the disclosure requirement established in the
Disclosures Delegated Act. Accordingly, for the purposes of classifying exposures as either taxonomy-eligible
or non-eligible, the Bank has only considered the first two environmental objectives established in the
Taxonomy Regulation (being climate change mitigation and climate change adaptation), with reference to
the Climate Delegated Act. The remaining four environmental objectives will be considered from 1
January
2023, following the adoption of the Environmental Delegated Act, which will establish the list of taxonomy-
eligible economic activities (along with the technical screening criteria to determine taxonomy alignment)
with respect to the remaining objectives.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
22
Directors’ Report (continued)
Carrying amount
As a proportion
of total assets
€ 000
%
Taxonomy eligible
196,678
17.3
Taxonomy non-eligible
90,851
8.0
Out-of-scope exposures*
852,085
74.8
of which non-NFRD counterparties
462,605
40.6
of which derivatives
-
-
of which on demand interbank loans
22,916
2.0
of which other assets (incl. cash-related assets)
88,649
7.8
of which trading portfolio
-
0.0
of which central governments, central banks and
supranational exposures
293,647
25.8
Total assets
1,139,614
100.0
*Out of scope exposures consist of (i) non-NFRD counterparties, (ii) derivatives, (iii) on demand interbank loans, (iv) other assets
including retail loans not related to residential real estate, house renovation and motor vehicles, and other assets not related to lending
or investments, (v) trading portfolio and (vi) governments, central banks and supranational exposures.
Scope of consolidation
The ratios disclosed above represent the Bank’s exposures on a standalone basis as a proportion of its total
assets as at 31 December 2021.
Assets in scope
The amounts disclosed above as taxonomy-eligible and taxonomy non-eligible economic activities consider
on-balance sheet financial assets not held for trading by the Bank. These include:
i) Loans and advances, debt securities and equity instruments in relation to undertakings that are
subject to Non-Financial Reporting Directive;
ii) Real estate collaterals obtained by the Bank by taking possession in exchange for the cancellation of
debts;
iii) Loans and advances towards individuals in respect of residential real estate, house renovation and
motor vehicles (the latter of which was nil as at 31 December 2021); and
iv) The investment in the Bank’s subsidiary.
Other assets which are considered to be out of scope of the Taxonomy Regulation have been disclosed
separately in the table above.
Taxonomy-eligible and Taxonomy non-eligible economic activities
Taxonomy-eligible economic activities are those activities for which technical screening criteria have been
established by virtue of the Climate Delegated Act, and therefore taxonomy alignment of such activities may
be determined. By contrast, taxonomy non-eligible economic activities are those activities which cannot be
assessed as environmentally sustainable, or not, for various reasons. In assessing whether, or not, an
exposure is taxonomy- eligible, the Bank must consider the activity being financed rather than the principle
operating activity of the counterparty. However, due to data limitations this was not always possible in the
current year, as explained further below.
Total exposures to undertakings not subject to the Non-Financial Reporting Directive (‘NFRD’)
Exposures to undertakings that are not obliged to publish Non-Financial Reporting information as per Article
19a or Article 29a of Directive 2013/34/EU as a proportion of total assets are also being disclosed.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
23
Directors’ Report (continued)
Data limitations
The Bank relies on various data sources to determine taxonomy-eligible and non-eligible exposures and
exposures not subject to NFRD. As scoped-in entities adopt the Taxonomy Regulation requirements for their
own disclosures, this could lead to a lack of comparability between the data reported in the current reporting
period and that reported in future periods.
In order to determine the taxonomy-eligibility of exposures, the Bank has relied on the NACE classification of
the principal activity of the counterparty. However, this is considered to be work-in-progress, as certain NACE
classifications do not necessarily reflect the economic activity for which the exposure has been granted. An
assessment has been carried out, on a sampled basis and for significant exposures, where the purpose of the
facility differs from the primary economic activity of the entity to ensure the correct classification of
taxonomy-eligible financed activities.
As per Article 19a or Article 29a of Directive 2013/34/EU, large public undertakings with more than an
average of 500 employees during the reporting year are subject to NFRD. Given limited data availability, it
has not been possible to identify with certainty all entities falling within the scope of NFRD. However, a best-
effort basis has been carried out to identify those exposures whose undertakings are subject to NFRD, based
on the level of individual exposure and the Bank’s current knowledge of the respective entity.
The Bank is in the process of implementing procedures to overcome such limitations, adopting
methodologies with the aim of improving the accuracy of the information being reported over time.
Additional Voluntary Disclosures in respect of the Bank’s subsidiary MaltaPost p.l.c.
The Bank’s subsidiary MaltaPost p.l.c. is subject to the NFRD and is therefore also subject to disclosure
requirements stemming from the Delegated Act supplementing Article 8 of the Taxonomy Regulation.
However, given that that MaltaPost p.l.c. is consolidated at the level of the Bank (its parent entity), the
company may claim an exemption from such disclosure requirements given that its parent entity complied
with the requirements of the Disclosure Delegated Act.
Despite this, the Group have opted to disclose, on a voluntary basis, the disclosure requirements with respect
to non-financial undertakings in accordance with the Disclosure Delegated Act for MaltaPost p.l.c. on a stand-
alone basis.
As previously explained, the Disclosure Delegated Act adopts a phased in approach to the disclosure
requirements of key performance indicators. In the first year of its adoption, non-financial undertakings are
only required to disclose their proportion of turnover derived from taxonomy-eligible and non-eligible
activities, and the proportion of capital and operating expenditure related to assets which qualify as
taxonomy eligible or non-eligible.
The following table was prepared in accordance with the disclosure requirement established in the
Disclosures Delegated Act, and as explained in the taxonomy related disclosures of the Bank, only the first
two environmental objectives established in the Taxonomy Regulation (being climate change mitigation and
climate change adaptation), were considered when determining taxonomy eligibility or non-eligibility.
Taxonomy
eligible activities
Taxonomy non-eligible
activities
Total
%
€000
%
€000
%
€000
Turnover
88
30,095
20
7,433
100
37,528
CapEx
54
1,828
46
1,539
100
3,367
OpEx
40
726
60
1,104
100
1,830
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
24
Directors’ Report (continued)
The amounts disclosed in the table above pertain to the following:
i) Turnover consists of the revenue generated by MaltaPost p.l.c. during the financial year ended 30
September 2021 from all of its business activities. When determining taxonomy eligibility, the
company has identified the following economic activities that fall within the scope of the Taxonomy
Regulation in the transport sector:
- 6.4 Operation of personal mobility devices, cycle logistics
- 6.5 Transport by motorbikes, passenger cars and light commercial vehicles
- 6.6 Freight transport services by road
ii) CapEx consists of additions to property, plant and equipment and intangible assets during the
financial year ended 30 September 2021 considered before depreciation, amortisation and any re-
measurements (including those resulting from revaluations and impairments, if applicable).
iii) OpEx consists of direct non-capitalised costs incurred during the financial year ended 30 September
2021 that relate to the day-to-day servicing of assets of property, plant and equipment (including
also intangible assets) that are necessary to ensure the continued and effective functioning of such
assets.
The determination of taxonomy eligible and non-eligible activities was determined in line with the criteria
described above in the taxonomy disclosures of the Bank.
In determining whether an activity should be classified as taxonomy eligible or taxonomy non-eligible with
respect to the transport sector, an assessment would need to be made on the specifications of the vehicles
used in the activity, with the activity only being considered as taxonomy eligible if certain vehicle criteria are
met. MaltaPost p.l.c. is still in the process of compiling the necessary information to complete this
assessment. Therefore, the amounts disclosed above as taxonomy eligible were determined on a best effort
basis based on the information that the Company has compiled to date. Going forward MaltaPost p.l.c. will
continue to enhance its processes and compile further information to improve the accuracy of its Taxonomy
reporting in future years, which is being disclosed on a voluntary basis.
8. COVID-19
The Group had already taken measures to manage and mitigate the disruptions caused by COVID-19 when
this first broke out in Malta, and though 2021 continued to present challenges in this regard, the Group
benefitted from the groundwork laid in 2020. Operational processes which were adapted to the new
circumstances were maintained and suitably enhanced where appropriate.
The Group remained sensitive to the fact that it provides essential services to a wide range of customers, and
therefore maintained its efforts to limit disruption, ensure business continuity, protect staff members and
customers alike.
The Bank maintained its support to those customers mostly affected by the pandemic by way of the
dedication of additional financial and other resources, to the extent required. Inevitably, the new realities
consequent to the pandemic impacted the local economy and as a result a number of customers too.
The Group continues to take all the necessary measures to limit any possible negative effects while keeping
as a foremost consideration the maintenance of business continuity without service interruptions while
safeguarding the well-being and health of staff and customers.
Signed on behalf of the Bank's Board of Directors on 20 April 2022 by Michael C. Bonello (Chairman) and
Joseph Said (Director and Chief Executive Officer) as per the Directors' Declaration on ESEF Annual Financial
Report submitted in conjunction with the Annual Report and Financial Statements 2021.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
25
Statement of Compliance with the Principles of Good Corporate Governance
A. INTRODUCTION
In terms of the Capital Markets Rules of the Malta Financial Services Authority (Rule 5.94), Lombard Bank Malta
p.l.c. (the Bank), as a company having its securities admitted to trading on a regulated market, is obliged to
report on the extent to which it has adopted the ‘Code of Principles of Good Corporate Governance’ (the
Principles) embodied in Appendix 5.1 to Chapter 5 of the same Capital Markets Rules, as well as the measures
which have been taken by the Bank to ensure compliance with these Principles.
While the Principles are not mandatory, the Board of Directors of the Bank has endeavoured to ensure that they
are upheld to the fullest extent possible, and this while acknowledging that good corporate governance is indeed
beneficial to all the Bank’s stakeholders. The instances in which the Bank has departed from the Principles are
explained below under Section C - ‘Non-Compliance with the Code’.
After having carried out a review of the extent to which the Bank has been compliant with the Principles
throughout the financial year ended 31 December 2021, the Board of Directors, in terms of Capital Markets Rule
5.97, presents its report as follows:
B. COMPLIANCE WITH THE CODE
PRINCIPLE 1: THE BOARD
As at 31 December 2021, the Board of Directors of the Bank consisted of five (5) Directors, four (4) of whom
being non-executive Directors together with the Chief Executive Officer of the Bank being also a Director.
Michael Zammit, one of the Bank’s non-executive directors, sadly passed away on 3 February 2022 (Refer to
Company Announcement LOM 263). Following his demise, the Board of Directors on 15 February 2022 co-opted
Peter Perotti as non-executive director of the Bank and as a member of the Bank’s Audit & Risk Committee and
Suitabilities & Evaluations Committee. (Refer to Company Announcement LOM 264). His fit and proper
assessment was approved by the Bank’s Suitabilities & Evaluations Committee and upon receipt of regulatory
approval on 14 April 2022, his appointment became effective as of such date. (Refer to Company Announcement
LOM 265).
The Directors, individually and collectively, are considered fit and proper to direct the business of the Bank,
having the necessary skills and experience to be able to do so.
In order to assist it in the execution of its duties and responsibilities, the Board of Directors has set up a number
of committees and these include the Audit & Risk Committee, the Assets & Liabilities Committee, the Credit
Committee and the Suitabilities & Evaluations Committee, all of which are regulated by their own Terms of
Reference as approved and periodically reviewed by the Board.
PRINCIPLE 2: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Different individuals occupy the positions of Chairman and Chief Executive Officer. A clear division of
responsibilities exists between the Chairman’s responsibility for the running of the Board of Directors and the
Chief Executive Officer’s responsibility for the running and managing of the Bank’s business. This separation of
roles of the Chairman and Chief Executive Officer avoids concentration of power, authority and unfettered
discretion in one individual alone and differentiates leadership of the Board from the running of the Bank’s
business.
The Chairman’s responsibilities, inter alia, include: (i) leading the Board and helping it reach its full potential,
particularly by facilitating the effective contribution of Directors and encouraging discussion; (ii) setting of the
Agenda for Board meetings; (iii) ensuring that the Directors receive precise, timely and objective information so
that they can make sound decisions and effectively monitor the performance of the Bank; (iv) ensuring that all
strategic and policy issues are appropriately discussed and formally approved; and (v) maintaining effective
communication with the Bank’s shareholders at all times.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
26
Statement of Compliance with the Principles of Good Corporate Governance (continued)
As stated below, the Chairman meets the independence criteria set out in the Principles. On the other hand, the
Chief Executive Officer is responsible for managing the day-to-day business of the Bank in conformity with the
agreed plans, policies and strategies approved by the Board.
PRINCIPLE 3: COMPOSITION OF THE BOARD
The following Directors served on the Board during the period under review:
Michael C. Bonello
Graham A. Fairclough
Kimon Palamidis
Joseph Said
Michael Zammit*
* As reported above, Michael Zammit passed away on 3 February 2022. Following his demise, the Board of Directors co-
opted Peter Perotti as non-executive director of the Bank and as a member of the Bank’s Audit & Risk Committee and
Suitabilities & Evaluations Committee, subject to regulatory approval which was granted on 14 April 2022, being the
effective date of his appointment.
All Board members are non-executive Directors who are not engaged in the daily management of the Bank, with
the exception of Joseph Said who is also Chief Executive Officer of the Bank. Furthermore, the Board considers
Michael C. Bonello, and Kimon Palamidis as independent Directors. Before his demise, Michael Zammit was still
considered to be independent despite the fact that he had served on the Board for more than twelve
consecutive years. Peter Perotti is also considered to be independent. In determining the independence of its
members, the Board takes into consideration the relevant criteria and Principles as well as what are generally
considered sound, acceptable standards. All non-executive Directors have declared in writing to the Board that
they undertake:
• to maintain in all circumstances their independence of analysis, decision and action;
• not to seek or accept any unreasonable advantages that could be considered as compromising their
independence; and
• to clearly express their opposition in the event that they find that a decision of the Board may harm the Bank.
It is considered that, in the current circumstances in which the Bank is operating, the size of the Board is
sufficient for the requirements of the business and that the balance of skills and experience therein is
appropriate to properly enable the Board to carry out its duties and responsibilities. This is considered so also
taking into account, inter alia, the Bank’s simple model and the principle of proportionality, based on the Bank’s
size and the nature, scale and complexity of its activities and products.
The composition and election of the Board of Directors is determined by the Bank’s Articles of Association
wherein it is established that it is the shareholders who must appoint Directors to serve on the Board. Within
these parameters, options for further strengthening the Board are always considered. In addition, however, the
Bank, by virtue of the Board-appointed Suitabilities & Evaluations Committee, carries out suitability assessments
of its existing Directors and any new nominated Directors in order to ensure that the suitability, fit and proper
criteria are observed, pursuant to all applicable laws, rules, regulations, guidelines etc.
The overall composition of the Board and the collective knowledge, skills and experience required are evaluated
during individual suitability assessments and collective suitability assessments so as to ensure that the Board is
effectively discharging all its duties and obligations at all times.
The appointment of Directors to the Board is a matter that is reserved entirely to the Bank’s shareholders in
terms of the Memorandum and Articles of Association. Therefore diversity, to an extent, depends on the profiles
of nominees proposed and their suitability in terms of applicable laws, rules, regulations, guidelines etc. The
benefits of diversity, including that in educational and professional backgrounds, age, gender, experience and
geographical provenance would be considered by the Suitability and Evaluations Committee in its assessment of
suitability of any nominees.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
27
Statement of Compliance with the Principles of Good Corporate Governance (continued)
The Board considers that as a policy and as reflected in its Board of Directors’ Charter, it endeavours to have a
varied board, particularly in terms of diverse educational and professional backgrounds and extensive and
specialised experience of its members. The Board is confident that for this reason, and in light of the current
circumstances in which it is operating, also taking into account proportionality and the Bank’s size and the
nature, scale and complexity of its activities and products, it benefits from a satisfactory diversity of skills,
knowledge and experience. This allows for a good understanding of current affairs, the Bank’s activities,
business model, strategy and associated risks and the environment in which the Bank operates and longer-term
risks and opportunities related to the Bank’s business. It also benefits from international expertise.
The Board is cognisant of the fact that the appropriate mix of Board Members ensures diverse perspectives,
experience and knowledge. It continues to remain committed to achieving further diversity among its members
particularly in terms of number, age, geographical provenance, gender, experience, educational and professional
backgrounds.
PRINCIPLE 4: THE RESPONSIBILITY OF THE BOARD
In pursuing the execution of the four basic roles of corporate governance, namely, accountability, monitoring,
strategy formulation and policy development, the Board of Directors, having the first level of responsibility for
such execution:
• regularly reviews and evaluates corporate strategy, major operational and financial plans, risk policy,
performance objectives and monitors implementation and corporate performance within the parameters of
all relevant laws, regulations and codes of best business practice;
• applies high ethical standards and takes into account the interests of stakeholders and acts responsibly and
with integrity and on a fully informed basis, in good faith, with due diligence and in the best interests of the
Bank and its shareholders;
• recognises that the Bank’s success depends upon its relationship with all groups of its stakeholders, including
employees, suppliers, customers and the wider community in which the Bank operates;
• monitors effectively the application and implementation by Management of its policies and strategy;
• recognises and supports enterprise and innovation within Management and examines how best to motivate
the Bank’s Management;
• seeks to establish an effective decision-making process in order to develop the Bank’s business efficiently;
and
• ensures that a balance is struck between enterprise and control in the Bank.
Furthermore, the Board of Directors:
• defines in clear and concise terms the Bank’s strategy, policies, management performance criteria and
business policies and effectively monitors the implementation of such by Management;
• establishes a clear internal and external reporting system so that the Board has continuous access to
accurate, relevant and timely information;
• has appointed Committees, including the Audit & Risk Committee, Credit Committee, Assets & Liabilities
Committee and Suitabilities & Evaluations Committee;
• continuously assesses and monitors the present and future operations’ opportunities, threats and risks;
• evaluates the Management’s implementation of corporate strategy and financial objectives;
• ensures that the Bank has appropriate policies and procedures in place to assure that the Bank and its
employees maintain the highest standards of corporate conduct, including compliance with applicable laws,
regulations, business and ethical standards;
• ensures that the financial statements of the Bank and the annual audit thereof are completed within the
stipulated time periods; and
• requires Management to constantly monitor performance and report fully and accurately to the Board.
Furthermore, Directors keep themselves updated on an ongoing basis of their statutory and fiduciary duties, the
Bank’s operations and prospects, the general business environment and skills and competences of Senior
Management. The expectations of the Board are also discussed regularly.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
28
Statement of Compliance with the Principles of Good Corporate Governance (continued)
PRINCIPLE 5: BOARD MEETINGS
The Board convened fourteen (14) times during the period under review with attendance as follows:
Michael C. Bonello 14
Graham A. Fairclough 14
Kimon Palamidis 14
Joseph Said 14
Michael Zammit 12 *
* Michael Zammit appointed an alternate director for the 2 meetings he did not attend.
The dates when the Board meetings are scheduled to be held are determined prior to the beginning of the year
in question. When required, further meetings are scheduled.
Ahead of Board meetings an agenda and supporting documentation are made available to all Directors. Other
than in the case of meetings specially convened to discuss particular matters, generally the agendas of regular
Board meetings set out items of a long-term strategic nature, as well as performance-related issues together
with credit applications which fall within the discretionary limits of the Board and also include various
compliance-related matters. During meetings, Directors are encouraged to present their views pertinent to the
subject matter and are given every opportunity to contribute to the relevant issues on the agenda. Following
each meeting, minutes which record attendance as well as all decisions taken are circulated to all Board
members.
PRINCIPLE 6: INFORMATION AND PROFESSIONAL DEVELOPMENT
The Board of Directors appoints the Chief Executive Officer. Each newly appointed Member of the Board is
briefed by the Chief Executive Officer, Senior Management officials, Heads of Internal Control Functions and any
other staff members as necessary, on all aspects of the Bank’s business and functions, while the Company
Secretary provides each newly appointed Director with relevant corporate governance information and
references to relevant Legislation, Rules, Guidelines, the Bank Statute as well as policy documents.
Board members are reminded that the Company Secretary is at their disposal to provide any advice or service
that may be required in the discharge of their duties and responsibilities. The Company Secretary is responsible
for advising the Board, through the Chairman, on all governance matters. The Secretary is responsible for
ensuring that Board procedures are complied with as well as that effective information flows within the Board,
its committees and with Senior Management. The Secretary also facilitates induction and assists with
professional development, as required.
Directors are given the opportunity to update and develop their skills and knowledge, particularly through
detailed presentations, briefings and training by senior executives and other relevant Bank officials. They are
invited to attend training sessions organised specifically for the Board and are also informed of and encouraged
to attend externally run seminars throughout their directorship. In addition, all Board members may obtain
independent professional advice at the Bank’s expense.
Furthermore, Directors have access to the advice and services of the external auditors who are invited to attend
all Audit & Risk Committee meetings as well as Board meetings when required, including the meetings at which
the Bank’s financial statements are approved.
The Board continues to be mindful of the crucial importance of recruiting, retaining and motivating quality
management. The ongoing training and development of staff at all levels is considered of the utmost importance
and this also in the light of the need for orderly succession.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
29
Statement of Compliance with the Principles of Good Corporate Governance (continued)
PRINCIPLE 7: EVALUATION OF THE BOARD’S PERFORMANCE
An assessment exercise of the Board’s performance was carried out through a ‘self-evaluation’ questionnaire in
which Board members participated. Furthermore, assessment exercises of performance of the committees were
also carried out by virtue of ‘self-evaluation’ questionnaires completed by the members and some regular
attendees of the Audit & Risk Committee, the Assets & Liabilities Committee and the Credit Committee. These
exercises also included an evaluation of the Chairman of each respective Committee. These ‘self-evaluation’
questionnaires were then set to be analysed by the Suitabilities & Evaluations Committee established by the
Board to report to the Board accordingly. This exercise did not reveal the need for any material changes in the
Bank’s governance structures and organisation.
PRINCIPLE 8: COMMITTEES
The Board has appointed the following committees:
Audit & Risk Committee
The primary purpose of the Audit & Risk Committee is to protect the interests of the Bank’s shareholders and to
assist the Directors in conducting their role effectively so that the Bank’s decision-making capability and the
accuracy of its reporting and financial results are maintained at a high level at all times. The Committee assists
the Board in fulfilling its supervisory and monitoring responsibility for effective financial reporting, risk
management, control and governance and this by, inter alia, reviewing any financial information, statements and
disclosures to be issued, systems of governance, systems of internal control established by Management and the
Board, the risk management processes, the external and internal audit processes as well as the compliance
processes. The Audit & Risk Committee met eleven (11) times during the period under review.
With respect to Risk Management, the Committee, inter alia, reviews reports from the Risk Management
Function which enable the Committee (and the Board) to consider the process of risk identification and
management, to assess the risks involved in the Bank’s business and to understand how they are controlled and
monitored by Management. The Committee also advises the Board on the Bank’s overall current and future risk
appetite and strategy and assists the Board in overseeing the implementation of that strategy by Management.
During the year under review, the Audit & Risk Committee was composed of the following four (4) non-executive
Board members three (3) of whom being independent: Michael C. Bonello Graham A. Fairclough, Kimon
Palamidis and Michael Zammit in accordance with the Audit & Risk Committee’s Terms of Reference. As stated
earlier, Michael Zammit passed away in February 2022. Peter Perotti was co-opted as a Board member and also
as a member of the Bank’s Audit & Risk Committee and Suitabilities & Evaluations Committee, subject to
regulatory approval which was granted on 14 April 2022, being the effective date of his appointment. He is an
independent non-executive Board member.
Kimon Palamidis is the Chairman of this Committee and is considered by the Board to be independent. Together
with the other members, he is also competent in accounting and/or auditing in terms of the Capital Markets
Rules. The Bank’s Head of Internal Audit and Head of Risk attend meetings of the Audit & Risk Committee. The
Bank’s External Auditors and members of Senior Management and others, including, inter alia, the Chief
Executive Officer, Chief Financial Officer, Chief Officer Credit and the Compliance Officer, are also invited to
attend meetings as is deemed necessary by the Committee. The Company Secretary acts as Secretary to the
Audit & Risk Committee.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
30
Statement of Compliance with the Principles of Good Corporate Governance (continued)
Assets & Liabilities Committee (ALCO)
Membership of this Committee is made up of a number of Chief Officers and senior officers, including from the
Finance and Treasury departments and the Corporate Advisory & Research and Asset and Fund Management
functions. The Chief Executive Officer chairs the ALCO whose main objective is to manage risks within approved
limits at the same time as maximising returns by efficient and judicious management of the Bank’s assets and
liabilities. Risk Management officials are also invited to attend meetings. A Secretary is appointed by the
Committee.
Credit Committee
The Credit Committee is responsible for considering and approving credit applications within delegated limits of
authority. It is composed of a number of Chief Officers and senior officers. The Chief Executive Officer chairs this
Committee and a Secretary is appointed by the Committee.
Suitabilities & Evaluations Committee
This Committee is responsible for carrying out suitability assessments of nominated and existing Directors, Key
Function holders or any other persons as may be required and also assesses the Board’s annual performance and
that of its committees following the completion of the self-evaluations by the Board and committee members.
The chairman of the Committee is selected by the Board of Directors (currently the non-executive Director and
Committee member, Graham A. Fairclough) and the Company Secretary acts as Secretary.
Remuneration Committee
The functions of the Remuneration Committee are carried out by the Board of Directors in view of the fact that
the remuneration of Directors for the holding of their office on the Board is not performance-related.
A separate ‘Remuneration Report’ features on page 35 of this Annual Report in compliance with the Principles.
PRINCIPLE 9 AND 10: RELATIONS WITH SHAREHOLDERS AND MARKETS AND INSTITUTIONAL SHAREHOLDERS
The Bank fully appreciates the importance of maintaining open lines of communication with shareholders, the
markets and institutional shareholders. The Board, in this regard, considers that throughout the period under
review the Bank has continued to communicate appropriately by means of regular company announcements.
The Bank communicates with its shareholders with respect to its Annual General Meetings. The prevailing
COVID-19 pandemic has precluded the Bank from holding its recent Annual General Meetings and the
forthcoming 2022 Annual General Meeting in person. This notwithstanding, despite being held remotely in terms
of the Companies Act (Public Companies – Annual General Meetings) Regulations, 2020 (L.N. 288 of 2020),
shareholders are still given the opportunity to participate by sending in questions beforehand and by appointing
the Chairman as their proxy and indicating their voting preferences. They can also follow proceedings which shall
be live streamed. The AGM documentation is sent to all shareholders at least twenty-one (21) days prior to the
holding of the Meeting.
The Bank’s website (www.lombardmalta.com), contains information about the Bank and its business and is
updated regularly.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
31
Statement of Compliance with the Principles of Good Corporate Governance (continued)
It is therefore the Bank’s policy:
• to publish information that can have a significant effect on the Bank’s share price through the Malta Stock
Exchange and immediately after on the Bank’s website;
• to make other published information available to the public on the Bank’s website;
• to strive for open, transparent communications;
• to ensure continuity and high quality in the information disclosed; and
• to be accessible to all stakeholders.
Minority shareholders are entitled to call special meetings should a minimum threshold of share ownership be
established in accordance with the Bank’s Memorandum and Articles of Association. Furthermore, minority
shareholders may formally present an issue to the Board if they own the predefined minimum threshold of
shares.
PRINCIPLE 11: CONFLICTS OF INTEREST
The Board of Directors recognises that its members have a primary responsibility to always act in the interest of
the Bank and its shareholders as a whole, irrespective of who appointed them to the Board.
Strict policies are in place, particularly in the Board of Directors’ Charter, to enable the management of conflict
of interest, both actual as well as potential, should the occasion arise.
In addition, the Bank’s ‘Policy on the Prevention of Market Abuse’ was adopted and implemented in conformity
with Market Abuse laws and regulations. Directors and staff members are also regularly reminded of their
obligations when dealing in securities of the Bank and other scheduled financial instruments.
Joseph Said, who is a Director of the Bank, holds a directorship in two companies that have a shareholding in the
Group, as disclosed in the Directors’ Report.
PRINCIPLE 12: CORPORATE SOCIAL RESPONSIBILITY
The Bank is well aware of the need to adhere to accepted principles of corporate social responsibility and in this
regard remains fully committed to conducting its activities ethically at all times. It consistently seeks to
contribute to economic and social development while also improving the quality of life of its staff members and
their families. These principles also include matters concerning data privacy and protection, diversity and
inclusion, talent management, customer relations, innovation, community and staff engagement as well as
responsible lending.
The Bank implements these principles of corporate social responsibility through strong governance and risk
management practices.
It extends support to various initiatives and projects together with direct community involvement. The Bank is
also sensitive to the fact that success in these areas requires investment in the community, customers and staff
members while not overlooking the impact that its activities may have on the environment.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
32
Statement of Compliance with the Principles of Good Corporate Governance (continued)
C. NON-COMPLIANCE WITH THE CODE
PRINCIPLE 4: (CODE PROVISION 4.2.7)
The above Code Provision states, ‘The Board should develop a succession policy for the future composition of the
Board of Directors and particularly of the executive component thereof, for which the Chairman should hold key
responsibility’.
The appointment of Directors to serve on the Board is a matter which is entirely reserved to the shareholders of
the Bank in terms of its Memorandum and Articles of Association (except where the need arises to fill a casual
vacancy). The concept of rotation of directors as set out by the Bank’s Memorandum and Articles of Association
also provides an element of continuity on the Board of Directors. On the basis of the above, the Board does not
at this stage consider it necessary to develop a succession policy for the future composition of the Board. This
notwithstanding, within the above parameters, options and opportunities for further strengthening the Board
continue to be considered.
PRINCIPLE 8A: (REMUNERATION COMMITTEE)
The Board did not establish a Remuneration Committee as specified in Code Provision 8.A.1. In terms of Code
Provision 8.A.2 of the Principles, given that the remuneration of Directors for the holding of their office on the
Board is not performance-related, the functions of the Remuneration Committee are carried out by the Board of
Directors.
PRINCIPLE 8B: (NOMINATION COMMITTEE)
A Nomination Committee has not been set up since the appointment of Directors to the Board is a matter that is
reserved entirely to the Bank’s shareholders in terms of the Memorandum and Articles of Association.
In this connection every member of the Bank holding in the aggregate at least fifteen percent (15%) of the
ordinary issued share capital of the Bank shall be entitled to appoint one (1) Director for each and every fifteen
percent (15%) of the ordinary issued share capital owned by that member.
Any fractional shareholding in excess of fifteen percent (15%) not applied in appointing such a Director or
Directors, and only that fraction, shall be entitled to vote in the election of the remaining Directors together with
the remaining body of shareholders. These are entitled to appoint the remaining Board members in accordance
with the provisions of the Bank’s statute.
This notwithstanding, in light of regulatory requirements, the Suitabilities & Evaluations Committee referred to
above was set up specifically to carry out suitability assessments of nominated and existing Directors, Key
Function holders or any other persons as may be required and also to assess the Board’s annual performance
and that of its committees.
PRINCIPLE 9: (CODE PROVISION 9.3)
There are no procedures disclosed in the Bank’s Memorandum or Articles as recommended in Code Provision 9.3
to resolve conflicts between minority shareholders and controlling shareholders.
D. INTERNAL CONTROL (CAPITAL MARKETS RULE 5.97.4)
The Board is ultimately responsible for the Bank’s internal controls as well as their effectiveness, while authority
to operate the Bank is delegated to the Chief Executive Officer. The Bank’s system of internal controls is
designed to manage all the risks in the most appropriate manner. Such controls, however, cannot completely
eliminate the possibility of material error or fraud. The Board, therefore, assumes responsibility for executing the
four basic roles of corporate governance, i.e. accountability, monitoring, strategy formulation and policy
development.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
33
Statement of Compliance with the Principles of Good Corporate Governance (continued)
In summary, the Board is therefore responsible for:
• reviewing the Bank’s strategy on an ongoing basis as well as setting the appropriate business objectives in
order to enhance value for all stakeholders;
• appointing and monitoring the Chief Executive Officer whose function it is to manage the operations of the
Bank; and
• identifying and ensuring that significant risks are managed satisfactorily.
Given the fiduciary responsibility involved, the Board of Directors also sets high business and ethical standards
for adoption right across the organisation.
The Board upholds a policy of clear demarcation between its role and responsibilities and those of Management.
It has defined the level of authority that it retains over strategy formulation and policy determination together
with delegated authority and has vested accountability for the Bank’s day-to-day business in the Assets &
Liabilities Committee, Credit Committee and in the management team comprising of the:
• Chief Executive Officer; and
• Chief Officers and other officers.
The Board frequently participates in asset allocation decisions as well as credit proposals above a certain
threshold, after the appropriate recommendations have been made.
The Bank’s internal control framework covering all the Bank’s activities ensures:
• effective and efficient operations and prudent conduct of business;
• proper risk management;
• reliable financial and non-financial information; and
• compliance with all internal policies, processes and procedures, laws, rules and regulations.
To this effect, a three-lines-of-defence model has been adopted by the Bank as follows:
• First line of defence – Business Units / Operations: This is provided by front line staff members and business
unit management. The internal controls and systems, the culture and control environment developed and
implemented by these business units play a vital role in anticipating and managing operational risks.
• Second line of defence – Risk Management & Compliance: The Bank maintains permanent and effective
compliance and risk management functions which report directly to the Audit & Risk Committee and Board of
Directors. The Compliance Function identifies, assesses and manages compliance risk. The Risk Management
Function is responsible for overseeing the Bank’s activities and for identifying, monitoring, controlling and
reporting such risk. Through the Bank’s Risk Management Framework, an appropriate balance is struck
between sound practices and profitability, by applying strict internal controls and discretionary limits, and
optimising the returns thereof, in line with the Bank’s risk appetite.
• Third line of defence – Internal Audit: This is an integral part of the Bank’s control environment and provides
Management and the Audit & Risk Committee and Board of Directors with an independent and objective
review of the Bank’s business activities and support functions.
E. GENERAL MEETINGS (CAPITAL MARKETS RULE 5.97.6)
General meetings are called by giving at least twenty-one (21) days’ notice and conducted in accordance with
the provisions contained in the Bank’s Articles of Association.
The ‘Ordinary Business’ which is dealt with at the Annual General Meeting consists of the adoption of the annual
financial statements, declaration of a dividend, appointment of Board members, appointment of auditors and
the fixing of their remuneration together with the voting of remuneration to the Directors for the holding of
their office. All other business shall be deemed ‘Special Business’.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
34
Statement of Compliance with the Principles of Good Corporate Governance (continued)
All shareholders registered in the shareholders’ register on record date as defined in the Capital Markets Rules
have the right to attend, participate and vote in the general meeting.
A shareholder or shareholders holding not less than five per cent (5%) of the voting issued share capital of the
Bank may: (i) request the Bank to include items on the agenda and; (ii) table draft resolutions for items included
in the agenda of a general meeting. Such requests shall be submitted to the Bank at least forty-six (46) days
before the date set for the general meeting.
Every shareholder shall be entitled to appoint only one (1) person to act as proxy holder to attend and vote at a
general meeting instead of him. The proxy holder shall enjoy the same rights to speak and ask questions in the
general meeting as those to which the member thus represented would be entitled.
In view of the continued circumstances arising from the ongoing COVID-19 pandemic, the 2022 Annual General
Meeting shall once again be held remotely, in terms of the Companies Act (Public Companies - Annual General
Meetings) Regulations, 2020 (L.N. 288 of 2020).
Signed on behalf of the Bank's Board of Directors on 20 April 2022 by Michael C. Bonello (Chairman) and Joseph
Said (Director and Chief Executive Officer) as per the Directors' Declaration on ESEF Annual Financial Report
submitted in conjunction with the Annual Report and Financial Statements 2021.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
35
Remuneration Report
As indicated in the ‘Statement of Compliance with the Code of Principles of Good Corporate Governance’, in terms of
the ‘Code of Principles of Good Corporate Governance’ within the Capital Markets Rules issued by the Malta Financial
Services Authority, the Board of Directors performs the functions of a Remuneration Committee on the basis that the
remuneration of the Bank’s Directors for the holding of their office on the Board, is not performance-related and does
not include share options, pension benefits, profit-sharing arrangements or any emolument related to the performance
of the Bank. Among the obligations established in the Capital Markets Rules, the Board, where applicable, carries out
the main duties established in the Supporting Principles enshrined in Principle 8A of the ‘Code of Principles of Good
Corporate Governance’. This Remuneration Report was approved by the Board of Directors at the Board Meeting held
on 20 April 2022.
Directors
The Bank’s Remuneration Policy for Directors drawn up in terms of the Capital Markets Rule 12.26A et seq. was
approved by the Annual General Meeting on 2 December 2020 and became effective from such date. (Refer
to https://www.lombardmalta.com/annual-general-meeting-2020). The result of the vote at the 2020 Annual General
Meeting when the Policy was last approved was 33,545,565 votes in favour, 34,325 votes against and 329,087
abstentions.
This document formalised the Bank’s policy in this regard and any remuneration paid following approval of the policy
was to be in accordance with the same. The remuneration of the Chief Executive Officer (‘CEO’), is also considered in
the above-mentioned Remuneration Policy for Directors.
This Policy is reviewed by the Board on an annual basis and shall be put to a vote by the General Meeting at every
material change and, in any case, at least every four years. No changes to the Policy are being proposed for approval at
the 2022 Annual General Meeting.
There were no deviations from the procedure for the implementation of the Remuneration Policy for Directors.
In terms of the Bank’s Memorandum and Articles of Association, the Bank’s shareholders determine the maximum
annual aggregate remuneration of the Directors. The maximum amount is established by resolution at each Annual
General Meeting of the Bank. The aggregate amount fixed for this purpose during the 2021 Annual General Meeting
was one hundred and twenty thousand euro (€120,000).
As per policy, members of the Board, in their role as directors, only receive a fixed fee, the amount of which is
determined on the basis of market practice as well as the Bank’s size and internal organisation and the nature, scale
and complexity of its activities and business model.
The fees paid to Directors for the holding of their office during 2021 amounted to €69,444 (2020: €48,900). This
amount is within the limit of €120,000 approved by the Annual General Meeting of 28 May 2021.
It is confirmed that none of the directors in their role as directors of the Bank are entitled to profit-sharing, share
options, pension benefits, variable remuneration, any other remuneration or related payments. One director (Graham
A. Fairclough) provides specific services to the Group, though he is still considered a non-executive director. Only one of
the directors has a service contract with the Bank, which director is the only executive Director and is the CEO Joseph
Said.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
36
Remuneration Report (continued)
In terms of Code Provision 8.A.5 of the Malta Financial Services Authority Capital Markets Rules, the total emoluments
received by Directors relative to their directorship for the financial year 2021, as compared to 2020, are specified
below:
€
2021
€
2020
Michael C. Bonello (Chairman)
25,480
20,960
Graham A. Fairclough
10,991
6,985
Joseph Said
10,991
6,985
Michael Zammit
10,991
6,985
Kimon Palamidis
10,991
6,985
Total
69,444
48,900
In determining the remuneration of the CEO, the Board of Directors considers factors which include among others,
professional qualifications, experience, initiative, acumen, number of years of service, the design and implementation
of the overall business strategy, objectives and risk appetite at Bank as well as Group level. The remuneration of the
CEO is fixed with no variable remuneration.
The CEO is also entitled to the use of a company car, health insurance and telecommunication allowance.
In a previous financial year, the Bank had decided to grant the CEO an ex-gratia gratuity upon his eventual retirement,
which amount was fully provided for and reflected in the financial statements of previous years.
In terms of Code Provision 8.A.5 of the Capital Markets Rules, during financial year 2021, the total emoluments
received by the executive Director from the Group amounted to €361,368 (2020: €357,496), split as follows:
€
€
2021
2020
Gross annual, fixed salary & fixed role-based allowances
333,377
333,511
Director Fees - Lombard Bank Malta p.l.c.
10,991
6,985
Chairman / Director Fees MaltaPost p.l.c.
17,000
17,000
The total remuneration for 2021 of the non-executive Director who provided specific services to the Group, amounted
to €76,229 (2020: €73,480), split as follows:
€
€
2021
2020
Payments for specific services
54,138
55,395
Director Fees - Lombard Bank Malta p.l.c.
10,991
6,985
Director Fees - MaltaPost p.l.c.
7,100
7,100
Company Secretary Fees - MaltaPost p.l.c.
4,000
4,000
There is no formal provision for the reclamation of variable remuneration. In any case, the directors and the CEO do
not receive variable remuneration.
The above remuneration levels for 2021 comply with the provisions of the approved Remuneration Policy for Directors
and take into consideration the interests of all the Bank's stakeholders together with the external context.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
37
Remuneration Report (continued)
Senior Management
Senior Management refers to the Chief Officers of the Bank, excluding the Chief Executive Officer.
The Board of Directors is satisfied that the packages offered to Senior Management continue to ensure that the Bank
attracts and retains management staff with the necessary qualities and skills. The Bank’s policy remains that of
engaging its senior management staff on the basis of indefinite contracts of employment, and this after a period of
probation. The terms and conditions of employment of senior management are established in the relative employment
contracts. The applicable notice period, after probation, is that provided for in the relevant legislation.
Share options, share incentive schemes and profit sharing do not feature in the Bank’s Remuneration Policy, and the
individual contracts of employment of senior management do not contain provisions for termination payments and/or
other payments linked to early termination other than as determined by the law.
From time to time the Board of Directors of the Bank approves the allocation of a financial contribution towards
retirement gratuities that it may decide to grant and/or contribute towards a staff pension fund that may be formally
established in the future. Gratuities that it may make, on an ex-gratia basis, to its employees are made accordingly.
Amounts contributed for this purpose in respect of 2021 amounted to €100,000 (2020: €66,000). Once contributed,
these amounts are held in a separate bank account which is not controlled by the Bank and is therefore not included in
the Bank’s financial statements. Amounts intended as a contribution to an eventual pension fund will be regulated by
rules yet to be determined in light of relevant legislation. No other pension benefits are currently payable by the Bank.
Senior management staff are eligible for annual salary increases, which are not directly performance-related. The
remuneration of Senior Management staff members is determined also by the role, responsibilities covered, market
practice, seniority, experience and qualifications. Annual bonuses are paid to senior management staff members
according to individual overall performance during the previous financial year. Bonus payments do not exceed 100% of
the fixed component of the total remuneration for each individual.
Non-cash benefits include private health care insurance as well as death-in-service benefits and personal accident
insurance cover.
Total emoluments received by Senior Management, excluding the CEO, during the period under review are as detailed
below, in terms of Code Provision 8.A.5.
Fixed Remuneration
Variable Remuneration
Share Options
Others
2021
2020
2021
2020
2021
2020
2021
2020
€
€
€
€
€
€
€
€
568,000
550,723
98,000
114,000
-
-
-
-
For other employees, fixed pay is determined by a Collective Agreement and annual bonuses are differentiated by
individual performance and grade.
The changes effected in the Bank’s Remuneration Policy during the financial year under review were such as to align it
with regulatory requirements. Furthermore, the Bank does not plan to effect changes in its Remuneration Policy in the
forthcoming financial year, unless required to do so in terms of any regulatory obligations or otherwise.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
38
Remuneration Report (continued)
In terms of Chapter 12 of the Capital Markets Rules, this Remuneration Report is being put to an advisory vote at the
2022 Annual General Meeting in accordance with the requirements of the Capital Markets Rule 12.26 L.
The Directors’ Remuneration Report for 2020 was approved at the Annual General Meeting held on 28 May 2021, with
10,232,256 votes in favour, 14,538 votes against and 215,314 abstentions. There were no issues raised on the Report
during the said Annual General Meeting.
Other information on remuneration in terms of Appendix 12.1 of the Capital Markets Rules
In terms of the requirements within Appendix 12.1 of the Capital Market Rules, the following tables present the annual
change regarding each individual director’s remuneration, the performance of the Bank, and of average remuneration
on a full-time equivalent basis of employees of the Bank, other than Directors over the two most recent financial years.
2021
€
2020
€
%
change
% annual change of the
Bank’s performance
based on Profit before
tax
% annual change of the
average remuneration on a
full-time equivalent basis
of employees of the Bank
other than Directors
(2020-2021)
Michael C. Bonello (Chairman)
25,480
20,960
22%
32%
2%
Graham A. Fairclough
10,991
6,985
57%
Joseph Said
10,991
6,985
57%
Michael Zammit
10,991
6,985
57%
Kimon Palamidis
10,991
6,985
57%
Total
69,444
48,900
€'000
2021
2020
% change
Group
Bank
Group
Bank
Group
Bank
Employee remuneration
(excluding CEO)
24,027
7,862
22,424
7,312
7%
8%
CEO remuneration
333
333
334
334
0%
0%
Entity’s performance – Profit before
tax
12,638
12,193
10,372
9,251
22%
32%
The Group's/Bank’s performance is measured using Profit before tax.
The contents of the Remuneration Report have been reviewed by PricewaterhouseCoopers, the external auditors, to
ensure that the information required in terms of Appendix 12.1 to Chapter 12 of the Capital Markets rules have been
included.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
39
Company Information
Number of shareholders analysed by range:
31 December 2021
31 March 2022
Range
Shareholders
Shares
Shareholders
Shares
1 – 500
168
28,426
167
28,207
501 – 1000
83
57,957
81
56,935
1001 – 5000
501
1,279,136
498
1,272,620
5001 and over
670
43,401,442
669
43,409,199
Total
1,422
44,766,961
1,415
44,766,961
The Bank has one class of shares and each share is entitled to one vote.
BOARD OF DIRECTORS
Michael C. Bonello
Chairman
Graham A. Fairclough
Kimon Palamidis
Joseph Said
Michael Zammit*
* Michael Zammit passed away
on 3 February 2022. Following his
demise, the Board of Directors co-
opted Peter Perotti as non-
executive director of the Bank and
as a member of the Bank's Audit
& Risk Committee and Suitabilities
& Evaluations Committee, subject
to regulatory approval which was
received on 14 April 2022, being
the effective date of his
appointment.
COMPANY SECRETARY
Helena Said
SENIOR MANAGEMENT
Joseph Said
Chief Executive Officer
David Attard
Chief Officer - Group Corporate Services
Anthony Bezzina
Chief Officer - Credit
Paul Debono
Chief Officer - Legal
Eugenio Farrugia
Chief Operations Officer
Aurelio Theuma
Chief Financial Officer
Anthony Zahra
Chief Information Officer
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
40
Company Information (continued)
REGISTERED OFFICE
Tel: 25581 117
BRANCHES
67 Republic Street, Valletta VLT 1117 Balzan Valley Road, Balzan BZN 1409
Tel: 25581 100 Tel: 25581 500
82 St. Sebastian Street, Qormi QRM 2335 225A Tower Road, Sliema SLM 1601
Tel: 25581 360 Tel: 25581 260
Ninu Cremona Street, Victoria VCT 2561 44 Tigne’ Street, Sliema SLM 3174
Tel: 25581 600 Tel: 25581 251
43 Pitkali Road, Attard ATD 2219
Tel: 25581 560
24/7 OUTLET
Paceville Avenue, St. Julian’s STJ 3103
CREDIT
9A St. Fredrick Street, Valletta VLT 1470
Tel: 25581 115
HOME LOANS
4 Main Street, Qormi QRM 1100
Tel: 25581 370
INTERNATIONAL BUSINESS BANKING
Graham Street, Sliema SLM 1711
Tel: 25581 226
LEGAL OFFICE
59 Republic Street, Valletta VLT 1117
Tel: 25581 116
TRADE SERVICES
4 Main Street, Qormi QRM 1100
Tel: 25581 366
WEALTH MANAGEMENT
Financial Advice & Stockbroking Services: 225A, Tower Road, Sliema SLM 1601
Tel: 25581 167
Portfolio Management: 225A, Tower Road, Sliema SLM 1601
Tel: 25581 288
Research & Corporate Advisory: 225A, Tower Road, Sliema SLM 1601
Tel: 25581 287
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
41
Statements of Financial Position
Group
Bank
notes
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Assets
Balances with Central Bank of Malta,
treasury bills and cash
5
125,552
168,648
Cheques in course of collection
530
666
Investments
6
224,600
157,863
Loans and advances to banks
7
68,424
93,641
Loans and advances to customers
8
642,895
621,132
Investment in subsidiaries
9
-
-
15,858
15,732
Investment in associates
10
1,645
1,645
Intangible assets
11
122
246
Property, plant and equipment
12
41,585
30,446
Assets classified as held for sale
8
661
134
Current tax assets
2,682
1,156
Deferred tax assets
14
9,283
9,669
Inventories
15
625
555
Trade and other receivables
16
1,606
1,761
Accrued income and other assets
17
3,546
3,737
Total assets
1,139,614
1,107,031
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
42
Statements of Financial Position (continued)
Group
Bank
notes
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Equity and Liabilities
Equity
Share capital
18
11,192
11,044
Share premium
19
18,530
18,530
Revaluation and other reserves
19
20,828
17,076
Retained earnings
81,452
74,692
Equity attributable to equity holders of the
Bank
132,002
121,342
Non-controlling interests
-
-
Total equity
132,002
121,342
Liabilities
Amounts owed to banks
20
1,224
5,602
Amounts owed to customers
21
978,365
948,478
Provisions for liabilities and other charges
22
435
903
Current tax liabilities
-
-
Deferred tax liabilities
14
5,545
5,421
Other liabilities
23
14,772
18,842
Accruals and deferred income
24
7,271
6,443
Total liabilities
1,007,612
985,689
Total equity and liabilities
1,139,614
1,107,031
Memorandum items
Contingent liabilities
25
13,360
10,983
Commitments
25
196,413
200,217
The notes on pages 50 to 165 are an integral part of these financial statements.
These financial statements on pages 41 to 165 were approved and authorised for issue by the Board of Directors on 20 April
2022. The financial statements were signed on behalf of the Bank's Board of Directors by Michael C. Bonello (Chairman) and
Joseph Said (Director and Chief Executive Officer) as per the Directors' Declaration on ESEF Annual Financial Report submitted
in conjunction with the Annual Report and Financial Statements 2021.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
43
Income Statements
Group
Bank
notes
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Interest receivable and similar income
- on loans and advances, balances with Central
Bank of Malta and treasury bills
26
23,414
22,768
- on debt and other fixed income instruments
26
2,174
1,983
Interest expense
26
(6,169 )
(6,026 )
(6,120)
(5,968)
Net interest income
19,468
18,783
Fee and commission income
27
4,341
3,887
Fee and commission expense
27
(213 )
(261 )
(213)
(261)
Net fee and commission income
4,128
3,626
Postal sales and other revenues
28
518
786
Dividend income
29
1,738
1,762
Net trading income
30
590
607
Other operating income
286
2,310
Operating income
26,728
27,874
Employee compensation and benefits
31
(24,360 )
(22,758 )
(8,195)
(7,646)
Other operating costs
33
(24,544 )
(20,706 )
(7,129)
(6,169)
Depreciation and amortisation
11,12
(2,719 )
(2,267 )
(927)
(782)
Provisions for liabilities and other charges
22
(115 )
250
(80)
Credit impairment reversals /(losses)
32
(3,973 )
1,466
(3,946)
Operating profit
12,193
9,251
Share of loss of investment accounted for using the
equity method, net of tax
10
(402 )
(151 )
-
-
Profit before taxation
12,193
9,251
Income tax expense
34
(4,759 )
(3,230 )
(4,389)
(2,792)
Profit for the year
7,804
6,459
Attributable to:
Equity holders of the Bank
7,804
6,459
Non-controlling interests
-
-
Profit for the year
7,804
6,459
Earnings per share
35
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
44
Statements of Comprehensive Income
Group
Bank
notes
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Profit for the year
7,804
6,459
Other comprehensive income
Items that may be reclassified subsequently to profit
or loss
Investments measured at FVOCI
Net loss in fair value
6
(2,711 )
(304 )
(2,653)
(174)
Net gain on financial assets reclassified to profit or
loss on disposal
(168 )
(167 )
(168)
(167)
Net (loss)/gain attributable to change in credit risk
(344 )
(343)
625
Income taxes relating to these items
34
(100 )
1,108
(100)
Items that will not be reclassified to profit or loss
Net gain on investments in equity instruments
measured at FVOCI
6
149
132
Surplus arising on revaluation of land and buildings
12
6,844
-
Remeasurements of defined benefit obligations
-
-
Income taxes relating to these items
34
(1,491 )
(92 )
(1,219)
(45)
Other comprehensive income for the year, net of
income tax
3,718
271
Total comprehensive income for the year, net of
income tax
11,522
6,730
Attributable to:
Equity holders of the Bank
Non-controlling interests
Total comprehensive income for the year, net of
income tax
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
45
Statements of Changes in Equity
Group
Attributable to equity holders of the Bank
Revaluation
Non-
Share
Share
and other
Retained
controlling
Total
capital
premium
reserves
earnings
Total
interests
equity
note
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January 2020
Comprehensive income
Profit for the year
Other comprehensive income
Fair valuation of financial assets measured at FVOCI:
Net changes in fair value arising during the year
(1,096 )
(1,096 )
(37 )
(1,133 )
Reclassification adjustments:
- net amounts reclassified to profit or loss on disposal
(109 )
(109 )
(109 )
Net amounts reflected directly in retained earnings on disposal
Net movement attributable to changes in credit risk
Remeasurements of deferred benefit obligations
Transfers and other movements
(120 )
Total other comprehensive income for the year
(854 )
(6 )
Total comprehensive income for the year
(854 )
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders
36
(429 )
(429 )
Total transactions with owners
(429 )
(429 )
At 31 December 2020
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
46
Statements of Changes in Equity (continued)
Group
Attributable to equity holders of the Bank
Revaluation
Non-
Share
Share
and other
Retained
controlling
Total
capital
premium
reserves
earnings
Total
interests
Equity
notes
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January 2021
Comprehensive income
Profit for the year
Other comprehensive income
Surplus on revaluation of land and buildings, net of tax
Fair valuation of financial assets measured at FVOCI:
Net changes in fair value arising during the year
(1,669 )
(1,669 )
(17 )
(1,686 )
Reclassification adjustments:
- net amounts reclassified to profit or loss on disposal
(110 )
(110 )
(110 )
Net movement attributable to changes in credit risk
(223 )
(223 )
(223 )
Transfers and other movements
(34 )
Total other comprehensive income for the year
(34 )
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders
36
(858 )
(858 )
(429 )
(1,287 )
Bonus issue
(148 )
Non-controlling interests arising on acquisition of subsidiary
9
Total transactions with owners
(1,006 )
(858 )
(42 )
(900 )
At 31 December 2021
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
47
Statements of Changes in Equity (continued)
Bank
Revaluation
Share
Share
and other
Retained
capital
premium
reserves
earnings
Total
note
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January 2020
11,044
18,530
17,901
67,137
114,612
Comprehensive income
Profit for the year
Profit for the year
-
-
-
6,459
6,459
Other comprehensive income
Fair valuation of financial assets measured at FVOCI:
Net changes in fair value arising during the year
-
-
(1,002)
-
(1,002)
Reclassification adjustments:
- net amounts reclassified to profit or loss on disposal
-
-
(109)
-
(109)
Net amounts reflected directly in retained earnings on disposal
6
-
-
-
976
976
Net change attributable to changes in credit risk
-
-
406
-
406
Transfers and other movements
-
-
(120)
120
-
Total other comprehensive income for the year
-
-
(825)
1,096
271
Total comprehensive income for the year
-
-
(825)
7,555
6,730
At 31 December 2020
11,044
18,530
17,076
74,692
121,342
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
48
Statements of Changes in Equity (continued)
Bank
Revaluation
Share
Share
and other
Retained
Total
capital
premium
reserves
earnings
Equity
note
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January 2021
11,044
18,530
17,076
74,692
121,342
Comprehensive income
Profit for the year
-
-
-
7,804
7,804
Other comprehensive income
Surplus on revaluation of land and buildings, net of tax
-
-
5,678
-
5,678
Fair valuation of financial assets measured at FVOCI:
Net changes in fair value arising during the year
-
-
(1,628)
-
(1,628)
Reclassification adjustments:
- net amounts reclassified to profit or loss on disposal
-
-
(109)
-
(109)
Net movement attributable to changes in credit risk
-
-
(223)
-
(223)
Transfers and other movements
-
-
34
(34)
-
Total other comprehensive income for the year
-
-
3,752
(34)
3,718
Total comprehensive income for the year
-
-
3,752
7,770
11,522
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends to equity holders
36
-
-
-
(862)
(862)
Bonus issue
148
-
-
(148)
-
Total transactions with owners
148
-
-
(1,010)
(862)
At 31 December 2021
11,192
18,530
20,828
81,452
132,002
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
49
Statements of Cash Flows
Group
Bank
2021
2020
2021
2020
notes
€ 000
€ 000
€ 000
€ 000
Cash flows from operating activities
Interest and commission receipts
28,599
31,712
Receipts from customers relating to
postal sales and other revenue
518
786
Interest and commission payments
(5,712 )
(5,838 )
(5,714)
(5,780)
Payments to employees and suppliers
(44,981 )
(45,053 )
(15,582)
(14,077)
Cash flows from operating profit before changes
in operating assets and liabilities
7,821
12,641
(Increase)/decrease in operating assets:
Treasury bills
(8,521 )
18,027
(8,521)
Deposits with Central Bank of Malta
(786 )
341
(786)
Loans and advances to banks and customers
(26,052 )
(72,163 )
(21,552)
(73,163)
Other receivables
(279)
1,911
Increase/(decrease) in operating liabilities:
Amounts owed to banks and to customers
29,887
79,646
Other payables
(5,142 )
(4,859)
4,736
Net cash generated from operations
29,386
16,464
Income tax paid
(5,870 )
(5,364 )
(5,516)
(6,013)
Net cash flows generated from operating activities
23,870
10,451
Cash flows from investing activities
Dividends received
1,738
1,762
Interest received from investments
2,863
2,029
Purchase of investments
(75,270 )
(67,862 )
(75,270)
(67,862)
Proceeds from maturity/disposal of investments
6,151
16,237
Purchase of property, plant and equipment and
intangible assets
(7,601 )
(8,942 )
(3,728)
(6,610)
Proceeds from disposal of property, plant and
equipment
-
18
Investments in associate
10
(1,500 )
(399 )
-
-
Investment in subsidiaries
9
-
-
(126)
-
Net cash inflow arising from acquisition of
subsidiary
9
-
-
Net cash flows used in investing activities
(73,685 )
(58,414 )
(68,372)
(54,426)
Cash flows from financing activities
Dividends paid to equity holders of the Bank
36
(862 )
(862)
-
Dividends paid to non-controlling interests
(429 )
(427 )
-
-
Principal element of lease payments
(527 )
(409 )
(203)
(152)
Net cash flows used in financing activities
(1,818 )
(836 )
(1,065)
(152)
Net (decrease)/increase in cash and cash
equivalents
(43,867 )
(44,775 )
(45,567)
(44,127)
Cash and cash equivalents at beginning of year
207,245
251,372
Cash and cash equivalents at end of year
37
161,678
207,245
The notes on pages 50 to 165 are an integral part of these financial statements.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
50
1. Summary of significant accounting policies .............................................................................................. 51
2. Financial risk management........................................................................................................................ 66
3. Accounting estimates and judgements ................................................................................................... 128
4. Segmental information ............................................................................................................................ 131
5. Balances with Central Bank of Malta, treasury bills and cash ................................................................. 132
6. Investments ............................................................................................................................................. 132
7. Loans and advances to banks .................................................................................................................. 133
8. Loans and advances to customers ........................................................................................................... 134
9. Investment in subsidiaries ....................................................................................................................... 134
10. Investment in associates ......................................................................................................................... 136
11. Intangible assets ...................................................................................................................................... 138
12. Property, plant and equipment ............................................................................................................... 139
13. Leases ...................................................................................................................................................... 143
14. Deferred tax assets and liabilities ............................................................................................................ 146
15. Inventories ............................................................................................................................................... 148
16. Trade and other receivables .................................................................................................................... 148
17. Accrued income and other assets ............................................................................................................ 148
18. Share capital ............................................................................................................................................ 149
19. Reserves ................................................................................................................................................... 149
20. Amounts owed to banks .......................................................................................................................... 150
21. Amounts owed to customers ................................................................................................................... 150
22. Provisions for liabilities and other charges .............................................................................................. 150
23. Other liabilities ........................................................................................................................................ 152
24. Accruals and deferred income ................................................................................................................. 152
25. Commitments and contingent liabilities .................................................................................................. 153
26. Net interest income ................................................................................................................................. 154
27. Net fee and commission income .............................................................................................................. 154
28. Postal sales and other revenues .............................................................................................................. 154
29. Dividend income ...................................................................................................................................... 155
30. Net trading income .................................................................................................................................. 155
31. Employee compensation and benefits ..................................................................................................... 155
32. Credit impairment losses ......................................................................................................................... 156
33. Profit before taxation .............................................................................................................................. 157
34. Income tax expense ................................................................................................................................. 159
35. Earnings per share ................................................................................................................................... 160
36. Dividends ................................................................................................................................................. 161
37. Cash and cash equivalents....................................................................................................................... 162
38. Related parties ........................................................................................................................................ 162
39. Investor compensation scheme ............................................................................................................... 165
40. Statutory information .............................................................................................................................. 165
41. Events subsequent to the reporting period ............................................................................................. 165
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
51
1. Summary of significant accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out
below. Unless otherwise stated, these policies have been consistently applied to all the years presented
and relate to both the Group and the Bank.
1.1 Basis of preparation
The consolidated financial statements include the financial statements of Lombard Bank Malta p.l.c. (the
Bank) and its subsidiary undertakings (together referred to as ‘the Group’ and individually as ‘Group
entities’). The Bank’s financial statements have been prepared in accordance with the requirements of
International Financial Reporting Standards (IFRSs) as adopted by the EU and with the requirements of the
Banking Act 1994 (Chapter 371 of the Laws of Malta) and the Companies Act, 1995 (Chapter 386 of the
Laws of Malta). These consolidated financial statements are prepared under the historical cost
convention, as modified by the fair valuation of financial assets and financial liabilities.
The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of
certain accounting estimates. It also requires the Directors to exercise their judgment in the process of
applying the Group’s accounting policies (see note 3.1 – Critical accounting estimates, and judgments in
applying the Group’s accounting policies).
1.2 Standards, interpretations and amendments to published standards effective in 2021
In 2021, the Group adopted amendments and interpretations to existing standards that are mandatory for
the Group’s accounting period beginning on 1 January 2021. The adoption of these revisions to the
requirements of IFRSs as adopted by the EU did not result in changes to the Group’s accounting policies
impacting the Group’s financial performance and position.
Interest Rate Benchmark Reform Phase 2
The IASB published ‘Interest Rate Benchmark Reform - Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7,
IFRS 4 and IFRS 16’ in August 2020, which became effective from 1 January 2021. These amendments
represent the second phase of the IASB’s project on the effects of the interest rate benchmark reform,
addressing issues affecting financial statements when changes are made to contractual cash flows
because of the reform.
Under these amendments, changes made to a financial instrument that are economically equivalent and
required by the interest rate benchmark reform, do not result in the derecognition or a change in the
carrying amount of the financial instrument, but instead require the effective interest rate to be updated
to reflect the change in the interest rate benchmark.
The Group has evaluated the extent of the discontinuation of the Interbank Offered rates (IBOR) on local
loans and advances granted by the Group. The Group’s exposure in this respect is insignificant and the
Bank expects to migrate all loans by July 2023, in line with the deadline set by the EU.
The Bank’s corporate loans and advances that re-price to the EURIBOR reference rate are not a significant
part of the portfolio. While not impacted by the benchmark rate reform, going forward, the Group will be
including a fallback provision in respect of these facilities that will safeguard the Group and its clients in
the unlikely event of a cessation of the EURIBOR reference rate, in line with the recommendations issued
by the ECB Working Group on Risk-free Rates.
Considering the Group’s insignificant and limited exposure to IBOR, the transition is expected to have an
insignificant impact on the Bank’s operations and financial position. The Group will continue to monitor
the regulatory developments in this respect, with a particular focus on developments relating to the
EURIBOR reference rate.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
52
1. Summary of significant accounting policies (continued)
1.3 Standards, interpretations and amendments to published standards that are not yet effective
There were no new standards, amendments and interpretations to existing standards which are
mandatory for accounting periods beginning after 1 January 2021 that were published by the date of
authorisation for issue of this financial information and which could have a possible significant impact on
the Group’s financial statements in the period of initial application.
1.4 Consolidation
Subsidiaries are all entities over which the Group has the power to govern the financial and operating
policies generally accompanying a shareholding of more than one half of the voting rights. The existence
and effect of potential voting rights that are currently exercisable or convertible are considered when
assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group manages and administers investment vehicles on behalf of investors. The financial statements
of these entities are not included in these financial statements, except when the Group controls the
entity.
The Group uses the acquisition method of accounting to account for business combinations. The
consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the
liabilities incurred and the equity interests issued by the Group. The consideration transferred includes
the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-
related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date. On
an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree
either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree
and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of
the identifiable net assets acquired is recorded as goodwill. If this aggregate is less than the fair value of
the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is
recognised directly in profit or loss.
Inter-company transactions, balances and unrealised gains on transactions between group companies are
eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. The accounting policies of the subsidiaries are consistent with the
policies adopted by the Group. In the Bank’s separate financial statements, investments in subsidiaries
are accounted for by the cost method of accounting, i.e. at cost less impairment. Provisions are recorded
where, in the opinion of the Directors, there is an impairment in value. Where there has been an
impairment in the value of an investment, it is recognised as an expense in the period in which the
diminution is identified. The results of subsidiaries are reflected in the Bank’s separate financial
statements only to the extent of dividends receivable. On disposal of an investment, the difference
between the net disposal proceeds and the carrying amount is charged or credited to profit or loss.
1.5 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the
Board of Directors which is the Group’s chief operating decision-maker.
An operating segment’s operating results are reviewed regularly by the Board of Directors to make
decisions about resources to be allocated to the segment and to assess its performance executing the
function of the chief operating decision-maker.
1.6 Foreign currency translation
The financial statements are presented in euro (€), which is the Group’s presentation currency.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
53
1. Summary of significant accounting policies (continued)
1.6.1 Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the
currency of the primary economic environment in which the entity operates (the functional currency).
The consolidated financial statements are presented in euro, which is the Group’s functional and
presentation currency.
1.6.2 Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the translation at year-end
exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the
income statement.
1.7 Financial assets
1.7.1 Initial recognition and measurement
The Group recognises a financial asset in its statement of financial position when it becomes a party to
the contractual provisions of the instrument. Regular way purchases and sales of financial assets are
recognised on the trade date, which is the date on which the Group commits to purchase or sell the asset.
Accordingly, the Bank uses trade date accounting for regular way contracts when recording financial asset
transactions.
At initial recognition, the Bank measures a financial asset at its fair value plus or minus, in the case of a
financial asset not at fair value through profit or loss, transaction costs that are incremental and directly
attributable to the acquisition or issue of the financial asset, such as fees and commissions. Transaction
costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. At initial
recognition, an Expected Credit Loss allowance (ECL) is recognised for financial assets measured at
amortised cost and investments in debt instruments measured at FVOCI, which results in an accounting
loss being recognised in profit or loss when an asset is newly originated.
When the fair value of financial assets differs from the transaction price on initial recognition, the Group
recognises the difference as follows:
• when the fair value is evidenced by a quoted price in an active market for an identical asset (i.e. a
Level 1 input) or based on a valuation technique that uses only data from observable markets, the
difference is recognised as a gain or loss; and
• in all other cases, the difference is deferred and the timing of recognition of deferred day one profit
or loss is determined individually. It is either amortised over the life of the instrument, deferred until
the instrument's fair value can be determined using market observable inputs, or realised through
settlement.
1.7.2 Classification and subsequent measurement
The Group classifies its financial assets in the following measurement categories:
• Fair Value through profit or loss (FVPL);
• Fair value through other comprehensive income (FVOCI); or
• Amortised cost.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
54
1. Summary of significant accounting policies (continued)
1.7.2.1 Debt instruments
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 and trade receivables purchased from
clients in factoring arrangements without recourse.
Classification and subsequent measurement of debt instruments depend on:
• the Group's business model for managing the asset; and
• the cash flow characteristics of the asset.
Based on these factors the Group classifies 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 FVPL, 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 1.7.3. 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 FVPL, are measured at fair value
through other comprehensive income (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 Investment income'. Interest income from these
financial assets is included in 'Interest income' using the effective interest rate method.
• Fair value through profit or loss (FVPL): 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 fair value through profit or loss and is not part of a hedging relationship is
recognised in profit or loss and presented in the profit or loss statement within 'Net trading income'
in the period in which it arises, unless it arises from debt instruments that were designated at fair
value or which are not held for trading, in which case they are presented separately in 'Net
investment income'. Interest income from these financial assets is included in 'Interest income' using
the effective interest.
The amortised cost is the amount at which the financial asset or financial liability is measured at initial
recognition minus the principal repayments, plus or minus the cumulative amortisation using the
effective interest method of any difference between that initial amount and the maturity amount and, for
financial assets, adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial asset or financial liability to the gross carrying amount of a
financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a
financial liability.
The calculation does not consider Expected Credit Losses and includes transaction costs, premiums or
discounts and fees and points paid or received that are integral to the effective interest rate, such as
origination fees. For purchased or originated credit-impaired (POCI) financial assets - assets that are
credit-impaired at initial recognition - the Bank calculates the credit-adjusted effective interest rate,
which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount
and incorporates the impact of Expected Credit Losses in estimated future cash flows.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
55
1. Summary of significant accounting policies (continued)
When the Bank revises the estimates of future cash flows, the carrying amount of the respective financial
assets or financial liability is adjusted to reflect the new estimate discounted using the original effective
interest rate. Any changes are recognised in profit or loss.
The Bank reclassifies debt instruments when and only when its business model for managing those assets
changes. The reclassification takes place from the start of the first reporting period following the change.
Such changes are expected to be very infrequent and none occurred during the period.
(a) Business model assessment
Key management personnel determine the Group’s business model by considering the way financial
instruments are managed in order to generate cash flows. That is, whether the Group's objective is solely
to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and
cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for
trading purposes), then the financial assets are classified as part of 'other' business model and measured
at FVPL. Such assessment is performed at a ‘portfolio level' as it best reflects the way the business is
managed and information is provided to management.
The information that will be considered in such assessment includes:
• the objectives for the portfolio including 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 assets;
• the method for the evaluation of the performance of the portfolio and how such performance is
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; and
• the frequency, volume and timing of sales in prior periods, the reasons for such sales and
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 those that are managed and whose performance is
evaluated on a fair value basis will be measured at FVPL because they are neither held to collect
contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
Securities held for trading are held principally for the purpose of selling in the near term or are part of a
portfolio of financial instruments that are managed together and for which there is evidence of a recent
actual pattern of short-term profit-taking.
The Bank may also irrevocably designate financial assets at fair value through profit or loss if doing so
significantly reduces or eliminates a mismatch created by assets and liabilities being measured on
different bases.
(b) Cash flows that represent solely payment of principal and interest (SPPI)
In respect of assets where the intention of the business model is to hold the financial assets to collect the
contractual cash flows or to hold to collect and to sell, the Group assesses whether the financial
instruments’ cash flows represent solely payments of principal and interest (the SPPI test). In making this
assessment, the Group considers whether the contractual cash flows are consistent with a basic lending
agreement. ‘Principal’ is the fair value of the financial asset at initial recognition. It is not the amount that
is due under the contractual terms of an instrument. ‘Interest’ is the compensation for time value of
money and credit risk of a basic lending-type return. A basic lending-type return could also include
consideration for other basic lending risks (for example, liquidity risk) and consideration for costs
associated with holding the financial asset for a particular period of time (for example, servicing or
administrative costs) and/or a profit margin. Where the contractual terms introduce exposure to risk or
volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified
and measured at fair value through profit or loss.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
56
1. Summary of significant accounting policies (continued)
Unlike the business model assessment, the SPPI assessment is performed for each individual product or
portfolio of products. The following considerations are made when assessing consistency with SPPI:
• contingent events that would change the amount and timing of cash flows such as contractual term
resetting interest to a higher amount in the event of a missed payment;
• leverage features, being contractual cash flow characteristics that increase the variability of the
contractual cash flows with the result that they do not have economic characteristics of interest;
• contractual terms that allow the issuer to prepay (or the holder to put a debt instrument back to the
issuer) before maturity and the prepayment amount substantially represents unpaid amounts of
principal and interest, which may include reasonable compensation for early termination of the
contract;
• contractual terms that allow the issuer or holder to extend the contractual term and the terms of
the extension option result in contractual cash flows during the extension period that are solely
payments of principal and interest, which may include reasonable compensation for the extension
of the contract; and
• features that modify consideration for the time value of money (for example, periodic reset of
interest rates).
Financial assets with embedded derivatives are considered in their entirety when determining whether
their cash flows are solely payment of principal and interest.
1.7.2.2 Equity instruments
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.
The Group subsequently measures all equity investments at fair value through profit or loss, except
where the Group's management has elected, at initial recognition, to irrevocably designate an equity
investment at fair value through other comprehensive income. The Group's policy is to designate equity
investments as FVOCI when those investments are held for purposes other than to generate investment
returns. When this election is used, fair value gains and losses are recognised in OCI and are not
subsequently reclassified to profit or loss, including on disposal.
Impairment losses (and reversal of impairment losses) are not reported separately from other changes in
fair value. Dividends, when representing a return on such investments, continue to be recognised in
profit or loss as other income when the Group's right to receive payments is established.
Gains and losses on equity investments at FVPL are included in the 'Net trading income’ line in the
income statement.
1.7.3 Impairment of financial assets
The Group assesses on a forward-looking basis the Expected Credit Losses (ECLs) associated with its debt
instruments carried at amortised cost and FVOCI and with the exposure arising from loan commitments
and financial guarantee contracts. The Group recognises a loss allowances for such losses at each
reporting date. The measurement of ECLs reflects:
• 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.
Note 2.3.4 provides more detail of how the Expected Credit Loss allowance is measured.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
57
1. Summary of significant accounting policies (continued)
Expected Credit Loss allowances are 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;
• financial instrument with both a drawn and undrawn component, whereby the Group cannot identify
the ECL on the loan commitment component separately from those on the drawn component: the
Group presents a combined loss allowance for both components, as a deduction from the gross
carrying amount of the drawn component; and
• debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial
position against the carrying amount of the asset because the carrying amount of these assets is their
fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve, i.e.
presented within other comprehensive income.
1.7.4 Modification of loans and advances to customers
The contractual terms of a loan may be modified for a number of reasons, including changing market
conditions, customer retention and other factors not related to a current or potential credit deterioration
of the customer.
The Group renegotiates loans and advances to customers in financial difficulties (referred to as
‘forbearance activities’) to maximise collection opportunities and minimise the risk of default. Under the
Group’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in
default on its debt or if there is a high risk of default, there is evidence that the debtor made all
reasonable efforts to pay under the original contractual terms, and the debtor is expected to be able to
meet the revised terms. The revised terms usually include extending the maturity, revision of interest rate
and changing the timing of interest payments. Both retail and corporate loans are subject to the
forbearance policy.
When modification happens, the Group assesses whether or not the new terms are substantially different
to the original terms. The Group does this by considering, among others, the following factors:
• If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash
flows to amounts the borrower is expected to be able to pay.
• Whether any substantial new terms are introduced.
• Significant extension of the loan term when the borrower is not in financial difficulty.
• Significant change in the interest rate
• Insertion of collateral, other security or credit enhancements that significantly affect the credit risk
associated with the loan.
If the terms are substantially different, the Group derecognises the original financial asset and recognises
a 'new' asset at fair value, and recalculates a new effective interest rate for the asset. The date of
renegotiation is consequently considered to be the date of initial recognition for impairment calculation
purposes, including for the purpose of determining whether a significant increase in credit risk has
occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be
credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by
the debtor being unable to make the originally agreed payments. Differences in the carrying amount are
also recognised in profit or loss as a gain or loss on derecognition.
If the terms are not substantially different, the renegotiation or modification does not result in
derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of
the financial asset and recognises a modification gain or loss in profit or loss.
The new gross carrying amount is recalculated by discounting the modified cash flows at the original
effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-
impaired financial assets). The impact of modifications of financial assets on the Expected Credit Loss
calculation is discussed in note 2.3.9.
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1. Summary of significant accounting policies (continued)
1.7.5 Derivative financial instruments
The Group deploys no hedging strategies that achieve hedge accounting in terms of IAS 39.
Derivative financial instruments are initially recognised at fair value on the date on which a derivative
contract is entered into, and are subsequently remeasured at their fair value. Fair values are obtained
from valuation techniques for over-the-counter derivatives, including discounted cash flow models. All
derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Fair values for currency forwards are determined using forward exchange market rates at the end of the
reporting period. Discounting techniques, reflecting the fact that the respective exchange or settlement
will not occur until a future date, are used when the time value of money has a significant effect on the
fair valuation of these instruments.
Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are
recognised immediately in profit or loss.
The Group uses derivatives such as cross currency swaps and forward foreign exchange contracts.
1.8 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the consolidated statement of
financial position when there is a legally enforceable right to offset the recognised amounts and there is
an intention to settle on a net basis or realise the asset and settle the liability simultaneously.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only when it is possible that future economic benefits associated with the item will flow to
the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is
derecognised. All other repairs and maintenance are charged to profit or loss during the financial period
in which they are incurred.
1.9 Investments in subsidiaries
The Group classifies investments in entities which it controls as subsidiaries.
The Group’s investments in subsidiaries are stated at cost less impairment losses in the Group’s stand-
alone financial statements. Impairment losses recognised in prior periods are reversed through profit or
loss if there has been a change in the estimates used to determine the investment’s recoverable amount
since the last impairment loss was recognised.
1.10 Investments in associates
Associates are all entities over which the Group has significant influence but not control or joint control,
generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in
associates are accounted for using the equity method of accounting in the consolidated financial
statements, after initially being recognised at cost. Under the equity method of accounting, the
investment is initially recognised at cost, and the carrying amount is adjusted thereafter to recognise the
Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s
share of movements in other comprehensive income of the investee in other comprehensive income. The
Group’s investment in associates includes goodwill identified on acquisition. Dividends received or
receivable from associates are recognised as a reduction in the carrying amount of the investment.
When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including
any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal
or constructive obligations or made payments on behalf of the associate.
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1. Summary of significant accounting policies (continued)
The Group determines at each reporting date whether there is any objective evidence that the
investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment
as the difference between the recoverable amount of the associate and its carrying value and recognises
the amount adjacent to ‘share of profit/(loss) of investment accounted for using the equity method’ in
the income statement.
Profits and losses resulting from upstream and downstream transactions between the Group and its
associate are recognised in the Group’s financial statements only to the extent of unrelated investor’s
interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of
an impairment of the asset transferred. Accounting policies of associates have been changed where
necessary to ensure consistency with the policies adopted by the Group.
If the ownership interest in an associate is reduced but significant influence is retained, only a
proportionate share of the amounts previously recognised in other comprehensive income is reclassified
to profit or loss where appropriate.
Dilution gains and losses arising in investments in associates are recognised in the income statement.
In the Bank’s separate financial statements, investments in associates are accounted for by the cost
method of accounting, i.e. at cost less impairment. Provisions are recorded where, in the opinion of the
Directors, there is impairment in value. Where there has been impairment in the value of an investment,
it is recognised as an expense in the period in which the diminution is identified. The results of the
associate are reflected in the Bank’s separate financial statements only to the extent of dividends
receivable. On disposal of an investment, the difference between the net disposal proceeds and the
carrying amount is charged or credited to profit or loss.
1.11 Intangible assets
1.11.1 Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the
identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of
subsidiaries is included in ‘intangible assets’.
Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.
Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is
made to those cash-generating units or groups of cash-generating units that are expected to benefit from
the business combination in which the goodwill arose, identified according to operating segment. A cash-
generating unit to which goodwill has been allocated is tested for impairment annually, and whenever
there is an indication that the unit may be impaired by comparing the carrying amount of the unit,
including the goodwill, with the recoverable amount of the unit. The recoverable amount is the higher of
fair value less costs to sell and value in use.
1.11.2 Computer software
Costs incurred to acquire and bring to use specific software are capitalised and amortised on the basis of
the expected useful lives. Software has a maximum expected useful life of four years.
1.12 Property, plant and equipment
All property, plant and equipment used by the Group is initially recorded at historical cost, including
transaction costs and borrowing costs. Historical cost includes expenditure that is directly attributable to
the acquisition of the items.
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1. Summary of significant accounting policies (continued)
Freehold and long leasehold properties (land and buildings) comprise mainly branches and offices. Land
and buildings are shown at fair value based on periodic valuations by external independent valuers, less
subsequent depreciation for buildings. Valuations are carried out on a regular basis such that the
carrying amount of property does not differ materially from that which would be determined using fair
values at the end of the reporting period. Any accumulated depreciation at the date of revaluation is
eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued
amount of the asset.
All other property, plant and equipment is stated at historical cost less accumulated depreciation.
Borrowing costs which are incurred for the purpose of acquiring or constructing a qualifying asset are
capitalised as part of its cost. Borrowing costs are capitalised while acquisition or construction is actively
underway. Capitalisation of borrowing costs is ceased once the asset is substantially complete, and is
suspended if the development of the asset is suspended.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only 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. The carrying amount of the replaced part is
derecognised. All other repairs and maintenance are charged to profit or loss during the financial period
in which they are incurred.
Increases in the carrying amount arising on revaluation of land and buildings are credited to other
comprehensive income and shown as a revaluation reserve in shareholders’ equity. Decreases that offset
previous increases of the same asset are charged to other comprehensive income and debited against
the revaluation reserve directly in equity; all other decreases are charged to profit or loss.
Land is not depreciated as it is deemed to have an indefinite life. Depreciation on other assets is
calculated using the straight-line method to allocate their cost or revalued amounts to their residual
values over their estimated useful lives, as follows:
Years
Buildings
100 or over period of lease/arrangement
Leasehold property
Over period of lease/arrangement
Computer equipment
4
Other
4 – 8
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each
reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying
amount is greater than its estimated recoverable amount (see note 1.13).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and
are recognised in profit or loss. When revalued assets are sold, the amounts included in the revaluation
reserve relating to that asset are transferred to retained earnings.
1.13 Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill or certain intangible assets, are not subject
to amortisation and are tested annually for impairment. Assets that are subject to amortisation are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less
costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest
levels for which there are separately identifiable cash inflows (cash-generating units). The impairment
test also can be performed on a single asset when the fair value less costs to sell or the value in use can
be determined reliably. Non-financial assets other than goodwill that suffered impairment are reviewed
for possible reversal of the impairment at each reporting date.
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1. Summary of significant accounting policies (continued)
1.14 Repossessed property
In certain circumstances, property is repossessed following the foreclosure on loans that are in default.
Repossessed properties are measured at the lower of carrying amount and fair value less costs to sell.
1.15 Non-current assets held for sale
Non-current assets are classified as assets held for sale and are stated at the lower of carrying amount
and fair value less costs to sell when their carrying amount is to be recovered principally through a sale
transaction rather than through continuing use and a sale is considered highly probable.
1.16 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss,
except to the extent that it relates to items recognised in other comprehensive income or directly in
equity. In this case, the tax is also recognised in other comprehensive income or directly in equity,
respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted
at the end of the reporting period.
Deferred income tax is recognised, using the liability method, on temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill;
deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that
have been enacted or substantively enacted by the end of the reporting period and are expected to apply
when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit
will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except
for deferred income tax liability where the timing of the reversal of the temporary difference is
controlled by the Group and it is probable that the temporary difference will not reverse in the
foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset
current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities
relate to income taxes levied by the same taxation authority on either the same taxable entity or
different taxable entities where there is an intention to settle the balances on a net basis.
1.17 Inventories
Inventories are stated at the lower of cost and net realisable value. The cost of postal stationery and
inventories held for resale is determined on a weighted average cost basis. The cost of inventories is
determined on a first-in first-out basis. The cost of inventories comprise the invoiced value of goods sold
and in general includes transport and handling costs. Net realisable value is the estimated selling price in
the ordinary course of business, less applicable variable selling expenses.
1.18 Trade and other receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the
ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle
of the business if longer), they are classified as current assets. If not, they are presented as non-current
assets.
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1. Summary of significant accounting policies (continued)
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method, less provisions for impairment. A provision for impairment of
trade and other receivables is established when there is objective evidence that the Group will not be
able to collect all amounts due according to the original terms of the receivables. Significant financial
difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments are considered indicators that the receivable is impaired. The
amount of the provision is the difference between the asset’s carrying amount and the present value of
estimated future cash flows, discounted at the original effective interest rate. 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. When a receivable is uncollectible, it is written off against the allowance account for trade
and other receivables. Subsequent recoveries of amounts previously written off are credited in profit or
loss.
1.19 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new
ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.
1.20 Financial liabilities
1.20.1 Initial recognition and measurement
The Group recognises a financial liability on its statement of financial position when it becomes a party to
the contractual provisions of the instrument. Financial liabilities not at fair value through profit or loss are
recognised initially at fair value, being the fair value of consideration received, net of transaction costs
that are directly attributable to the acquisition or the issue of the financial liability.
1.20.2 Classification and subsequent measurement
Financial liabilities are classified as subsequently measured at amortised cost, except for:
• financial liabilities at fair value through profit or loss: this classification is applied to derivatives,
financial liabilities held for trading (e.g. short positions in the trading booking) and other financial
liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated
at fair value through profit or loss are presented partially in other comprehensive income (the
amount of change in the fair value of the financial liability that is attributable to changes in the
credit risk of that liability, which is determined as the amount that is not attributable to changes in
market conditions that give rise to market risk) and partially profit or loss (the remaining amount of
change in the fair value of the liability). This is unless such a presentation would create, or enlarge,
an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk
of the liability are also presented in profit or loss;
• financial liabilities arising from the transfer of financial assets which did not qualify for
derecognition, whereby a financial liability is recognised for the consideration received for the
transfer. In subsequent periods, the Group recognises any expense incurred on the financial liability;
and
• financial guarantee contracts and loan commitments (see note 1.30).
The Group’s financial liabilities were classified as financial liabilities which were not at fair value through
profit or loss (classified as ‘Other liabilities’) under IAS 39. These liabilities were subsequently measured
at amortised cost.
Financial liabilities measured at amortised cost comprise principally amounts owed to banks, amounts
owed to customers, debt securities in issue together with other liabilities.
1.20.3 Derecognition
The Group derecognises a financial liability from its statement of financial position when the obligation
specified in the contract or arrangement is discharged, is cancelled or expires.
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1. Summary of significant accounting policies (continued)
The exchange between the Group and its original lenders of debt instruments with substantially different
terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for
as an extinguishment of the original financial liability and the recognition of a new financial liability. The
terms are substantially different if the discounted present value of the cash flows under the new terms,
including any fees paid net of any fees received and discounted using the original effective interest rate,
is at least 10% different from the discounted present value of the remaining cash flows of the original
financial liability.
In addition, other qualitative factors, such as the currency that the instrument is denominated in,
changes in the type of interest rate, new conversion features attached to the instrument and change in
covenants are also taken into consideration. If an exchange of debt instruments or modification of terms
is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or
loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment,
any costs or fees incurred adjust the carrying amount of the liability and are amortised over the
remaining term of the modified liability.
1.21 Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase at a specified future date are not derecognised from the
statement of financial position as the Group retains substantially all of the risks and rewards of
ownership. The corresponding cash received is recognised in the statement of financial position as an
asset with a corresponding obligation to return it, including accrued interest as a liability, reflecting the
transaction’s economic substance as a loan to the Group. The difference between the sale and
repurchase prices is treated as interest expense and is accrued over the life of agreement using the
effective interest rate.
When the counterparty has the right to sell or repledge the securities, the Bank reclassifies those
securities in its statement of financial position to financial assets held for trading pledged as collateral or
to financial investments available-for-sale pledged as collateral, as appropriate.
Conversely, securities purchased under agreements to resell at a specified future date are not recognised
in the statement of financial position. The consideration paid, including accrued interest, is recorded in
the statement of financial position, reflecting the transaction’s economic substance as a loan by the
Bank. The difference between the purchase and resale prices is recorded in net interest income and is
accrued over the life of the agreement using the effective interest rate.
If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to
return the securities is recorded as a short sale within financial liabilities held for trading and measured at
fair value with any gains or losses included in net trading income.
1.22 Trade and other payables
Trade payables comprise obligations to pay for goods or services that have been acquired in the ordinary
course of business from suppliers. Accounts payable are classified as current liabilities if payment is due
within one year or less (or in the normal operating cycle of the business if longer). If not, they are
presented as non-current liabilities. Trade and other payables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest method.
1.23 Provisions for legal and other claims
Provisions for legal and other claims are recognised when: the Group has a present legal or constructive
obligation as a result of past events; it is probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated. Provisions are not recognised for future
operating losses.
Provisions are measured at the present value of the expenditures expected to be required to settle the
obligation using a pre-tax rate that reflects current market assessments of the time value of money and
the risks specific to the obligation. The increase in the provision due to passage of time is recognised as
interest expense.
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1. Summary of significant accounting policies (continued)
1.24 Provision for pension obligations
A subsidiary of the Bank provides for the obligation arising in terms of Article 8A of the Pensions
Ordinance, (Chapter 93 of the Laws of Malta), covering those former Government employees who opted
to become full-time employees of the subsidiary of the Bank, and who continued to be entitled to
pension benefits which go beyond the National Insurance Scheme.
The pension related accounting costs are assessed using the projected unit credit method. Under this
method, the cost of the subsidiary’s obligation is charged to profit or loss so as to spread the cost over
the years of service giving rise to entitlement to benefits in accordance with actuarial techniques. The
obligation is measured as the present value of the estimated future cash outflows using interest rates of
long-term Government bonds which have terms to maturity approximating the terms of the related
liability. Subsequent to the adoption of IAS 19 (revised 2011), all actuarial gains and losses are charged or
credited to equity in other comprehensive income in the period in which they arise.
1.25 Interest income and expense
Interest income and expense for all interest-bearing financial instruments are recognised within ‘interest
income’ and ‘interest expense’ in the profit or loss using the effective interest method. The effective
interest method is a method of calculating the amortised cost of a financial asset or a financial liability
and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial asset or financial liability to the gross carrying amount of a
financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a
financial liability.
The calculation does not consider Expected Credit Losses and includes transaction costs, premiums or
discounts and fees and points paid or received that are integral to the effective interest rate, such as
origination fees. For purchased or originated credit-impaired (POCI) financial assets - assets that are
credit-impaired at initial recognition - the Group calculates the credit-adjusted effective interest rate,
which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount
and incorporates the impact of Expected Credit Losses in estimated future cash flows.
1.26 Fees and commissions
Fee and commission income and expense that are an integral part of the effective interest rate on a
financial asset or liability are included in the calculation of the effective interest rate and treated as part
of effective interest. Other fees and commissions are generally recognised on an accrual basis when the
service has been provided.
Fee and commission income, comprising account servicing fees, investment management fees,
placement fees and other similar fees, are recognised as the related services are performed.
Loan commitment fees for loans that are likely to be drawn down are deferred (together with related
direct costs) and recognised as an adjustment to the effective interest rate on the loan. When a loan
commitment is not expected to result in the drawdown of a loan, the related loan commitment fees are
recognised on a straight-line basis over the commitment period. Fee and commission expense, relating
mainly to transaction and service fees, are expensed as the services are received.
1.27 Postal sales and service income
Postal sales and service revenue comprises the fair value of the consideration received or receivable for
the sale of services in the ordinary course of the subsidiary’s activities. Revenue is shown net of sales
taxes and discounts. It comprises revenue directly received from customers, commissions earned on
postal and non-postal transactions and income from foreign outbound mail receivable from overseas
postal administrators.
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1. Summary of significant accounting policies (continued)
Income from sale of stamps, commission earned on postal and non-postal transactions and revenue from
foreign outbound mail from overseas postal administrators is recognised when the service is rendered.
Allowance is made for the assessed amount of revenue from prepaid product sales at the end of the
reporting period for which the service has not yet been provided. In the case of services rendered to
postal administrators in countries subject to severe exchange control restrictions and undue delays in
settlement, revenue is not recognised until the subsidiary is in a position to ensure that the economic
benefits associated with the transaction will flow to it, which is often upon or shortly before actual
receipt.
1.28 Dividend income
Dividends are recognised in profit or loss in ‘dividend income’ when the entity’s right to receive payment
is established.
1.29 Leases
1.29.1 When a Group company is the lessee
The Group recognises lease liabilities in relation to leases within ’other liabilities’. The lease liability is
measured at the present value of the remaining lease payments, discounted at the Group’s incremental
borrowing rate. The associated right-of-use (ROU) assets are recognised and included within ‘property,
plant and equipment’ and are measured at the amount equal to the lease liability.
The Group applies the following practical expedients:
• a single discount rate is applied to a portfolio of leases with reasonable similar characteristics;
• an assessments is performed on whether leases are onerous; and
• hindsight are used in determining the lease term where the contract contains options to extend or
terminate the lease.
Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit
or loss over the lease term.
The lease term is the non-cancellable period of a lease, together with both (a) periods covered by an
option to extend the lease if the lessee is reasonably certain to extend that option; and (b) periods
covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
In assessing the length of the non-cancellable period of a lease, the Group applies the definition of a
contract to determine the period for which the contract is enforceable. A lease is no longer enforceable
when the lessee and the lessor each has the right to terminate the lease without permission from the
other party with no more than an insignificant penalty.
The ROU asset is depreciated over the shorter of the ROU asset’s useful economic life and the lease term
on a straight-line basis.
The leases with a remaining lease term of less than 12 months are accounted as short-term operating
leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to
profit or loss on a straight-line basis over the period of the lease.
1.30 Financial guarantee contracts and loan commitments
Financial guarantee contracts are contracts that require the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in
accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial
institutions and other bodies on behalf of customers.
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1. Summary of significant accounting policies (continued)
In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit,
guarantees and acceptances.
Financial guarantee contracts are initially measured at fair value and subsequently measured at higher of:
• the amount of the loss allowance (calculated as described in note 1.7.3); and
• the premium received on initial recognition less income recognised in accordance with the principles
of IFRS 15.
'Loan commitments' are the Bank’s commitments to provide credit under pre-specified terms and
conditions, and are measured as the amount of the loss allowance (calculated as described in note 1.7.3).
For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision.
However, for contracts that include both a loan and an undrawn commitment and the Bank cannot
separately identify the Expected Credit Losses on the undrawn commitment component from those on
the loan component, the Expected Credit Losses on the undrawn commitment are recognised together
with the loss allowance for the loan. To the extent that the combined Expected Credit Losses exceed the
gross carrying amount of the loan, the Expected Credit Losses are recognised as a provision.
1.31 Cash and cash equivalents
Cash and cash equivalents are carried in the statement of financial position at face value. Cash and cash
equivalents comprise balances with less than three months’ maturity from the date of acquisition,
including cash in hand, deposits held at call with banks and other short-term highly liquid investments
with original maturities of three months or less.
1.32 Dividend distribution
Dividend distribution to the Bank’s shareholders is recognised as a liability in the Group’s financial
statements in the period in which the dividends are approved by the Bank’s shareholders.
2. Financial risk management
2.1 Introduction
2.1.1 Preamble
The Group’s business involves taking on risks in a targeted manner and managing them professionally.
The core functions of the Group’s risk management are to identify all key risks for the Group, measure
these risks, manage the risk positions and determine capital allocations. The Group regularly reviews its
risk management policies and systems to reflect changes in markets, products and best market practice.
The Group’s aim is to achieve an appropriate balance between risk and return and minimise potential
adverse effects on the Group’s financial performance. The Group defines risk as the possibility of losses or
profits foregone, which may be caused by internal or external factors.
The Group considers risk management a core competency that helps produce consistently high returns for
its various stakeholders. The Group aims to manage all major types of risk by applying methods that meet
best practice. The Group considers it important to have a clear distribution of responsibilities within the
area of risk management. One of the main tasks of the Group’s executive management is to set the
framework for this area. An understanding of risk-taking and transparency in risk-taking are key elements
in the Group’s business strategy and thus in its ambition to be a strong financial entity. The Group’s
internal risk management processes support this objective.
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2. Financial risk management (continued)
Risk management within the Bank is mainly carried out on a unified basis, using an integrated and entity-
wide framework. This framework is based on local and international guidelines, such as the Basel III
Accord, corresponding Directives and Regulations of the European Union, including technical standards,
as well as contemporary international banking practices. The Bank has adopted the Standardised
Approach and the Basic Method with respect to the calculation of capital requirements in relation to, and
management of, credit and market risks, and the Basic Indicator Approach with respect to operational
risk. The Bank regularly updates its Internal Capital and Liquidity Adequacy Assessment Processes (ICAAP
and ILAAP), that are approved by the Board of Directors.
2.1.2 Organisation
The Bank’s Board of Directors is responsible for ensuring that adequate processes and procedures exist to
ensure effective internal control systems for the Group. These internal control systems ensure that
decision-making capability and the accuracy of the reporting and financial results are maintained at a high
level at all times. The Board assumes responsibility for:
• setting business objectives, goals and the general strategic direction for Management with a view to
maximise value;
• selecting and appointing the Chief Executive Officer who is entrusted with the day-to-day operations
of the Group;
• management of the Group’s operations;
• ensuring that significant business risks are identified and appropriately managed; and
• setting the highest business standards and code for ethical behaviour, and monitoring adherence with
these.
In deciding how best to discharge its responsibilities, the Board upholds a policy of clear demarcation
between its role and responsibilities and those of Management. It has defined the level of authority that it
retains over strategy formulation and policy determination, and delegated authority and vested
accountability for the Bank’s day-to-day business in the Assets & Liabilities Committee and Credit
Committee, and, for the Group’s day-to-day operations, in an Executive Team comprising the Chief
Executive Officer and Chief Officers. The Audit & Risk Committee reviews the processes and procedures to
ensure the effectiveness of the Group’s system of internal control, as well as the implementation of the
Board’s risk strategy by management. The Audit & Risk Committee is supported by the Internal Audit, Risk
Management and Compliance functions.
Authority to operate the Bank and its subsidiaries is delegated to the Chief Executive Officer within the
limits set by the Board. The Board is ultimately responsible for the Group’s system of internal control and
for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can provide only reasonable, and not absolute, assurance
against material misstatement or loss.
The Group is committed to the highest standards of business conduct and seeks to maintain these
standards across all operations. Group policies and procedures are in place for the reporting and
addressing of fraudulent activities.
The Group has an appropriate organisational structure for planning, executing, controlling and monitoring
business operations in order to achieve Group objectives.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
2.1.3 Risk policies
The Bank’s Board of Directors is empowered to set out the overall risk policies and limits for all material
risk types. The Board also decides on the general principles for managing and monitoring risks. The Board
provides written principles for overall risk management, as well as written policies covering specific areas,
such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and
non-derivative financial instruments.
Internal controls, procedures and processes are managed within the following areas:
• Finance
• Treasury
• Credit
• Internal Audit
• Risk Management
• Compliance
• Anti-Money Laundering
2.1.4 Risk appetite
The risk appetite determines the maximum risk that the Group is willing to assume to meet business
targets. To ensure coherence between the Group’s strategic considerations regarding risk-taking and day-
to-day decisions, from time to time, the Group formulates and updates its risk appetite for the purposes
of strategic direction. The Group’s risk appetite is set in a process based on a thorough analysis of its
current risk profile. The Group identifies a number of key risk components and for each, determines a
target that represents the Group’s view of the component in question. The following are the key risk
components:
• Credit risk
• Market risk
• Capital risk
• Liquidity risk
• Operational risk
• Information technology risk
• Information management risk
• Financial crime risk
• Compliance risk
2.1.5 Reporting
The Group allocates considerable resources to ensure the ongoing compliance with approved limits and
to monitor its asset portfolio. In particular, the Bank has a fixed reporting cycle to ensure that the relevant
management bodies, including the Board of Directors and the Executive Team, are kept informed on an
ongoing basis of developments in the asset portfolio, such matters as non-performing loans and other
relevant information.
2.2 Risk exposures
In terms of the CRR, ‘an exposure’ is the amount at risk arising from the reporting credit institution's
assets and off-balance sheet items. Consistent with this, an exposure would include the amount at risk
arising from the Bank’s:
• claims on a customer including actual and potential claims which would arise from the drawing down
in full of undrawn advised facilities, which the Bank has committed itself to provide;
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
• contingent liabilities arising in the normal course of business, and those contingent liabilities which
would arise from the drawing down in full of undrawn advised facilities which the Bank has committed
itself to provide; and
• other on and off-balance sheet financial assets and commitments.
The Group is exposed to a number of risks, which it manages at different organisational levels.
The main categories of risk are:
• Credit risk: Credit risk stems from the possible non-prompt repayment or non-payment of existing and
contingent obligations by the Group’s counterparties, resulting in the loss of equity and profit. It is the
risk that deterioration in the financial condition of a borrower will cause the asset value to decrease or
be extinguished. Country risk and settlement risk are included in this category. Country risk refers to
the risk of losses arising from economic or political changes that affect the country from which the
asset originates. Settlement risk refers to the risk of losses through failure of the counterparty to
settle outstanding dues on the settlement date owing to bankruptcy or other causes.
• Market risk: Risk of losses arising from unfavourable changes in the level and volatility of interest
rates, foreign exchange rates or investment prices.
• Liquidity risk: Liquidity risk may be divided into two sub-categories:
- Market (product) liquidity risk: Risk of losses arising from difficulty in accessing a product or
market at the required time, price and amount.
- Funding liquidity risk: Risk of losses arising from a timing mismatch between investing,
placements and fund raising activities resulting in obligations missing the settlement date or
satisfied at higher than normal rates.
• Operational risk: Risk of loss resulting from the lack of skilful management or good governance within
the Group and the inadequacy of proper control, which might involve internal operations, personnel,
systems or external occurrences that in turn affect the income and capital funds of financial
institutions. The Bank has adopted an operational risk management framework and procedures,
which provide for the identification, assessment, management, monitoring and reporting of the
Bank’s operational risks.
The Bank’s approach to management of the above risks is addressed in this note.
2.3 Credit risk
2.3.1 Introduction
Credit risk is the risk of suffering financial loss, should any of the Group’s customers, clients or market
counterparties fail to fulfil their contractual obligations to the Group. Credit risk arises mainly from
consumer loans and advances and loan commitments arising from such lending activities, but can also
arise from credit enhancement provided, such as financial guarantees and letters of credit.
The Group is also exposed to other credit risks arising from investments in debt securities and other
exposures arising from its investing activities.
Credit risk constitutes the Bank’s largest risk in view of its significant lending and securities portfolios,
which is monitored in a structured and formal manner through several mechanisms and procedures. The
credit risk management and control functions are centralised.
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2. Financial risk management (continued)
2.3.2 Credit risk management
The granting of a credit facility (including loans and advances, loan commitments and guarantees) is based
on the Bank’s insight into the customer’s financial position, which is reviewed regularly to assess whether
the basis for the granting of credit has changed. Furthermore, the customer must be able to demonstrate,
in all probability, the ability to repay the debt. Internal approval limits are in place starting from Bank
operational managers leading up to the Credit Committee and the Board of Directors depending on the
magnitude and the particular risks attached to the facility. Facilities are generally adequately secured
either by property and/or guarantees and are reviewed periodically by management in terms of the
exposure to the Bank and to ensure that collateral still covers the facility.
In order to minimise the credit risk undertaken, counterparty credit limits are defined with respect to
investment activities, which limits consider a counterparty’s creditworthiness, the value of collateral and
guarantees pledged, which can reduce the overall credit risk exposure, as well as the type and the
duration of the asset. In order to examine a counterparty’s creditworthiness, the following are
considered: country risk, quantitative and qualitative characteristics, as well as the industry sector in
which the counterparty operates.
The Group has set limits of authority and has segregation of duties so as to maintain impartiality and
independence during the approval process and control new and existing assets or credit facilities.
The Group manages, limits and controls concentrations of credit risk wherever they are identified in
particular, to individual counterparties and groups, and to industries and countries. The Group structures
the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one
borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored
on a revolving basis and subject to an annual or more frequent review, when considered necessary. The
exposure to any one borrower including banks and brokers is further restricted by sublimits covering on
and off-balance sheet exposures. Actual exposures against limits are monitored at end of day on a daily
basis and on a real-time basis too.
The financial years ended 31 December 2021 and 2020 have been characterised by unprecedented
economic conditions as a result of the COVID-19 outbreak, which have impacted the Group's customers.
In view of the nature and operations of the Bank, the impact was more pronounced at the level of the
Bank’s customers in view of the direct impact on the respective business models, income levels and cash
flow generation. Whereas economic growth has been registered during 2021 subsequent to the
significant 2020 adverse impacts, economic uncertainty still prevails taking cognisance of the forecast
conditions as at 31 December 2021.
In view of the above, the Bank has increased the depth of monitoring activities on its loan portfolios and
continued to support its customers and to apply adapted credit risk operational processes accordingly.
During the years ended 31 December 2021 and 2020, the Bank granted moratoria on capital and/or
interest payments and originated new loans to provide relief to customers experiencing liquidity
pressures as a result of the prevailing macroeconomic scenario.
From a risk perspective, the pandemic affected the Bank’s corporate book, which has a significant
exposure to the local construction and real estate industry (“corporate”), and retail portfolios which
typically comprise of the personal, professional and home loans (‘’retail”) (note 2.3.4.5). This has
impacted the performance of the Bank’s expected credit loss models, requiring enhanced monitoring of
model outputs and use of alternative mechanisms or controls. In view of the nature of the Bank’s
portfolio, where a relatively small number of loans comprise a significant proportion of the loan book
value, during the past two years, the Bank continued to apply an individual-debtor-focused credit
management process. Such process enabled the identification of any deterioration in credit risk at the
level of the Bank’s material exposures at an early stage and the estimation of expected credit loss
allowances using the best possible judgement.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
Subsequent to the outbreak of COVID-19, the Bank had adapted further its credit risk management
processes for the purposes of identifying deterioration in credit risk within its portfolios as early as
possible. In this respect, the Bank increased the frequency and depth of monitoring activities on its loan
portfolios.
In relation to those customers that requested moratoria, the Bank carried out assessments to determine
whether the immediate COVID-19 induced shock may transform into long-term financial difficulties,
thereby potentially requiring a downgrade of individual exposures or exposures sharing similar credit risk
characteristics to Stage 2 or Stage 3 to reflect the change in the level of credit risk as appropriate.
Sectorial reviews, in particular on exposures connected to the hospitality industry, which have been
mostly impacted by the pandemic, are performed to identify customers or groups of customers who are
experiencing, or are likely to experience, financial difficulty as a result of COVID-19. Such reviews
continued to be monitored on a regular basis during 2021 in order to assess ongoing developments in
respect of COVID-19, such as the emergence of new waves of infections or virus strains, the status and
efficacy of vaccination programmes, together with the unwinding of government support schemes and
regulatory relief measures.
Specifically, with respect to corporate exposures, during 2021, the Bank continued to assess and
individually rate on an ongoing basis those borrowers deemed mostly impacted by the pandemic,
including the ones which accepted payment deferrals and other relief designed to address short-term
liquidity issues, especially those which have extended deferrals following the occurrence of the COVID-19
pandemic, through individual ad-hoc credit assessments on the basis of recently obtained management
information including forecasts. Exposures deemed mostly impacted and in respect of which a SICR has
been observed are assigned an elevated internal credit rating, requiring closer and more frequent
monitoring on a monthly or quarterly basis (depending on the extent of credit risk deterioration).
During 2021, more information became available in respect of the impact of COVID-19 on specific
borrowers and industry sectors, enabling management to assess in an enhanced manner borrower-
specific credit risk levels and identify SICR or unlikeliness to pay ‘UTP’ events. The Bank continued to
monitor closely corporate exposures previously assigned to any of the underperforming grades (P2, P3)
(note 2.3.8) to update credit risk assessments by reference to actual financial performance and, where
available, financial forecasts. Moreover, additional borrowers were attributed P2 and P3 internal ratings
during 2021 as financial difficulties became more evident by reference to updated financial information.
In relation to retail exposures, the Bank typically resorts more to portfolio measures or reviews in respect
of groups of exposures exhibiting shared risk characteristics, unless specific debtor level information
which suggests developments in the respective credit risk becomes known to the Bank.
The unprecedented nature of the pandemic induced an elevated level of uncertainty in respect of
economic outlook. Whilst economic consensus forecasts have stabilised in recent months and monthly
modifications to forecasts have become narrower, the extent to which these forecasts accurately reflect
the effects of new virus strains, the distribution and efficacy of vaccines (and vaccine boosters) and
eventual business recovery remains uncertain.
The level of local macroeconomic uncertainty increased subsequent to the grey-listing of Malta by the
Financial Action Task Force (FATF) in June 2021. The estimated economic impact of grey-listing remains
uncertain since this is highly dependent on the speed at which Malta exits grey-listing, the effectiveness
of national efforts to address the findings, and the response of foreign investors.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
These factors necessitate more regular monitoring and rigorous evaluation of forecast economic
conditions, together with heightened expert judgement, in order to best determine the range of possible
economic outcomes used for the purposes of estimating ECL. Further information in respect of
macroeconomic forecasts reflected within the ECL calculations is provided in note 2.3.4. (Forward looking
information incorporated in the ECL model).
2.3.3 Credit risk measurement
The measurement of credit exposure for risk management purposes considers that an exposure varies
with changes in market conditions, expected cash flows and the passage of time. The assessment of
credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of
the associated loss ratios and of default correlations between counterparties. The Group measures credit
risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is
similar to the approach used for the purposes of measuring Expected Credit Loss (ECL) under IFRS 9. Refer
to note 2.3.4 for more details.
(a) Loans and advances to customers
The Group uses internal credit risk gradings (note 2.3.8) to reflect its assessment of the Probability of
Default of individual counterparties. Internal credit risk gradings are based on payment behaviour, loan
specific information and expert judgement.
Corporate
Information considered by the Group when determining the internal credit risk grades include the
payment behaviour of the borrower and other information about borrowers which impact their
creditworthiness, including level of income and/or financial performance.
The Group determines its internal rating grades at a borrower level. The Group incorporates any updated
or new information/credit assessments on an ongoing basis. In addition, the Group also updates
information about the creditworthiness of the borrower from sources such as financial statements.
The creditworthiness of the borrower is considered in every periodic review - normally on a yearly basis;
or more frequently on an exceptions basis. This determines the updated internal credit risk gradings.
Retail
After initial recognition, for retail business, the payment behaviour of the borrower is monitored on an
ongoing basis. Any other known information about the borrower which impacts the respective credit
worthiness, such as unemployment and previous delinquency history, is also captured.
(b) Other financial assets
Other financial assets include Balances with Central Bank of Malta, investments and loans and advances
to banks. The Group uses external risk grades to reflect its assessment of the Probability of Default of
individual counterparties. These published grades are continuously monitored and updated. The PDs
associated with each grade are determined based on realised default rates over the prior 12 months, as
published by rating agencies.
In determining the Probability of Default of individual counterparties, the Group distinguishes between
exposures considered ‘investment-grade’ and ‘non-investment grade’ based on credit ratings by
recognised external rating agencies.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
2.3.4 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. Please refer to note
2.3.4.1 for a description of how the Bank determines when a significant increase in credit risk has
occurred;
- if the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'.
Please refer to note 2.3.4.2 for a description of how the Group defines credit-impaired and default;
- 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’ or ‘3’ have their ECL measured based on Expected Credit Losses on a lifetime
basis. Please refer to note 2.3.4.3 for a description of inputs, assumptions and estimation techniques
used in measuring the ECL;
- a pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward
looking information. Note 2.3.4.4 includes an explanation of how the Group has incorporated this in
its ECL models; and
- purchased or originated credit-impaired financial assets are those financial assets that are credit-
impaired on initial recognition. Their ECL is always measured on a lifetime basis (‘Stage 3’).
Further explanation is also provided in respect of how the Group determines appropriate groupings of
loans and advances to customers for ECL measurement (refer to note 2.3.4.5).
The Expected Credit Loss requirements apply to financial assets measured at amortised cost and FVOCI,
and certain loan commitments and financial guarantee contracts. At initial recognition, an impairment
allowance (or provision in the case of commitments and guarantees) is required for ECL resulting from
default events that are possible within the next 12 months (12-month ECL). In the event of a significant
increase in credit risk, an allowance (or provision) is required for ECL resulting from all possible default
events over the expected life of the financial instrument (lifetime ECL). Financial assets where 12-month
ECL is recognised are considered ‘Stage 1’. Financial assets which are considered to have experienced a
significant increase in credit risk would be classified as ‘Stage 2’ and financial assets for which there is
objective evidence of impairment, thus considered to be in default or otherwise credit-impaired, would
be classified as ‘Stage 3’.
The Group recognises loss allowances at an amount equal to 12-month ECL for debt investment securities
that are determined to have low credit risk at the reporting date. The Group considers a debt security to
have low credit risk when it is considered ‘investment-grade’, as defined by recognised external rating
agencies.
The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or
originated credit-impaired financial assets):
Stage 1
Stage 2
Stage 3
(Initial recognition)
(Significant increase in credit risk
since initial recognition)
(Credit-impaired financial
assets)
12-month Expected Credit Losses
Lifetime Expected Credit Losses
Lifetime Expected Credit
Losses
Change in credit quality since initial recognitionMateriality
Group scoping
nKey audit matters
nce initial recognitio
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2. Financial risk management (continued)
2.3.4.1 Significant increase in credit risk (SICR)
To determine whether the credit risk (i.e. risk of default) on a financial instrument has increased
significantly since initial recognition, the Group considers reasonable and supportable information that is
relevant and available without undue cost or effort, including both quantitative and qualitative
information. Such analysis is based on the Group’s historical experience, credit assessment and forward-
looking information.
The Group primarily identifies whether a SICR has occurred for an exposure within the loans and
advances to customers, through the Group’s internal risk gradings. The Group allocates each exposure to
an internal rating grade based on a variety of data that is determined to be predictive of the risk of
default and applying experienced credit judgement. These factors vary depending on the nature of the
exposure and the type of borrower. Exposures are subject to ongoing monitoring, which may result in an
exposure being moved to a different internal rating grade.
The Group identifies SICR and classifies such non-defaulted exposures into ‘Stage 2’ when they fulfil at
least one of the following conditions:
• the exposure is considered forborne;
• the credit quality of any other exposure(s) of the same customer is/are not considered ‘regular’
(except where otherwise stated in the Group’s Credit Policy e.g. cash covered facilities); and
• the borrower’s internal rating grade is not considered ‘performing’, as defined in note 2.3.8.
As referred to previously, the COVID-19 pandemic and the consequential economic conditions have
exacerbated the level of uncertainty, particularly with respect to the identification of customers that
would have experienced a SICR. This is also attributable to limitations in credit information available on
customers, particularly where these customers were granted a general payment moratorium.
The Bank’s individual-debtor-focused approach enabled the identification of SICR at the level the
significant exposures, specifically within its corporate portfolio. In respect of such individually significant
loans the Bank assessed and individually rated those borrowers that during 2020 and 2021 requested
payment deferrals/moratoria as well as those individually significant borrowers within specific industries
which are deemed mostly impacted by the pandemic. These exposures were assessed periodically for
SICR and UTP events through individual credit risk assessments, on the basis of recently obtained
management information, including forecasts. Exposures in respect of which SICR has been observed
were attributed higher ECL, and were assigned an elevated internal rating of P2 or P3, hence requiring
closer and more frequent monitoring on a monthly or quarterly basis (depending on the extent of credit
risk deterioration) to facilitate timely identification of further deterioration in financial condition. The
assessments were performed by the Commercial Credit Department and were discussed and reviewed at
Credit Committee or Board level as applicable.
For the purpose of achieving a comprehensive assessment the Bank also utilised segmentation
techniques in relation to identifying indicators of SICR or unlikeness-to-pay (UTP) (note 2.3.4.2) within
both corporate and retail portfolios.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
In relation to retail portfolios, SICR is generally determined on the basis of delinquency related indicators
since less information is available at asset level to enable the timely identification of a SICR. In this
respect, a set of criteria were established to determine if borrowers which during 2020 and 2021 were
granted a general payment moratorium (see note 2.3.9) exhibited signs of SICR or Unlikeliness-to-Pay
(UTP). Such criteria include whether the COVID-19 pandemic negatively affects the level of income of the
borrower to the extent that the repayment ability of the borrower is jeopardised and whether the
economic sector in which the borrower is employed is severely affected. With respect to borrowers who
have not requested a moratorium, the Bank continued to apply rigorously its credit assessment and
oversight processes, which include monitoring of arrears. Retail borrowers were considered to exhibit
signs of SICR and consequently downgraded to Stage 2 if they met the following criteria:
- repayments being past-due by more than 30 days; and
- other qualitative criteria, including but not limited to actual or potential loss of personal income.
During 2021, more information became available in respect of the impact of COVID-19 on specific
borrowers and industry sectors, both in terms of actual financial performance and revised forecasts
reflecting more accurate impacts of the pandemic when compared to prior year estimates. Credit risk
assessments in respect of individually significant loans within the corporate portfolio were updated
during the financial year ended 31 December 2021 based on updated financial information, enabling
management to better identify SICR or UTP events and resulting in further migrations from stage 1 to 2,
as per information presented in note 2.3.10. Such assessments also facilitated the process through which
a number of exposures were cured from Stage 2 to 1 after the Bank ascertained that during 2021 the
respective debtors did not experience the level of elevated risk which was anticipated in 2020.
In summary, the Bank’s monitoring typically includes the assessment of following risk criteria:
Corporate exposures
Retail exposures
All exposures
• information obtained during periodic review of
customer files – e.g. audited financial statements,
management accounts, budgets and projections.
Examples of areas of particular focus are: gross
profit margins, financial leverage ratios, debt
service coverage, compliance with contractual
conditions, quality of management and senior
management changes;
• data from credit reference agencies, press
articles;
• actual and expected significant changes in the
political, regulatory and technological
environment of the borrower or in its business
activities; and
• industry of the borrower is significantly impacted
by the COVID-19 pandemic.
• internally collected
data on customer
behaviour – e.g.
utilisation of credit
card facilities;
• affordability metrics;
• external data from
credit reference
agencies including
industry-standard
credit scores; and
• employment of the
borrower is
significantly impacted
by the COVID-19
pandemic.
• payment record – this
includes overdue status as
well as a range of variables
about payment ratios;
• utilization of the granted
limit;
• requests for and granting
of forbearance;
• existing and forecast
changes in business,
financial and economic
conditions; and
• request for a general
payment moratorium (as a
consequence of the
COVID-19 pandemic).
The assessment of SICR incorporates forward-looking information (refer to note 2.3.4.4 for further
information) and is performed at the counterparty level on a periodic basis. The criteria used to identify
SICR are monitored and reviewed periodically for appropriateness by the independent Risk Management
function.
As a backstop, and as required by IFRS 9, the Group presumptively considers that a SICR occurs when an
asset is more than 30 days past due. The Group determines days past due by counting the number of
days since the earliest elapsed due date in respect of which full payment has not been received.
In the case of other financial assets (including loans and advances to banks and investments in debt
securities), the Group applies the low credit risk simplification to all its exposures considered ‘investment-
grade’, thus they are not subject to the SICR assessment. Moving from ‘investment-grade’ to ‘non-
investment grade’ does not automatically mean that there has been a SICR.
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Annual Report and Financial Statements 2021
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2. Financial risk management (continued)
2.3.4.2 Definition of default and credit-impaired assets
The Group’s assessment to determine the extent of increase in credit risk of a financial instrument since
initial recognition is performed by considering the change in the risk of default occurring over the
remaining life of the financial instrument. As a result, the definition of default is important.
The Group applies the definition of default in a consistent manner with internal credit risk management
practices for the relevant instruments and the definition considers qualitative and quantitative factors
where appropriate.
The Group determines that a financial instrument is credit-impaired (in default and in ‘Stage 3’ for IFRS 9
purposes) by considering relevant objective evidence, primarily whether:
- contractual payments of either principal or interest are past due for more than 90 days for any
material credit obligations to the Group;
- there are other indications that the borrower is unlikely to pay such as that a concession has been
granted to the borrower for economic or legal reasons of an enduring nature relating to the
borrower’s financial condition, which indicates the borrower is in significant financial difficulty
(unlikeliness to pay criteria); and
- the loan is otherwise considered to be in default. If unlikeliness to pay is not identified at an earlier
stage, it is deemed to occur when an exposure is 90 days past due.
Therefore, the definitions of credit-impaired and default are aligned so that ‘Stage 3’ represents all loans
which are considered defaulted or credit-impaired.
In assessing whether a borrower is in default, the Group will consider indicators that are:
- qualitative – such as non-adherence to terms and conditions of sanction and/or other breaches of
covenants, overdue status and non-payment of another obligation of the same obligor to the Group;
- quantitative - such as changes in probabilities of default; and
- based on data developed internally and obtained from external sources.
The default definition has been applied consistently to model the Probability of Default (PD), Exposure at
Default (EAD) and Loss Given Default (LGD) throughout the Bank's expected loss calculations.
As referred to previously, the COVID-19 pandemic and the consequential economic conditions have
exacerbated the level of uncertainty, particularly with respect to the identification of customers that
would have showed signs of unlikeliness to pay (‘UTP’). The Bank also performed assessments to
determine whether the short-term economic shock as a result of the pandemic may transform into long-
term borrower financial difficulties, thereby potentially requiring a downgrade of individual exposures or
exposures sharing similar credit risk characteristics to Stage 3 to reflect the level of change in credit risk.
With respect to the retail portfolio, assessments covered individual exposures meeting certain criteria as
reflected previously and were also carried out for groups of exposures sharing common risk
characteristics. In relation to the corporate portfolio, the Bank’s assessment is highly dependent on
individual exposure reviews.
Except for forborne exposures, an instrument is considered to no longer be in default (i.e. to have been
cured) when it no longer meets any of the default criteria for a consecutive period of three months. This
period has been determined based on an analysis which considers the likelihood of a financial instrument
returning to default status after cure using different possible cure definitions.
In the case of forborne exposures, the cure period comprises 12 consecutive monthly repayments made
in a timely manner with a minimal grace period of one day (i.e. one or more repayments may be made no
more than one day late).
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2. Financial risk management (continued)
The Group considers other financial assets to be in default when a payment due including a coupon
payment is not effected.
2.3.4.3 Measuring ECL – Explanation of inputs, assumptions and estimation techniques
The Expected Credit Loss (ECL) is measured on either a 12-month (12M) or on a 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). When calculating the Bank’s ECL,
special considerations were made to assess the impact of COVID-19 on ECL. Further details are set out in
note 2.3.4.4.
The ECL is determined by projecting the PD, EAD and LGD for each future month and for each individual
exposure. 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.
The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated
on a similar basis for the residual life of the exposure.
The PD, EAD and LGD parameters are derived from internally developed statistical models and other
historical data, adjusted to reflect forward-looking information as described below.
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. Accordingly, the 12-month and lifetime PDs represent the
Probability of Default occurring over the next 12 months and the remaining maturity of the instrument,
respectively.
PD estimates are estimates at a certain date, which, for the loans and advances to customers, are
calculated based on statistical rating models and assessed using rating tools tailored to the various
categories of counterparties and exposures. These statistical models are based on internally-compiled
data comprising both quantitative and qualitative factors. The PD calculation is based on a transition
matrix approach. The main assumptions underlying such approach is that the PD depends on the
particular periods after origination (‘months on book’) and the current characteristics of the exposure
or borrower. Default is considered to be an absorbing state, whereby if an exposure is defaulted, it
remains in this state during all next years. Market data is used for the PD of loans and advances to banks
and investment securities. If a counterparty or exposure migrates between internal rating grades or
external credit ratings, then this will lead to a change in the associated PD.
The lifetime PD is developed by utilising statistical methodologies to analyse historical observed data to
estimate the probability of a borrower’s transition from one internal rating class to another (or of staying
in the same class) within a given horizon. The conditional PD is adjusted to consider forward-looking
information through macro-economic modelling.
EAD represents the expected exposure in the event of a default (including any expected drawdowns of
committed facilities). The Group derives the EAD from the current exposure to the counterparty and
potential changes to the current amount allowed under the contract. The EAD of a financial asset is the
gross carrying amount at default.
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.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
78
2. Financial risk management (continued)
The 12-month and lifetime EADs are determined based on the expected payment profile, which varies by
product type:
• for amortising products and bullet repayment loans, this is based on the contractual repayments
owed by the borrower over a 12-month or lifetime basis; and
• for revolving products, the Exposure at Default is predicted by taking current drawn balance and
adding a ‘credit conversion factor’ which allows for the expected drawdown of the remaining limit by
the time of default. These assumptions vary by product type and current limit utilisation band, based
on analysis of the Group's recent default data.
The Loss Given Default (LGD) represents the Bank’s expectation of the extent of loss on a defaulted
exposure. Hence, the LGD represents Expected Credit Losses on the EAD given the event of default, taking
into account, among other attributes, the mitigating effect of collateral values at the time it is expected to
be realised and the time value of money. The 12-month and lifetime LGD are determined based on the
factors which impact the recoveries made post default.
For secured products, LGD is primarily based on collateral type and projected collateral values, historical
discounts to market/book values due to forced sales, time to repossession and recovery costs observed.
The LGD for exposures secured by real estate will be derived from the adjusted loan-to-value ratio of the
individual facilities, and takes into account the expected recovery by applying a costs to sell haircut and a
market value haircut to the property value, and by discounting (using the effective interest rate) the
updated market value of the property after haircuts, over a period of time equivalent to the perceived
time to sell. The LGD for other exposures is based on the Group’s perceived risk on the collateral. For
unsecured products, LGDs are typically set at product level due to the limited differentiation recoveries
achieved across different borrowers. These LGDs are influenced by collective strategies.
The ECL is measured from the initial recognition of the financial asset. The maximum period considered
when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the
Group is exposed to credit risk. With respect to non-revolving credit facilities, the contractual life of the
facility is considered. In the case of revolving credit facilities, provided that such facilities do not have a
fixed term or repayment structure, the Group defines the lifetime of such exposures as 12 months, in
case the next substantive credit review is within the next 12 months. For the credit cards portfolio, the
Group also applies a lifetime of 12 months.
Forward-looking economic information is also included in determining the 12-month and lifetime PD and
LGD. Refer to note 2.3.4.4 for an explanation of forward-looking information and its inclusion in ECL
calculations.
The assumptions underlying the ECL calculations are monitored and reviewed on a regular basis. In fact,
the Bank estimates the impact of the COVID-19 pandemic on its ECL by utilising segmentation techniques
for the purposes of identifying indicators of SICR within both retail and corporate portfolios. As explained
in note 2.3.4.1, during 2020 management has adopted a prudent approach by downgrading a number of
retail and corporate customers to Stage 2.
For individually significant credit impaired loans, management determines the size of the allowance
required based on a range of factors such as the realisable value of security, the viability of the
customer’s business model and the capacity to generate cash flow to service debt obligations, under
different scenarios. Judgement is applied in estimating the expected future cash flows from each
borrower and the time to recover these cash flows under the different scenarios as well as to attach
probabilities to those scenarios. The assumptions around forecasted recoveries from the sale of
collateralised properties, including around valuation haircuts and time to recovery, are key drivers in the
estimation of credit loss allowances in respect of individually assessed loans. The heightened level of
uncertainty within the local property market, driven by the pandemic, increases the level of expert
judgement required to predict with reasonable accuracy the recoverability of exposures through the sale
of collateral, since the real impact of the pandemic will not be fully known until market conditions
stabilise. To reflect the volatile economic conditions associated with the COVID-19 pandemic,
judgemental overlay were applied by management in order to overcome limitations in respect of
determining collateral valuations, and the uncertainty around the time to repossess properties held as
collateral and to resell such properties in the open market.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
79
2. Financial risk management (continued)
2.3.4.4 Forward-looking information incorporated in the ECL model
The calculation of ECL incorporates forward-looking information. The Group performs a historical analysis
to identify the key economic variables affecting credit risk and Expected Credit Losses for each portfolio.
These economic variables and their associated impact on the PD, EAD and LGD may vary by portfolio.
In this respect, the Group has identified key drivers of credit risk and credit losses for each portfolio of
financial instruments and, using an analysis of historical data, has analysed relationships between macro-
economic variables, credit risk and credit losses. The key driver is predominantly Gross Domestic Product
(GDP) at constant prices.
The impact of this economic variable on the PD, EAD and LGD has been determined by performing
statistical regression analysis to understand the impact changes in these variables have had historically on
default rates and on the components of LGD and EAD.
Three possible scenarios are considered to capture non-linearity across credit portfolios. The ‘base line’
scenario represents the most-likely outcome. It is based on authoritative sources forecasting these
economic variables referred to above and providing the best estimate view of the economy. Apart from
the ‘base line’ scenario, the Group considers two other macro-economic scenarios – Upside and
Downside scenarios – which respectively represent a more optimistic and a more pessimistic outcome.
Such scenarios reflect the current top and emergent risks and opportunities. The more optimistic and
more pessimistic scenarios are economically plausible, and the more pessimistic scenario will not
necessarily be as severe as scenarios used in stress testing.
Modelling of the economic scenarios, i.e the forecast values of GDP growth for optimistic and pessimistic
scenario, is performed on the basis of the historical values of annual GDP growth and annual forecast
values for base scenario, based on the published three-year forecast of the Central Bank of Malta.
The pessimistic and optimistic scenarios represent a sensitivity to the base scenario, and are deemed to
represent management's best forecast of an economically plausible upside and downside scenario.
Each scenario is weighted by a probability of occurrence, determined by a combination of macro-
economic research and expert credit judgment, taking account the range of possible outcomes each
chosen scenario represents. The Group measures ECL as either a probability weighted 12-month ECL
(Stage 1), or a probability weighted lifetime ECL (Stages 2 and 3). These probability-weighted ECLs are
determined by running each scenario through the relevant ECL model and multiplying the outcome by the
appropriate scenario weighting (as opposed to weighting the inputs).
As with any macro-economic forecasts, the projections and likelihoods of occurrence are subject to a high
degree of uncertainty and therefore, the actual outcomes may be significantly different to those
projected.
The COVID-19 outbreak dominated the political and economic landscape through the financial years
ended 31 December 2020 and 2021. The twin shocks of a public health emergency and the resultant
economic fallout have been felt around the world during 2020. The sharp contraction in economic activity
experienced in both global and local economies has had varying effects on different industry sectors, with
borrowers operating or employed within such industry sectors experiencing financial difficulties.
Measures designed to soften the extent of the damage to economic activity and the labour market were
implemented by the Maltese government, as well as European and local regulatory authorities. Such
measures included income support to households, funding support to businesses (including through
government guaranteed schemes), as well as the granting of general public moratoria on capital and/or
interest repayments in response to the outbreak of the pandemic.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
80
2. Financial risk management (continued)
The current financial year was characterised by strong economic growth after a complicated winter, as
the global and local economies bounced back, particularly in spring and summer, resulting in abnormally
high growth rates principally due to a spending spree unfolding as facilitated by successful vaccination
campaigns. The strong growth rates during 2021 reflect the dynamics throughout the year, but also the
low base value in 2020 due to the economic downturn. This growth is set to significantly slow down as
the pandemic situation worsens throughout winter, alongside ongoing supply-chain issues. The autumn
wave of infections towards the end of the year was stronger than expected, resulting in stricter
government measures. The base assumption is that these measures remain focused on the unvaccinated,
as current vaccines are expected to provide a degree of efficacy against the Omicron variant, thus
avoiding the need for prolonged, full-scale lockdowns in the euro zone. The rise in infections is being
tackled by governments using measures that aim to boost vaccination rates and some level of imposed
social distancing rolled out across countries, which will affect economic activity. However, it is forecasted
that the effect of the pandemic on aggregate activity will be more contained than in previous outbreaks.
The unwinding of government support schemes and regulatory relief measures introduced as a response
to the outbreak of COVID-19 also commenced during the current financial year, taking cognisance of the
economic developments.
Uncertainty remains with respect to the potential economic impacts of epidemiological assumptions in
relation to the pandemic as different regions emerge from the pandemic at different speeds, the progress
registered from continued roll-outs of vaccination programmes, the efficacy of such vaccines/boosters
upon the emergence of new virus strains, further restrictions imposed at national level by various
governments as events unfold, and the unwinding of government support schemes and regulatory relief
measures.
The main downside and upside risks to the baseline are still centred on developments surrounding the
coronavirus pandemic. Although the baseline outlook foresees the economy weathering the winter
outbreak, the pandemic might linger or consumer behaviour may remain cautious, preventing economic
activity from fully rebounding to normal levels.
The significant changes in economic and market drivers, customer behaviours and government actions
caused by COVID-19 have also impacted the performance of ECL models, since the severity of projections
of macroeconomic variables being forecasted in response to the pandemic are outside the historical
observations on which the ECL models have been built and calibrated. In this regard, a significant
judgement within the Bank’s estimation of ECL impairment allowances as at 31 December 2020 and 2021
relates to the determination of forward-looking scenarios reflecting potential future economic conditions
under different scenarios and their impact on PDs and LGDs.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
81
2. Financial risk management (continued)
The most significant period-end assumptions used for the ECL estimate as at 31 December 2021 and 2020
are set out below. The ‘base’, ‘upside’ and ‘downside’ scenarios were used for all portfolios:
- The ‘Base’ Scenario captures business-as-usual macro-economic expectations, whereby the current
rhythm of economic activity is maintained;
- The ‘Downside’ Scenario is based on a subdued level of economic activity hypothesized to correspond
to prolonged period of an economic contraction;
- The ‘Upside’ Scenario is based on the assumption that it would be possible to marginally improve
further over the already benign economic conditions considered in the ‘Base’ Scenario.
As of 31 December 2021
2022
2023
2024
Gross Domestic Product, constant prices (YoY)*
‘Base’
6.50%
5.30%
3.80%
Range of forecasts for alternative scenarios
[4.0 - 9.0]%
[2.8 - 7.8]%
[1.3 - 6.3]%
As of 31 December 2020
2021
2022
2023
Gross Domestic Product, constant prices (YoY)*
‘Base’
5.00%
5.50%
4.70%
Range of forecasts for alternative scenarios
[2.4 - 7.6]%
[2.9 - 8.1]%
[2.1 - 7.3]%
*YoY = year on year % change
The weightings assigned to each economic scenario were 64% for the ‘Base’ Scenario, 18% for the
‘Downside’ scenario and 18% for the ‘Upside’ scenario. The number of scenarios used is based on the
analysis of each major product type to ensure that non-linearities are captured. The number of scenarios
and their attributes are reassessed at each reporting date. The economic scenarios were simulated over a
full economic cycle.
The Bank considers the macroeconomic forecasts to represent its best estimate of the possible outcomes
after analysing its different portfolios to establish that the chosen scenarios are appropriately
representative of the range of possible scenarios.
The Bank’s weightings take into account the current performance of the Maltese economy over the
foreseeable future and the anticipated recoveries as described above. The Board considers that the
probability weightings assigned to the respective scenarios reflect an unbiased evaluation of range of
possible outcomes.
As highlighted previously, the impact of the pandemic on the duration and severity of the economic
impacts remains uncertain, especially in light of potential subsequent waves of infection or new virus
strains, the effectiveness of vaccinations in slowing and eventually reversing the spread of new virus
strains, as well as the unwinding of government support schemes and local political decisions. The
economic outlook has been further exacerbated in March 2022 following the commencement of war in
eastern Europe, which is deemed to be a non-adjustable subsequent event for financial reporting
purposes. Such turmoil is anticipated to put further disruption on supply chain and create additional
inflationary pressures world-wide.
Lombard Bank Malta p.l.c.
Annual Report and Financial Statements 2021
82
2. Financial risk management (continued)
Based on the above, the estimation of credit loss allowances as of 31 December 2020 and 2021 required
an elevated level of subjectivity and expert judgement. Despite the recovery in economic conditions
during 2021, principally driven by the effective implementation of vaccination programmes addressing
the mutation of COVID-19 variants, ECL estimates remain subject to a high degree of uncertainty. In this
respect, judgements applied by management in estimating ECL continue to reflect a degree of caution,
both in the determination of probability of defaults, particularly for exposures currently classified as
performing, for selection of economic scenarios and in terms of the calibration of scenario weightings.
Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the
impact of any regulatory, legislative, or political changes, have also been considered, but are not deemed
to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is
reviewed and monitored for appropriateness on an ongoing basis.
The outcome of the Bank’s credit loss allowances estimation process is sensitive to judgements and
estimations made through the reflection of several forward-looking economic conditions. Management
has assessed the sensitivity of the Bank’s expected credit losses by assigning a 100% weighting to the
baseline, downside and upside scenarios respectively. The Bank’s credit loss allowances would decrease
by €17.1 million if the provisions has to be calculated solely on the baseline scenario; ECLs would increase
by €7.6 million if these had to be estimated using only the downside scenario and would reduce by €17.4
million if the upside scenario only were to be taken into consideration. This demonstrates the Bank’s
resilience in overcoming negative shocks and its ability to absorb such allowance changes, if necessary.
2.3.4.5 Categorisation of loans and advances to customers for ECL measurement
As part of the ECL model, the Group classifies its exposures to loans and advances to customers into
homogeneous groups with similar credit risk characteristics that include instrument type and credit risk
gradings. In this respect, the Group considers the following categories for ECL measurement:
• retail portfolio, which includes loans and advances to individual customers such as mortgages, credit
cards and other consumer credit;
• construction and real estate portfolio, which includes loans and advances to customers in respect of
financing construction of real estate projects for the purpose of re-sale or rental; and
• corporate portfolio, which includes loans and advances to business entities, other than construction
and real estate related borrowers.
2.3.5 Maximum exposure to credit risk
An ‘exposure’ is defined as the amount at risk arising from the Group’s assets and off-balance sheet
items. The Group’s maximum credit risk with respect to on- and off-balance sheet items can be classified
into the following categories:
• Financial assets recognised on-balance sheet comprising principally balances with Central Bank of
Malta, financial investments and loans and advances to banks and customers. The maximum exposure
to credit risk of these financial assets equals their gross carrying amounts.
• Documentary credits and guarantee obligations incurred on behalf of third parties. The latter carry the
same credit risk as loans, whilst documentary credits are collateralised by the underlying shipments of
goods to which they relate, and therefore carry less risk than a loan to a customer. The maximum
exposure to credit risk is the full amount that the Group would have to pay if the guarantees are
called upon or if documentary credits are exercised.
• Loan commitments and other credit related commitments that are irrevocable over the life of the
respective facilities. The maximum exposure to credit risk is the full amount of the committed
facilities. However, the likely amount of loss is less than the total unused commitments as most
commitments to extend credit are contingent upon customers maintaining specific credit standards.
These exposures are monitored in the same manner in respect of loans and advances.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
83
2. Financial risk management (continued)
The Group’s credit risk exposures relating to on-balance sheet assets and off-balance sheet instruments, reflecting the maximum exposure to credit risk before collateral held
or other credit enhancements, include the following:
Group
Bank
2021
2020
2021
2020
Gross
exposure
ECL
allowance
Gross
exposure
ECL
allowance
Gross
exposure
ECL
allowance
Gross
exposure
ECL
allowance
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Credit risk exposures relating to on-balance sheet assets:
Subject to IFRS 9 impairment allowance
Financial assets measured at amortised cost:
Balances with Central Bank of Malta
71,805
-
68,417
-
71,805
-
68,417
-
Cheques in course of collection
530
-
666
-
530
-
666
-
Loans and advances to banks
78,279
-
96,985
-
68,424
-
93,641
-
Financial investments measured at FVOCI
275,091
(465)
255,080
(808)
272,190
(465)
251,518
(808)
Loans and advances to customers
668,515
(25,622)
647,043
(25,914)
668,517
(25,622)
647,046
(25,914)
Trade and other receivables
10,787
-
9,136
-
1,605
-
1,761
-
Accrued income and other assets
2,999
-
3,283
-
2,965
-
3,243
-
Credit risk exposure
1,108,006
(26,087)
1,080,610
(26,722)
1,086,036
(26,087)
1,066,292
(26,722)
Credit risk exposures relating to off-balance sheet instruments:
Contingent liabilities
13,195
(24)
10,851
(61)
13,360
(24)
10,983
(62)
Undrawn commitments to lend
195,264
(45)
197,180
(226)
196,372
(45)
198,288
(226)
Credit risk exposure
208,459
(69)
208,031
(287)
209,732
(69)
209,271
(288)
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
84
2. Financial risk management (continued)
Accrued income substantially arises from loans and advances to customers. Expected Credit Losses in
respect of accrued income have been allocated to loans and advances to customers.
2.3.6 Credit concentration risk
Within the Bank, concentration risk of losses results from inadequate diversification of the credit
exposures. This risk is managed by actively measuring, reporting and monitoring on a regular and ongoing
basis risk concentration levels against reasonable thresholds for industry sectors, counterparties,
products, and collateral types.
Credit concentration risk by industry sector
The Bank’s financial investments measured at FVOCI (gross of Expected Credit Losses) are composed of
local government debt securities and treasury bills, and other debt and equity instruments as shown in
the following table:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Government
221,008
201,812
219,345
199,732
Corporate
Tourism
506
769
461
454
Property and construction
6,049
6,351
5,435
5,753
Financial institutions
39,681
39,885
39,102
39,317
Other sectors
7,847
6,263
7,847
6,262
Gross financial investments
275,091
255,080
272,190
251,518
The industry sector analysis of the Bank’s loans and advances to customers (gross of Expected Credit Losses) is
described in the following table:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Manufacturing
9,895
10,297
9,895
10,297
Tourism
59,430
47,452
59,430
47,452
Trade
38,147
49,813
38,147
49,813
Property and construction
236,693
251,989
236,693
251,989
Personal, professional and home loans
162,282
128,781
162,282
128,781
Financial institutions
140,253
132,645
140,253
132,645
Other sectors
21,815
26,066
21,817
26,069
Gross advances to customers
668,515
647,043
668,517
647,046
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
85
2. Financial risk management (continued)
Credit concentration risk for counterparties
The majority of the Bank’s loans and advances to customers comprise exposures to corporates.
As at 31 December 2021 and 2020, no loans and advances to customers were deemed to be prohibited
large exposures, prior to any eligible exemptions, in accordance with the requirements of Part Four: Large
Exposures, of the CRR. A limited number of customers account for a certain percentage of the Bank’s
loans and advances. Whilst no individual customer or group of dependent customers is considered by
management as a significant concentration of credit risk in the context of the CRR, these exposures are
monitored and reported more frequently and rigorously.
Credit concentration risk by geographical region
The Group also monitors credit concentration risk by geographical region. The majority of the Group’s
exposures are in Malta in view of the Group’s lending operations being conducted with Maltese
corporate entities. Moreover, the significant part of the Group investments in debt securities are all
issued by local government and local corporate entities.
The Group’s balances with correspondent banks in different jurisdictions are split by geographical region,
as shown in the following table:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Loans and advances to banks
Germany
16,998
16,290
16,998
16,290
United Kingdom
12,001
8,095
12,001
8,095
France
-
15,888
-
15,888
Norway
1
1
1
1
Spain
7,614
13,494
7,614
13,494
Belgium
7,630
8,171
7,630
8,171
Denmark
-
3,340
-
3,340
Malta
9,859
3,346
4
2
Switzerland
13,443
11,018
13,443
11,018
Ireland
8,830
-
8,830
-
Other
1,903
17,342
1,903
17,342
Gross loans and advances to banks
78,279
96,985
68,424
93,641
2.3.7 Information on credit quality of balances with banks, investments and treasury bills
The Group holds debt instruments that are issued by local government, local banks and other local
corporate entities. All such securities are listed on the Malta Stock Exchange, which is currently the only
locally-based Recognised Investment Exchange (RIE). The other debt securities held by the Group, issued
by foreign entities, are listed on other recognised exchanges. The Bank acquires debt securities and
similar instruments issued by counterparties having strong financial background. These issuers are
approved and regularly reviewed considering the process previously highlighted, focusing on market
developments.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
86
2. Financial risk management (continued)
Within its daily operations the Bank transacts with banks and other financial institutions. The Bank
primarily places short-term funds with pre-approved banks subject to limits in place and subject to the
respective institution’s credit rating being within controlled parameters. By conducting these transactions
the Bank is running the risk of losing funds due to the possible delays in the repayment to the Bank of the
existing and future obligations of the counterparty banks. Actual exposures are monitored against the
limits on a daily basis and in a real-time manner. The credit status of the pre-authorised banks is
monitored on an ongoing basis. At 31 December 2021, loans and advances to banks consisted primarily of
term placements maturing within one month.
The Bank runs the risk of loss of funds due to the possible political, economic and other events in a
particular country where funds have been placed or invested with several counterparties. Countries are
assessed according to their size, economic data and prospects and their credit ratings from international
rating agencies. Existing country credit risk exposures are monitored and reviewed periodically. The
Bank’s assets are predominantly in Malta. The Bank’s exposures to other countries are mainly limited to
bank balances and money market placements with a total carrying amount of €68,420,000 (2020:
€93,639,000) at the end of the reporting period.
At the end of the reporting period, none of these financial assets mentioned were past due or impaired.
The following tables set out information about the credit quality of financial assets of the Bank measured
at amortised cost and financial investments at FVOCI. The credit quality of financial assets is based on
external credit ratings assigned to issuers or counterparties by recognised external rating agencies:
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta at
amortised cost
Gross carrying amount
71,805
-
-
71,805
Loss allowance
-
-
-
-
Carrying amount – net of loss allowance
71,805
-
-
71,805
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta at
amortised cost
Gross carrying amount
68,417
-
-
68,417
Loss allowance
-
-
-
-
Carrying amount – net of loss allowance
68,417
-
-
68,417
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
87
2. Financial risk management (continued)
The credit rating of the Government of Malta as at 31 December 2021 and 2020 was considered as
‘investment grade’ and hence no loss allowance in respect of balances with the Central Bank of Malta
were recognised.
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Financial investments at FVOCI
AAA to AA-
12,228
-
-
12,228
A+ to A-
220,191
-
-
220,191
BBB+ to BBB-
22,487
-
-
22,487
Unrated
17,284
-
-
17,284
Carrying amount – fair value
272,190
-
-
272,190
Loss allowance
(465)
-
-
(465)
Carrying amount – net of loss allowance
271,725
-
-
271,725
Loans and advances to banks at amortised cost
AAA to AA-
807
-
-
807
A+ to A-
55,975
-
-
55,975
BBB+ to BBB-
11,636
-
-
11,636
Lower than BB-
2
-
-
2
Unrated
4
-
-
4
Carrying amount
68,424
-
-
68,424
Loss allowance
-
-
-
-
Carrying amount – net of loss allowance
68,424
-
-
68,424
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Financial investments at FVOCI
AAA to AA-
10,291
-
-
10,291
A+ to A-
202,073
-
-
202,073
BBB+ to BBB-
22,746
-
-
22,746
Unrated
16,408
-
-
16,408
Carrying amount – fair value
251,518
-
-
251,518
Loss allowance
(808)
-
-
(808)
Carrying amount – net of loss allowance
250,710
-
-
250,710
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
88
2. Financial risk management (continued)
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to banks at amortised cost
AAA to AA-
775
-
-
775
A+ to A-
78,710
-
-
78,710
BBB+ to BBB-
14,151
14,151
BB+ to BB-
2
-
-
2
Unrated
3
-
-
3
Carrying amount
93,641
-
-
93,641
Loss allowance
-
-
-
-
Carrying amount – net of loss allowance
93,641
-
-
93,641
As at 31 December 2021 and 2020, there were no purchased credit-impaired assets.
After the end of the reporting period there were no significant changes in credit ratings reflected in the
tables above which have a material impact on the credit quality of the financial assets.
2.3.8 Information on credit quality of loans and advances to customers
The Bank manages the credit quality of its loans and advances to customers by using internal risk grades,
which provide a progressively increasing risk profile ranging from ‘P1’ (best quality, less risky) to ‘NP’.
These risk grades are an essential tool for the Bank to identify both non-performing exposures and
better-performing customers. The internal risk grades used by the Bank are as follows:
- Performing: Internal grade ‘P1’
- Under performing: Internal grades ‘P2’, ‘P3’ and ‘PF’; and
- Non-performing: Internal grade ‘NP’.
P1
The Bank’s loans and advances to customers which are categorised as ‘P1’ are principally debts in respect
of which the payment of interest and/or capital is not overdue by 30 days and no recent history of
customer default exists. Management does not expect any losses from non-performance by these
customers.
P2
Loans and advances which attract a ‘P2’ grading are those which are receiving the close attention of the
Bank’s management and are being reviewed periodically in order to determine whether such advances
should be reclassified to either the ‘P1’ or the ‘P3’ classification. Credit facilities that attract this category
include those where the payment of interest and/or capital becomes overdue by 30 days and over but
not exceeding 60 days.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
89
2. Financial risk management (continued)
P3
Loans and advances which attract a ‘P3’ grading are those having the weaknesses inherent in those loans
and advances classified as ‘P2’ with the added characteristics that repayment is inadequately protected
by the current sound worth and paying capacity of the borrower. Loans and advances so graded have a
well-defined weakness or weaknesses that could jeopardise the repayment of the debt. They are
characterised by the distinct possibility that the Bank will sustain some loss if the deficiencies are not
corrected. Credit facilities that attract this category include those where the payment of interest and/or
capital becomes overdue by 60 days and over but not exceeding 90 days.
PF
Loans and advances which attract a ‘PF’ grading are those facilities (other than Non-Performing
Exposures) in respect of which forbearance measures have been extended. Forbearance measures consist
of concessions towards a debtor facing or about to face difficulties in meeting its financial commitments
(financial difficulties).
A concession is deemed to have taken place when any of the following two actions are taken;
(a) a modification of the previous terms and conditions of a contract, as the debtor is considered unable
to comply therewith, due to its financial difficulties (‘troubled debt’) to allow for sufficient debt service
ability, that would not have been granted had the debtor not been in financial difficulties; and/or
(b) a total or partial refinancing of a troubled debt contract, that would not have been granted had the
debtor not been in financial difficulties.
NP
Loans and advances which attract a ‘NP’ grading are those facilities where the Bank deems the
recoverability of principal to be remote as a result of worsening conditions of loans and advances
classified as ‘P3’. Credit facilities that attract this category include those where the payment of interest
and/or capital becomes overdue by 90 days and over. Accordingly, these loans and advances are
generally past due by more than 90 days and comprise those exposures which are deemed by the Bank as
credit-impaired (see definition in note 2.3.4.2).
The following table sets out information about the credit quality of financial assets measured at
amortised cost. Explanation of the terms: 12-month ECL, lifetime ECL and credit-impaired are included in
note 2.3.4.3.
2021
Stage 1
Stage 2
Stage 3
12-month ECL
Lifetime ECL
Lifetime ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at amortised cost
P1
504,477
4,330
-
508,807
P2
-
34,065
-
34,065
P3
-
24,285
-
24,285
PF
-
49,603
-
49,603
NP
-
-
51,757
51,757
Gross carrying amount
504,477
112,283
51,757
668,517
Loss allowance
(5,187)
(3,361)
(17,074)
(25,622)
Carrying amount
499,290
108,922
34,683
642,895
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
90
2. Financial risk management (continued)
2020
Stage 1
Stage 2
Stage 3
12-month ECL
Lifetime ECL
Lifetime ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at amortised cost
P1
522,923
-
-
522,923
P2
-
33,294
-
33,294
P3
-
6,493
-
6,493
PF
-
17,853
-
17,853
NP
-
-
66,483
66,483
Gross carrying amount
522,923
57,640
66,483
647,046
Loss allowance
(6,200)
(2,799)
(16,915)
(25,914)
Carrying amount
516,723
54,841
49,568
621,132
As at 31 December 2021, undrawn commitments to lend amounted to €196,372,000 (2020: €198,288,000)
and predominantly comprise of sanctioned but not yet drawn facilities which are classified as ‘Stage 1’
(12-month ECL) upon drawdown by customers. Undrawn facilities in respect of existing ‘Stage 2’ and
‘Stage 3’ (Lifetime ECL) facilities as at 31 December 2021 have not been considered significant. ECL
allowances on undrawn commitments specifically connected to revolving credit facilities to lend as at 31
December 2021 amounted to €45,000 (2020: €226,000).
Contingent liabilities and financial guarantee contracts as at 31 December 2021 amounting to
€13,360,000 (2020: €10,983,000) are all classified as ‘Stage 1’ (12-month ECL) by the Bank. ECL
allowances on contingent liabilities and financial guarantee contracts as at 31 December 2021 amounted
to €24,000 (2020: €62,000).
As at 31 December 2021 and 2020, there are no purchased credit-impaired assets.
The following table analyses the impaired loans and advances, gross of impairment allowances, by
industry sector:
2021
2020
€ 000
€ 000
Manufacturing
446
456
Tourism
2,483
2,481
Trade
3,923
4,672
Property and construction
35,785
48,554
Personal, professional and home loans
3,185
4,238
Financial institutions
5,173
1,929
Other sectors
762
4,153
Gross impaired advances to customers
51,757
66,483
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
91
2. Financial risk management (continued)
The following table provides a detailed analysis of the credit quality of the Bank’s lending portfolio as at
31 December 2021:
Non-forborne
exposures
Forborne
exposures
Total
2021
2021
2021
€ 000
€ 000
€ 000
Performing - Stage 1
Loans which are not past due
500,928
-
500,928
Loans which are past due by less than 30 days
3,549
-
3,549
504,477
-
504,477
Performing - Stage 2
Loans which are not past due
P1
4,317
-
4,317
P2
33,134
-
33,134
P3
23,795
-
23,795
PF
-
49,603
49,603
Loans which are past due by less than 90 days
Past due between 1 and 30 days
1,380
-
1,380
Past due between 31 and 89 days
54
-
54
62,680
49,603
112,283
Non-performing – Stage 3
Past due loans by 90 days or more and credit-impaired loans
40,501
11,256
51,757
Gross loans and advances
607,658
60,859
668,517
12-month ECL
(5,187)
-
(5,187)
Lifetime ECL
(17,359)
(3,076)
(20,435)
Net loans and advances
585,112
57,783
642,895
Interest income recognised during the financial year ended 31 December 2021 in respect of forborne
exposures amounted to €2,658,000.
The following table provides a detailed analysis of the credit quality of the Bank’s lending portfolio as at
31 December 2020:
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
92
2. Financial risk management (continued)
Non-forborne
exposures
Forborne
exposures
Total
2020
2020
2020
€ 000
€ 000
€ 000
Performing - Stage 1
Loans which are not past due
513,333
-
513,333
Loans which are past due by less than 30 days
9,590
-
9,590
522,923
-
522,923
Performing - Stage 2
Loans which are not past due
P2
31,505
-
31,505
P3
6,202
-
6,202
PF
-
17,853
17,853
Loans which are past due by less than 90 days
Past due between 1 and 30 days
1,742
-
1,742
Past due between 31 and 89 days
338
-
338
39,787
17,853
57,640
Non-performing – Stage 3
Past due loans by 90 days or more and credit-impaired loans
53,173
13,310
66,483
Gross loans and advances
615,883
31,163
647,046
12-month ECL
(6,200)
-
(6,200)
Lifetime ECL
(15,838)
(3,876)
(19,714)
Net loans and advances
593,845
27,287
621,132
Interest income recognised during the financial year ended 31 December 2020 in respect of forborne
exposures amounted to €1,994,000.
2.3.9 Modification of financial assets
The contractual terms of a loan may be revised for a number of reasons, including changes in market
conditions, customer retention and other factors that are not related to the credit quality of a customer.
Forbearance measures comprise concessions made on the contractual terms of a loan in response to a
customer’s financial difficulties. The Group categorises loans on which concessions have been granted
under conditions of financial difficulties as ‘forborne loans’ when their contractual payment terms have
been revised, because of significant concerns about the customer’s ability to meet contractual payments
when due.
When considering whether there is significant concern regarding a customer’s ability to meet contractual
loan repayments when due, the Group assesses the customer’s delinquency status, account behaviour,
repayment history, current financial situation and continued ability to repay.
If the customer is not meeting contractual repayments or it is evident that the client will be unable to do
so without the renegotiation, there will be a significant concern regarding the ability to meet contractual
payments. Indicators of significant concerns regarding a borrower’s ability to pay include:
• the customer is currently in default on any of its debt;
• the customer has declared or is in the process of declaring bankruptcy or entering into a similar
process;
• there is significant doubt as to whether the customer will continue to be a going concern; and
• the Group forecasts that the customer’s entity-specific cash flows will be insufficient to service the
debt (both interest and principal) in accordance with the contractual terms of the existing agreement
through maturity.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
93
2. Financial risk management (continued)
A range of forbearance measures are employed by the Group in order to improve the management of
customer relationships, maximise collection opportunities and, if possible, avoid default or call-in of
facilities. They include extended payment terms, a reduction in principal repayments, the deferral of call-
in of facilities and other forms of loan modifications. The Group’s policies and procedures in this area
allow the Group to provide a customer with terms and conditions that are more favourable than those
provided initially. Loan forbearance is only granted in situations where the customer has shown a
willingness to repay the loan and is expected to be able to meet the revised obligations. The Group’s
credit risk management policies set out restrictions on the number and frequency of forbearance
measures and the minimum period an account must have been opened before any forbearance measure
can be considered.
For the purposes of determining whether changes to a customer’s agreement should be treated as
forbearance the following types of modification could be regarded as concessionary in cases where the
customer is in financial difficulty:
• reduction of the stated interest rate for the remaining original life of the debt;
• extension of the maturity date or dates at a stated interest rate lower than the current market rate for
new debt with similar risk;
• reduction of the face amount or maturity amount of the debt; and
• reduction of accrued interest.
Term extension is the most common type of modification granted by the Group. Other types of
concession, namely transfer to an interest-only arrangement or interest rate changes, occur less often.
In assessing whether forbearance is a sustainable strategy, the customer’s entire exposures are reviewed
and the customer’s ability to meet the terms in relation to the revised obligations and other unchanged
credit facilities is considered. In all cases, forbearance is only granted when the customer is expected to
be able to meet the revised terms. When considering acceptable modified terms the Group considers the
ability of the customer to be able to service the revised interest payments as a necessity. When principal
payment modifications are utilised, the Group requires the customer to be able to comply with the
revised terms as a necessary pre-condition for the restructuring to proceed.
Generally, forbearance is a qualitative indicator of a significant increase in credit risk.
The risk of default of modified assets is assessed at the reporting date and compared with the risk under
the original terms at initial recognition. When the modification is not substantial it does not result in
derecognition of the original asset (refer to notes 1.7.4).
The Group monitors the subsequent performance of modified assets and may determine that the credit
risk has significantly improved after restructuring:
• modified assets are moved from ‘Stage 3’ (Lifetime ECL) to ‘Stage 1’ (12-month ECL) only if they have
performed in accordance with the new terms for 36 consecutive months or more; and
• modified assets are moved from ‘Stage 2’ (Lifetime ECL) to ‘Stage 1’ (12-month ECL) only if they have
performed in accordance with the new terms for 24 consecutive months or more.
The gross carrying amount of the assets subject to modifications described above, not considered as
forbearance activities, as at 31 December 2021 amounted to €8,151,000 (2020: €11,465,000).
The Group continues to monitor if there is a subsequent significant increase in credit risk in relation to
modified assets that moved from Stage 3 (Lifetime ECL) or ‘Stage 2’ (Lifetime ECL) to ‘Stage 1’.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
94
2. Financial risk management (continued)
During the financial year ended 31 December 2020, a number of government support schemes and
regulatory relief measures were announced in response to the outbreak of the COVID-19 pandemic, one
of which being the granting of moratoria on capital and/or interest payments to provide relief to
individual and corporate customers during the ensuing macroeconomic recession triggered by the
pandemic. In this regard, the Central Bank of Malta issued Directive No. 18 on Moratoria on Credit
Facilities in Exceptional Circumstances (Directive No. 18) in order to provide guidance on the treatment of
such instances, in line with European Banking Authority (EBA) Guidelines on legislative and non-legislative
moratoria on loan repayments applied in the light of the COVID-19 crisis (the EBA Guidelines)
1
. These are
referred to as general payment moratoria. In line with the EBA Guidelines and Directive No. 18, exposures
meeting established criteria and eligible for the granting of a general payment moratorium are not
classified as forborne/renegotiated, unless the borrower was already experiencing financial difficulties
prior to the pandemic. Nevertheless, the Bank performed an assessment in respect of such exposures in
order to determine whether the short-term shock may transform into long-term financial difficulties,
thereby potentially requiring a downgrade to stage 2 or stage 3 to reflect the level of credit risk as
appropriate. This assessment was performed on a periodic basis at the level of significant corporate
exposures, whereas the assessment in respect of retail exposures was performed by reference to shared
credit quality characteristics (for instance employment status and sector within which the customer is
employed).
In accordance with the requirements of Directive No. 18, applications for new general payment moratoria
or for extensions of existing general payment moratoria were accepted until 31 March 2021, with the
total duration of the moratorium, inclusive of extensions, being limited to nine months. In this respect,
applications for new general payment moratoria or for extensions of general payment moratoria received
after 31 March 2021, or extending beyond the maximum duration prescribed by Directive No. 18, are
considered to be forbearance measures. In addition, the granting of moratoria which do not meet the
conditions of a general payment moratorium are also considered to be forbearance measures.
The movement in the carrying amount of forborne loans and advances, before impairment allowances, is
analysed below:
Forborne exposures
2021
2020
€ 000
€ 000
At 1 January
31,163
24,225
Loans to which forbearance measures have been extended during the year
40,128
18,087
Repayments and other movements
(2,281)
316
Retired from forborne
(8,151)
(11,465)
At 31 December
60,859
31,163
1
EBA Guideline (EBA/GL/2020/02) published on 2 April 2020, as amended by EBA/GL/2020/08 published on 25 June
2020, and EBA/GL/2020/15 published on 2 December 2020.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
95
2. Financial risk management (continued)
Forborne loans, gross of Expected Credit Losses, are analysed by industry sector as follows:
2021
2020
€ 000
€ 000
Manufacturing
-
18
Tourism
7,399
-
Trade
2,765
4,585
Property and construction
8,917
6,976
Personal, professional and home loans
2,099
2,321
Financial institutions
35,318
16,748
Other sectors
4,361
515
60,859
31,163
As at 31 December 2021 and 2020, forborne loans mainly comprise exposures to customers based in
Malta.
In addition to the forborne loans as disclosed in the tables above, during 2020 the Bank granted moratoria
to 96 obligors in respect of gross exposures amounting to €78.6 million which moratoria met the criteria
for a general payment moratorium as established within Directive No. 18 and the EBA guidelines.
As at 31 December 2020, outstanding gross loans and advances subject to general payment moratoria
amounted to €65.7 million, of which €0.5 million are classified as Stage 2 and €0.05 million are classified
as Stage 3. The allowance for ECL in respect of Stage 1 loans subject to general payment moratoria
amounted to €0.3 million, while the ECL in respect of Stage 2 and Stage 3 loans subject to general
payment moratoria amounted to €0.2 million and nil respectively.
As at 31 December 2021, there were no outstanding gross loans and advances subject to general payment
moratoria.
During the financial year ended 31 December 2021, extensions to general payment moratoria in respect
of loans subject to general payment moratoria as at 31 December 2020 were granted to 1 obligor in
respect of gross exposures amounting to €0.5 million, which extensions met the criteria established within
Directive No. 18 and the EBA Guidelines.
During 2021, the Bank also granted new moratoria to 3 obligors in respect of gross exposures amounting
to €15.6 million, which moratoria met the criteria for a general payment moratorium as established
within Directive No. 18 and the EBA Guidelines.
Out of the outstanding gross loans and advances subject to general payment moratoria at 31 December
2020, €12 million relate to retail mortgage customers and €1.7 million relate to other retail customers. In
order to earmark obligors experiencing a significant increase in credit risk and estimate the impact of
delayed emergence of defaults in view of these moratoria, and accordingly estimate the ECL referred to
above, the Bank assessed these exposures by reference to specific criteria established by management
(refer to note 2.3.4.1). In respect of corporate exposures amounting to €52 million, the Bank assessed and
individually rated each borrower requesting a general payment moratorium on the basis of recently
obtained management information, including forecasts.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
96
2. Financial risk management (continued)
Following the expiration of all general payment moratoria during 2021, a post-model mechanism was
enhanced to estimate the impact of delayed emergence of default in view of government support
measures which were still in force during the year ended 31 December 2021 and also the potential
economic impact of Malta’s grey-listing by the FATF.
Specifically, the mechanism devised by management considers an overlay which increases the expected
credit losses on performing (Stage 1) exposures within both the corporate and retail portfolios, which
would have otherwise being subjected to a higher decrease in expected credit losses driven by the
forecasted macroeconomic model inputs (note 2.3.4.4). The overlay, which is in the region of €3 million,
is based on specific expert-based assumptions intended to account for possible losses which could arise
on performing exposures, after taking cognisance of the current level of uncertainty in respect of the
duration and economic impact of the pandemic, other developments referred to above, and the level of
coverage of expected credit losses on Stage 1 exposures. The Bank specifically focused on those
customer segments that are connected to industries which have been more impacted by the COVID-19
pandemic and those to whom a general payment moratorium was granted since the outbreak of the
COVID-19 pandemic. The default risk following the eventual uplift of government support measures is
deemed to be higher in respect of such customers and, accordingly, the potential impact on ECL as a
result of these factors was estimated.
This post-model mechanism addresses the potential limitations in statistical models which could emerge,
given that a number of assumptions are being applied during a period of time characterised by a high
degree of economic volatility. Forward-looking assumptions entail a higher degree of uncertainty as
historical relationships between key variables may not be relevant within the current scenario.
During 2020, the Bank also confirmed its participation in the Malta Development Bank COVID-19
Guarantee Scheme, whereby the risk of newly originated loans under the scheme to viable businesses
experiencing liquidity pressures resulting from the effects of the pandemic are mitigated by a government
guarantee.
In this respect, as at 31 December 2021, newly originated gross loans subject to the Malta Development
Bank COVID-19 Guarantee Scheme amounted to €10.9 million (2020: €7.2 million), of which a maximum
amount of €9.8 million (2020: €6.4 million) is considered guaranteed, though subject to an overall capping
of €4.9 million (2020: €3.2 million). As at 31 December 2021, newly originated gross loans, under this
scheme, classified as Stage 1 and Stage 2, amounted to €5.1 million (2020: €6.7 million) and €5.8 million
(2020: €0.5 million) respectively. As at 31 December 2021, there were no (2020: nil) newly originated
loans under this scheme classified in Stage 3.
The total ECL allowance in respect of Stage 1 loans subject to the Malta Development Bank COVID-19
Guarantee Scheme amounted to €117,000 (2020: €61,000), while the ECL in respect of Stage 2 loans
amounted to €468,000 (2020: €1,000).
2.3.10 Loss allowances
Reconciliation of 12-month and lifetime ECL provision
The loss allowance recognised in the period is impacted by a variety of factors, as described below:
• Transfers between ‘Stage 1’ and ‘Stages 2’ or ‘3’ due to financial instruments experiencing significant
increases (or decreases) of credit risk or becoming credit-impaired in the period, and the
consequent ‘step up’ (or ‘step down’) between 12-month and Lifetime ECL;
• Additional allowances for new financial instruments recognised during the period, as well as releases
for financial instruments derecognised in the period upon full repayment;
• Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from
regular refreshing of inputs to models;
• Impacts on the measurement of ECL due to changes made to models and assumptions;
• Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis;
• Foreign exchange retranslations for assets denominated in foreign currencies and other movements;
and
• Financial assets written off during the period and reversal of allowances related to assets that were
written off.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
97
2. Financial risk management (continued)
The following tables explain the changes in the loss allowance between the beginning and the end of the
annual period:
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta at
amortised cost
Loss allowance as at 1 January 2021
-
-
-
-
Total net profit and loss charge during the year
-
-
-
-
Loss allowance as at 31 December 2021
-
-
-
-
Financial investments measured at FVOCI
Loss allowance as at 1 January 2021
808
-
-
808
Changes to risk parameters (model inputs: PDs/LGDs/EADs)
(344)
-
-
(344)
Total net profit and loss credit during the year
(344)
-
-
(344)
Loss allowance as at 31 December 2021
464
-
-
464
Loans and advances to banks at amortised cost
Loss allowance as at 1 January 2021
-
-
-
-
Total net profit and loss credit during the year
-
-
-
-
Loss allowance as at 31 December 2021
-
-
-
-
Undrawn commitments
Loss allowance as at 1 January 2021
224
-
2
226
Changes to risk parameters (model inputs PDs/LGDs/EADs)
(191)
11
(1)
(181)
Total net profit and loss charge/(credit) during the year
(191)
11
(1)
(181)
Loss allowance as at 31 December 2021
33
11
1
45
Contingent liabilities
Loss allowance as at 1 January 2021
61
-
-
61
Changes to risk parameters (model inputs PDs/LGDs/EADs)
(37)
-
-
(37)
Total net profit and loss credit during the year
(37)
-
-
(37)
Loss allowance as at 31 December 2021
24
-
-
24
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
98
2. Financial risk management (continued)
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at amortised cost
Loss allowance as at 1 January 2021
6,200
2,799
16,915
25,914
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(167)
167
-
-
Transfer from Stage 1 to Stage 3
(10)
-
10
-
Transfer from Stage 2 to Stage 1
41
(41)
-
-
Transfer from Stage 2 to Stage 3
-
(8)
8
-
Transfer from Stage 3 to Stage 1
4
-
(4)
-
Transfer from Stage 3 to Stage 2
-
1,059
(1,059)
-
Net remeasurement of ECL arising from stage
transfers
-
10
1
11
Total remeasurement of loss allowance arising
from transfers in stages
(132)
1,187
(1,044)
11
New financial assets originated
881
189
54
1,124
Changes to risk parameters (model inputs
PDs/LGDs/EADs)
(811)
(681)
954
(538)
Financial assets derecognised
(951)
(133)
(417)
(1,501)
Total net profit and loss (credit)/charge
during the year
(1,013)
562
(453)
(904)
Other movements
Write-offs
-
-
(81)
(81)
Unwinding of discount
-
-
693
693
Loss allowance as at 31 December 2021
5,187
3,361
17,074
25,622
The movements reflected within the line item “Changes to risk parameters” have been analysed and
described in notes 2.3.4.3, 2.3.4.4 and 2.3.9.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
99
2. Financial risk management (continued)
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta at
amortised cost
Loss allowance as at 1 January 2020
-
-
-
-
Total net profit and loss charge during the year
-
-
-
-
Loss allowance as at 31 December 2020
-
-
-
-
Financial investments measured at FVOCI
Loss allowance as at 1 January 2020
183
-
-
183
Changes to risk parameters (model inputs: PDs/LGDs/EADs)
625
-
-
625
Total net profit and loss charge during the year
625
-
-
625
Loss allowance as at 31 December 2020
808
-
-
808
Loans and advances to banks at amortised cost
Loss allowance as at 1 January 2020
-
-
-
-
Total net profit and loss charge during the year
-
-
-
-
Loss allowance as at 31 December 2020
-
-
-
-
Undrawn commitments
Loss allowance as at 1 January 2020
39
-
-
39
Changes to risk parameters (model inputs PDs/LGDs/EADs)
185
-
2
187
Total net profit and loss charge during the year
185
-
2
187
Loss allowance as at 31 December 2020
224
-
2
226
Contingent liabilities
Loss allowance as at 1 January 2020
1
-
-
1
Changes to risk parameters (model inputs PDs/LGDs/EADs)
60
-
-
60
Total net profit and loss charge during the year
60
-
-
60
Loss allowance as at 31 December 2020
61
-
-
61
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
100
2. Financial risk management (continued)
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at amortised cost
Loss allowance as at 1 January 2020
3,832
1,346
19,917
25,095
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(63)
63
-
-
Transfer from Stage 1 to Stage 3
(183)
-
183
-
Transfer from Stage 2 to Stage 1
45
(45)
-
-
Transfer from Stage 2 to Stage 3
-
(2)
2
-
Transfer from Stage 3 to Stage 1
60
-
(60)
-
Transfer from Stage 3 to Stage 2
-
20
(20)
-
Net remeasurement of ECL arising from stage
transfers
-
-
51
51
Total remeasurement of loss allowance arising
from transfers in stages
(141)
36
156
51
New financial assets originated
685
198
6
889
Changes to risk parameters (model inputs
PDs/LGDs/EADs)
2,225
1,326
3,166
6,717
Financial assets derecognised
(401)
(107)
(4,075)
(4,583)
Total net profit and loss charge/(credit)
during the year
2,368
1,453
(747)
3,074
Other movements
Write-offs
-
-
(3,267)
(3,267)
Unwinding of discount
-
-
1,012
1,012
Loss allowance as at 31 December 2020
6,200
2,799
16,915
25,914
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
101
2. Financial risk management (continued)
The unwinding of discount on ‘Stage 3’ financial assets is reported within 'Interest Income' so that
interest income is recognised on the amortised cost basis (after deducting the ECL allowance).
Remeasurement of loss allowances arising from foreign-exchange and other movements were not
considered significant.
Changes in the gross carrying amount that contributed to changes in loss allowance
The following table explains changes in the gross carrying amount of the financial assets to help
demonstrate their significance to the changes in the loss allowance for the same portfolios as discussed
above:
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta
Gross carrying amount as at 1 January 2021
68,417
-
-
68,417
New financial assets originated
2,375,426
-
-
2,375,426
Financial assets derecognised
(2,372,038)
-
-
(2,372,038)
Gross carrying amount as at 31 December 2021
71,805
-
-
71,805
Financial investments measured at FVOCI
Gross carrying amount as at 1 January 2021
255,080
-
-
255,080
New financial assets originated
332,639
-
-
332,639
Financial assets derecognised
(310,490)
-
-
(310,490)
Other movements
(2,138)
-
-
(2,138)
Gross carrying amount as at 31 December 2021
275,091
-
-
275,091
Loans and advances to banks at amortised cost
Gross carrying amount as at 1 January 2021
96,985
-
-
96,985
New financial assets originated
4,833,173
-
-
4,833,173
Financial assets derecognised
(4,851,879)
-
-
(4,851,879)
Gross carrying amount as at 31 December 2021
78,279
-
-
78,279
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
102
2. Financial risk management (continued)
2021
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at
amortised cost
Gross carrying amount as at 1 January 2021
522,920
57,640
66,483
647,043
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(39,692)
39,692
-
-
Transfer from Stage 1 to Stage 3
(2,774)
-
2,774
-
Transfer from Stage 2 to Stage 1
6,392
(6,392)
-
-
Transfer from Stage 2 to Stage 3
-
(1,246)
1,246
-
Transfer from Stage 3 to Stage 1
4
-
(4)
-
Transfer from Stage 3 to Stage 2
-
15,036
(15,036)
-
Total changes in gross carrying amounts arising from
transfers in stages
(36,070)
47,090
(11,020)
-
New financial assets originated
103,553
22,383
4,553
130,489
Changes in gross carrying amount in respect of facilities
present as at 1 January 2021
9,310
(1,602)
(1,781)
5,927
Financial assets derecognised
(95,238)
(13,228)
(6,396)
(114,862)
Write-offs
-
-
(82)
(82)
Total net change during the year
(18,445)
54,643
(14,726)
21,472
Gross carrying amount as at 31 December 2021
504,475
112,283
51,757
668,515
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
103
2. Financial risk management (continued)
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta
Gross carrying amount as at 1 January 2020
74,976
-
-
74,976
New financial assets originated
220,446
-
-
220,446
Financial assets derecognised
(227,005)
-
-
(227,005)
Gross carrying amount as at 31 December 2020
68,417
-
-
68,417
Financial investments measured at FVOCI
Gross carrying amount as at 1 January 2020
211,872
-
-
211,872
New financial assets originated
437,211
-
-
437,211
Financial assets derecognised
(390,901)
-
-
(390,901)
Other movements
(3,102)
-
-
(3,102)
Gross carrying amount as at 31 December 2020
255,080
-
-
255,080
Loans and advances to banks at amortised cost
Gross carrying amount as at 1 January 2020
121,060
-
-
121,060
New financial assets originated
756,602
-
-
756,602
Financial assets derecognised
(780,677)
-
-
(780,677)
Gross carrying amount as at 31 December 2020
96,985
-
-
96,985
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
104
2. Financial risk management (continued)
2020
Stage 1
12-month
ECL
Stage 2
Lifetime
ECL
Stage 3
Lifetime
ECL
Total
€ 000
€ 000
€ 000
€ 000
Loans and advances to customers at
amortised cost
Gross carrying amount as at 1 January 2020
479,831
45,927
51,380
577,138
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(24,310)
24,310
-
-
Transfer from Stage 1 to Stage 3
(15,967)
-
15,967
-
Transfer from Stage 2 to Stage 1
18,884
(18,884)
-
-
Transfer from Stage 2 to Stage 3
-
(1,841)
1,841
-
Transfer from Stage 3 to Stage 1
1,141
-
(1,141)
-
Transfer from Stage 3 to Stage 2
-
482
(482)
-
Total changes in gross carrying amounts
arising from transfers in stages
(20,252)
4,067
16,185
-
New financial assets originated
98,770
4,926
6,282
109,978
Changes in gross carrying amount in respect of
facilities present as at 1 January 2020
14,206
3,249
5,332
22,787
Financial assets derecognised
(49,635)
(529)
(9,255)
(59,419)
Write-offs
-
-
(3,441)
(3,441)
Total net change during the year
43,089
11,713
15,103
69,905
Gross carrying amount as at 31 December 2020
522,920
57,640
66,483
647,043
Undrawn commitments to lend as at 31 December 2021 amounted to €195,264,000 (2020: €197,180,000)
and predominantly comprise of sanctioned but not yet drawn facilities which are classified as ‘Stage 1’
(12-month ECL) upon drawdown by customers. Changes in gross carrying amount of undrawn
commitments to lend mainly relate to existing facilities drawn down by customers and new facilities
sanctioned during 2021 and 2020.
Contingent liabilities and financial guarantee contracts as at 31 December 2021 amounting to
€13,195,000 (2020: €10,851,000) are all classified as ‘Stage 1’ (12-month ECL) by the Group. Changes in
gross carrying amount of contingent liabilities and financial guarantee contracts mainly related to the
expiry or enforcement of existing financial guarantees and the issuance of new financial guarantees
during 2021 and 2020.
Changes in gross carrying amount arising from foreign-exchange and other movements were not
significant.
2.3.11 Write-off policy
The Group writes off loans and advances to customers when it determines that these are uncollectible
and it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of
recovery. This is generally the case when the Group determines that the borrower does not have assets or
sources of income that could generate sufficient cash flows to repay the amounts subject to the write-
offs.
The Group may write-off financial assets that are still subject to enforcement activity. The Group still
seeks to recover amounts it is legally owed in full, but which have been partially written off due to no
reasonable expectation of full recovery.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
105
2. Financial risk management (continued)
2.3.12 Collateral
The Group employs a range of policies and practices to mitigate credit risk. The amount and type of
collateral required depends on an assessment of the credit risk of the counterparty. The Group’s Board
established a policy regarding the acceptability of types of collateral and valuation parameters.
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit
facilities are generally unsecured.
The main types of collateral obtained are as follows:
• for corporate lending, charges over real estate properties, cash or securities;
• for retail lending (including home loans and consumer credit), mortgages over residential properties,
cash or securities; and
• for exposures arising from reverse repurchase transactions, a pledge on liquid sovereign debt
securities.
Collateral held as security for financial assets other than loans and advances depends on the nature of the
instrument. Debt securities, treasury and other eligible bills are generally unsecured.
Management assesses the market value of collateral as part of the loan origination process. This
assessment is reviewed periodically through ongoing credit file reviews. The Group requests additional
collateral in accordance with the underlying agreement when necessary.
The Group's policies regarding obtaining collateral have not significantly changed during the reporting
period and there has been no significant change in the overall quality of the collateral held by the Group
since the prior period.
A portion of the Group’s financial assets has sufficiently low ‘loan-to-value’ (LTV) ratios, which result in
insignificant loss allowance being recognised in accordance with the Group’s Expected Credit Loss model.
As at 31 December 2021, the gross carrying amount of such financial assets is €450,511,000
(2020: €466,033,000).
Loans granted as part of the Malta Development Bank COVID-19 Guarantee Scheme (note 2.3.9) are
secured by guarantees granted as part of this Scheme and included within Other collateral in the tables
below.
The Group closely monitors collateral held for financial assets considered to be credit-impaired, as it
becomes more likely that the Group will take possession of collateral to mitigate potential credit losses.
Financial assets that are credit-impaired and related collateral held in order to mitigate potential losses
are shown below:
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
106
2. Financial risk management (continued)
Gross
exposure
Impairment
allowance
Carrying
amount
Fair value of
collateral held
Credit-impaired assets
€ 000
€ 000
€ 000
€ 000
As at 31 December 2021
- Overdrafts
15,303
2,655
12,648
19,744
- Term loans
33,394
12,656
20,738
74,474
Total credit-impaired assets
48,697
15,311
33,386
94,218
As at 31 December 2020
- Overdrafts
15,646
1,742
13,904
22,704
- Term loans
47,140
13,280
33,860
91,048
- Credit cards
1
-
1
13
Total credit-impaired assets
62,787
15,022
47,765
113,765
Financial assets that are credit-impaired, but with no collateral held in this respect, are shown below:
Gross
exposure
Impairment
allowance
Carrying
amount
€ 000
€ 000
€ 000
Credit-impaired assets
As at 31 December 2021
- Overdrafts
426
380
46
- Term loans
2,622
1,370
1,252
- Credit cards
12
12
-
Total credit-impaired assets
3,060
1,762
1,298
As at 31 December 2020
- Overdrafts
1,146
399
747
- Term loans
2,537
1,481
1,056
- Credit cards
13
13
-
Total credit-impaired assets
3,696
1,893
1,803
It is the Bank's policy to dispose of properties acquired through judicial action in an orderly fashion. The
proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy
properties acquired through judicial action for business use.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
107
2. Financial risk management (continued)
The following tables show the distribution of LTV ratios for the Group’s loans and advances to customers.
Non-forborne
exposures
Forborne
exposures
Total
Non-forborne
exposures
Forborne
exposures
Total
2021
2021
2021
2020
2020
2020
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Performing – Stage 1
Not collateralised
36,776
-
36,776
49,697
-
49,697
Fully collateralised:
Less than 50% LTV
298,058
-
298,058
293,679
-
293,679
51% to 75% LTV
98,708
-
98,708
129,905
-
129,905
76% to 90% LTV
54,011
-
54,011
31,942
-
31,942
91% to 100% LTV
6,190
-
6,190
9,522
-
9,522
456,967
-
456,967
465,048
-
465,048
Partially collateralised
Greater than 100% LTV
10,734
-
10,734
8,178
-
8,178
Total performing – Stage 1
504,477
-
504,477
522,923
-
522,923
Underperforming – Stage 2
Not collateralised
4,902
69
4,971
1,568
9
1,577
Fully collateralised:
Less than 50% LTV
17,620
29,521
47,141
27,403
1,096
28,499
51% to 75% LTV
33,256
860
34,116
6,889
-
6,889
76% to 90% LTV
-
512
512
1,350
-
1,350
91% to 100% LTV
3,403
-
3,403
82
-
82
54,279
30,893
85,172
35,724
1,096
36,820
Partially collateralised
Greater than 100% LTV
3,499
18,641
22,140
2,495
16,748
19,243
Total underperforming – Stage 2
62,680
49,603
112,283
39,787
17,853
57,640
Non-performing – Stage 3
Not collateralised
3,051
9
3,060
3,513
183
3,696
Fully collateralised:
Less than 50% LTV
12,067
8,643
20,710
12,602
5,596
18,198
51% to 75% LTV
2,326
1,376
3,702
12,496
4,871
17,367
76% to 90% LTV
1,492
832
2,324
980
876
1,856
91% to 100% LTV
-
-
-
3,145
362
3,507
15,885
10,851
26,736
29,223
11,705
40,928
Partially collateralised
Greater than 100% LTV
21,565
396
21,961
20,437
1,422
21,859
Total non-performing -Stage 3
40,501
11,256
51,757
53,173
13,310
66,483
At 31 December
607,658
60,859
668,517
615,883
31,163
647,046
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
108
2. Financial risk management (continued)
2.3.13 Trade and other receivables
The Bank’s subsidiary assesses the credit quality of its customers taking into account financial position,
past experience and other factors. It has policies in place to ensure that sales of products and services are
effected to customers with an appropriate credit history in the case of credit sales. The subsidiary
monitors the performance of these financial assets on a regular basis to identify incurred collection losses
which are inherent in the subsidiary’s receivables taking into account historical experience in collection of
accounts receivable.
Standard credit terms are in place for individual clients, however, wherever possible, new corporate
customers are analysed individually for creditworthiness before the subsidiary’s standard payment and
service delivery terms and conditions are offered. The entity’s review includes external creditworthiness
databases when available. The subsidiary establishes an allowance for impairment that represents its
estimate of both incurred and expected losses in respect of trade and other receivables. This allowance
represents Expected Credit Losses (ECL) against individual exposures. The movement in provisions for
impairment in respect of trade receivables is disclosed in note 16. Other overdue trade receivables
amounted to €248,000 (2020: €428,000), principally overdue by nine months, but were not impaired.
The subsidiary’s receivables, which are not impaired financial assets, are principally in respect of
transactions with customers for whom there is no recent history of default. Management does not expect
any material losses from non-performance by these customers.
2.3.14 Contingencies and commitments
Guarantees and standby letters of credit carry the same credit risk as loans. Documentary, credit and
commercial letters of credit – which are written undertakings by the Bank on behalf of a customer
authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and
conditions – are collateralised by the underlying shipments of goods to which they relate and therefore
carry less risk than a direct loan. Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit
risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the
total unused commitments. However, the likely amount of loss is less than the total unused commitments
as most commitments to extend credit are contingent upon customers maintaining specific credit
standards. These exposures are monitored in the same manner outlined above in respect of loans and
advances.
2.4 Market risk
The Group takes on exposure to market risk, which is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices. Market risks arise from open
positions in interest rate, currency and equity products, all of which are exposed to general and specific
market movements and changes in the level of volatility of market rates or prices such as interest rates,
credit spreads, foreign exchange rates and equity prices.
Accordingly, market risk for the Group consists of three elements:
- Interest rate risk, which is the risk of losses because of changes in interest rates;
- Exchange rate risk, which is the risk of losses on the Group’s positions in foreign currency because of
changes in exchange rates; and
- Equity price risk, which is the risk of losses because of changes in investment prices.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
109
2. Financial risk management (continued)
2.4.1 Interest rate risk
Interest rate risk is the risk that the value or cash flows of a financial instrument will fluctuate due to
changes in market interest rates. Cash flow interest rate risk is the risk that the future cash flows of a
financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk
is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest
rates. The Group, through its banking operations, takes on exposure to the effects of fluctuations in the
prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may
increase as a result of such changes but losses may occur in the event that unexpected movements arise.
The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-
earning assets and interest-bearing liabilities mature or reprice within different time periods or on
different terms. The Bank accepts deposits from customers at both fixed and floating rates and for
varying terms. This poses a risk to the Bank, which risk is managed by monitoring on a continuous basis
the level of mismatch of interest rate repricing taking cognisance of the terms of the Bank’s principal
assets, loans and advances to customers, that are repriceable at the Bank’s discretion. The Bank also
invests in highly liquid quality assets and other short-term instruments for the purposes of mitigating
exposures to fluctuations in interest rates. The Bank is accordingly in a position to manage the interest
rate terms of its financial assets and simultaneously to effect changes to interest terms of liabilities
reflecting the Bank’s strategy together with market developments. The Group seeks to manage its net
interest spread, considering the cost of capital, by investing funds in a portfolio of assets with a longer
term than the liabilities funding them (therefore normally giving rise to a negative maturity gap position)
but with shorter repricing periods or terms. The Bank manages the shorter term nature of the liabilities
funding the assets for the purposes of ensuring a steady base of deposits with differing terms over the
medium to longer term. The Bank’s Assets & Liabilities Committee is primarily responsible for oversight
over the Bank’s interest rate risk management process and monitors actively the interest rate risk
measures utilised by the Bank.
Credit facilities and commitments to lend funds to customers are granted at prevailing market interest
rates at drawdown date.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
110
2. Financial risk management (continued)
The following tables summarise the Group’s exposures to interest rate risks. These analyse the Group’s financial instruments, which were interest-bearing, at their carrying
amounts categorised by the earlier of contractual repricing or maturity dates.
Group
Effective
Between
Between
Carrying
Interest
Less than
3 months
1 year
More than
Non-interest
Amount
Rate
3 months
and 1 year
and 5 years
5 years
bearing
As at 31 December 2021
€ 000
%
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
126,279
(0.10)
105,362
14,033
-
-
6,884
Debt and other fixed income instruments measured at FVOCI
218,080
1.14
531
4,091
88,095
125,363
-
Loans and advances to banks
78,279
0.11
75,779
2,500
-
-
-
Loans and advances to customers
642,893
3.72
549,358
12,607
53,233
15,990
11,705
Total financial assets
1,065,531
731,030
33,231
141,328
141,353
18,589
Financial liabilities
Amounts owed to banks
1,224
0.14
1,224
-
-
-
-
Amounts owed to customers
977,143
0.77
514,225
66,209
183,384
59,676
153,649
Total financial liabilities
978,367
515,449
66,209
183,384
59,676
153,649
Interest repricing gap
215,581
(32,978)
(42,056)
81,677
(135,060)
Cumulative gap
215,581
182,603
140,547
222,224
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
111
2. Financial risk management (continued)
Group
Effective
Between
Between
Carrying
Interest
Less than
3 months
1 year
More than
Non-interest
Amount
Rate
3 months
and 1 year
and 5 years
5 years
bearing
As at 31 December 2020
€ 000
%
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
169,687
(0.20)
148,042
14,030
-
-
7,615
Debt and other fixed income instruments measured at FVOCI
152,182
2.06
237
3,706
45,276
102,963
-
Loans and advances to banks
96,985
0.05
95,485
1,500
-
-
-
Loans and advances to customers
621,129
3.97
514,320
25,756
34,428
35,658
10,967
Total financial assets
1,039,983
758,084
44,992
79,704
138,621
18,582
Financial liabilities
Amounts owed to banks
5,602
0.10
5,602
-
-
-
-
Amounts owed to customers
941,110
0.69
533,908
69,660
158,805
44,178
134,559
Total financial liabilities
946,712
539,510
69,660
158,805
44,178
134,559
Interest repricing gap
218,574
(24,668)
(79,101)
94,443
(115,977)
Cumulative gap
218,574
193,906
114,805
209,248
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
112
2. Financial risk management (continued)
Bank
Effective
Between
Between
Carrying
interest
Less than
3 months
1 year
More than
Non-interest
Amount
rate
3 months
and 1 year
and 5 years
5 years
bearing
As at 31 December 2021
€ 000
%
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
125,552
(0.10)
105,362
14,033
-
-
6,157
Debt and other fixed income instruments measured at FVOCI
215,179
1.09
531
4,066
87,371
123,211
-
Loans and advances to banks
68,424
0.09
68,424
-
-
-
-
Loans and advances to customers
642,895
3.72
549,360
12,607
53,233
15,990
11,705
Total financial assets
1,052,050
723,677
30,706
140,604
139,201
17,862
Financial liabilities
Amounts owed to banks
1,224
0.14
1,224
-
-
-
-
Amounts owed to customers
978,365
0.77
514,358
66,410
183,384
59,676
154,537
Total financial liabilities
979,589
515,582
66,410
183,384
59,676
154,537
Interest repricing gap
208,095
(35,704)
(42,780)
79,525
(136,675)
Cumulative gap
208,095
172,391
129,611
209,136
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
113
2. Financial risk management (continued)
Bank
Effective
Between
Between
Carrying
interest
Less than
3 months
1 year
More than
Non-interest
Amount
rate
3 months
and 1 year
and 5 years
5 years
bearing
As at 31 December 2020
€ 000
%
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
168,648
(0.20)
148,043
14,029
-
-
6,576
Debt and other fixed income instruments measured at FVOCI
148,621
1.99
-
3,364
44,733
100,524
-
Loans and advances to banks
93,641
0.04
93,641
-
-
-
-
Loans and advances to customers
621,132
3.97
514,322
25,757
34,428
35,658
10,967
Total financial assets
1,032,042
756,006
43,150
79,161
136,182
17,543
Financial liabilities
Amounts owed to banks
5,602
0.10
5,602
-
-
-
-
Amounts owed to customers
948,478
0.68
537,909
71,660
158,805
44,178
135,926
Total financial liabilities
954,080
543,511
71,660
158,805
44,178
135,926
Interest repricing gap
212,495
(28,510)
(79,644)
92,004
(118,383)
Cumulative gap
212,495
183,985
104,341
196,345
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
114
2. Financial risk management (continued)
2.4.2 Interest rate profile
At the end of the reporting periods the interest rate profile of the Group’s interest-bearing financial
instruments was:
Group
Fixed rate
Variable rate
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Interest-bearing assets
Balances with Central Bank of Malta and treasury bills
67,151
123,048
52,244
39,024
Debt and other fixed income instruments measured at
FVOCI
218,080
152,182
-
-
Loans and advances to banks
44,754
51,227
33,525
45,758
Loans and advances to customers
86,062
97,233
545,126
512,929
416,047
423,690
630,895
597,711
Interest-bearing liabilities
Amounts owed to banks
23
22
1,201
5,580
Amounts owed to customers
358,094
317,535
465,400
489,016
358,117
317,557
466,601
494,596
At the end of the reporting periods the interest rate profile of the Bank’s interest-bearing financial
instruments was:
Bank
Fixed rate
Variable rate
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Interest-bearing assets
Balances with Central Bank of Malta and treasury bills
67,151
123,047
52,244
39,024
Debt and other fixed income instruments measured at
FVOCI
215,179
148,621
-
-
Loans and advances to banks
42,254
49,727
26,170
43,914
Loans and advances to customers
86,062
97,233
545,128
512,932
410,646
418,628
623,542
595,870
Interest-bearing liabilities
Amounts owed to banks
23
22
1,201
5,580
Amounts owed to customers
358,294
321,633
465,532
490,919
358,317
321,655
466,733
496,499
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
115
2. Financial risk management (continued)
2.4.3 Fair value sensitivity analysis for fixed rate instruments
The Group’s instruments exposing the Bank to fair value interest rate risk consist of quoted debt
securities measured at FVOCI (also refer to note 6) since these are fair valued with fair value changes
recognised in other comprehensive income. Considering the nature and carrying amount of the
investments, with the majority of investments comprising securities issued by the Government of Malta, a
sensitivity analysis disclosing how equity would have been affected by changes in interest rates that were
reasonably possible at the end of the reporting period is not deemed necessary. All other financial
instruments subject to fixed interest rates are measured at amortised cost.
2.4.4 Cash flow sensitivity analysis for variable rate instruments
At the end of the reporting periods, if interest rates had increased/decreased by 100 basis points
(assuming a parallel shift of 100 basis points in yields) with all other variables held constant, the pre-tax
result for the year would change by the following amounts determined by applying the shift to the net
variable interest exposure of the Group/Bank at the end of the reporting periods:
Group
2021
2020
€ 000
€ 000
(+) 100 bp
1,643
1,031
(-) 100 bp
(1,643)
(1,031)
Bank
2021
2020
€ 000
€ 000
(+) 100 bp
1,568
994
(-) 100 bp
(1,568)
(994)
2.4.5 Currency risk
The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange
rates on its financial position and cash flows particularly within the Bank’s operations. Foreign exchange
risk to the Bank is the risk that earnings and values fluctuate as a result of changes in foreign exchange
rates. The Bank’s foreign exchange risk arises when financial assets or liabilities are denominated in
currencies which are different from the Bank’s functional currency.
The Bank essentially manages this risk by ensuring that foreign currency liabilities are utilised to fund
assets denominated in the same foreign currency thereby matching asset and liability positions as much
as is practicable. This mechanism is reflected in the figures reported in the tables below which present
this matching process.
The Bank maintains its exposure to foreign currencies within prescribed limits set by the Bank’s ALCO.
ALCO sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day
positions which are monitored on a real-time basis.
The Bank enters into forward foreign exchange contracts with customers in the normal course of its
business. Generally, it is the Bank’s policy to cover the exposure arising from forward contracts. As a
result, the Group is not exposed to any significant exchange risk in respect of outstanding derivative
financial instruments at the end of the reporting periods. The Bank also retains a deposit margin covering
a portion of the notional amount of the respective contract from the customer thereby reducing the
extent of credit risk should the derivative client default. The Bank did not have any derivative financial
instruments as at 31 December 2021 and 2020.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
116
2. Financial risk management (continued)
The following tables summarise the Group’s exposures to foreign currency risk. Included in the tables are
the Group’s financial instruments which are subject to foreign exchange risk at carrying amounts,
categorised by currency.
Group
Total
EUR
GBP
USD
Other
€ 000
€ 000
€ 000
€ 000
€ 000
As at 31 December 2021
Financial assets
Balances with Central Bank of Malta,
treasury bills and cash
126,279
106,106
11,080
9,081
12
Investments measured at FVOCI
227,501
209,654
6,668
11,179
-
Loans and advances to banks
78,279
21,987
20,354
32,586
3,352
Loans and advances to customers
642,893
639,443
3,118
302
30
Other assets
13,853
11,879
274
1,187
513
Total financial assets
1,088,805
989,069
41,494
54,335
3,907
Financial liabilities
Amounts owed to banks
1,224
1,224
-
-
-
Amounts owed to customers
977,143
881,729
40,232
51,809
3,373
Other liabilities
42,297
38,913
1,137
1,895
352
Total financial liabilities
1,020,664
921,866
41,369
53,704
3,725
Net currency exposure in financial assets/liabilities
67,203
125
631
182
Commitments and contingent liabilities
208,390
206,517
1,195
678
-
Group
Total
EUR
GBP
USD
Other
€ 000
€ 000
€ 000
€ 000
€ 000
As at 31 December 2020
Financial assets
Balances with Central Bank of Malta,
treasury bills and cash
169,687
139,568
14,281
15,825
13
Investments measured at FVOCI
161,424
144,790
6,428
10,206
-
Loans and advances to banks
96,985
31,105
24,508
37,572
3,800
Loans and advances to customers
621,129
617,551
3,031
534
13
Other assets
9,044
7,033
279
1,207
525
Total financial assets
1,058,269
940,047
48,527
65,344
4,351
Financial liabilities
Amounts owed to banks
5,602
5,602
-
-
-
Amounts owed to customers
941,110
828,588
47,169
61,500
3,853
Other liabilities
41,401
35,792
1,272
3,791
546
Total financial liabilities
988,113
869,982
48,441
65,291
4,399
Net currency exposure in financial assets/liabilities
70,065
86
53
(48)
Commitments and contingent liabilities
207,744
207,203
142
399
-
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
117
2. Financial risk management (continued)
Under the scenario that the euro appreciates by 20% against all currencies the effect would be a decrease
of €159,000 (2020: €16,000) in the carrying amount of financial instruments with the adverse impact
recognised in profit or loss. Should the euro depreciate against all currencies by 20%, the effect would be
a gain of €233,000 (2020: €23,000) in the carrying amount of financial instruments and the favourable
impact would be recognised in profit or loss.
The following tables summarise the Bank’s exposures to foreign currency risk. Included in the tables are
the entity’s financial instruments which are subject to foreign exchange risk at carrying amounts,
categorised by currency.
Bank
Total
EUR
GBP
USD
Other
€ 000
€ 000
€ 000
€ 000
€ 000
At 31 December 2021
Financial assets
Balances with Central Bank of Malta,
treasury bills and cash
125,552
105,379
11,080
9,081
12
Investments measured at FVOCI
224,600
206,753
6,668
11,179
-
Loans and advances to banks
68,424
12,237
20,354
32,482
3,351
Loans and advances to customers
642,895
639,445
3,118
302
30
Other assets
4,048
3,913
59
76
-
Total financial assets
1,065,519
967,727
41,279
53,120
3,393
Financial liabilities
Amounts owed to banks
1,224
1,224
-
-
-
Amounts owed to customers
978,365
882,951
40,232
51,809
3,373
Other liabilities
22,043
19,742
995
1,244
62
Total financial liabilities
1,001,632
903,917
41,227
53,053
3,435
Net currency exposure in financial assets/liabilities
63,810
52
67
(42)
Commitments and contingent liabilities
209,663
207,790
1,195
678
-
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
118
2. Financial risk management (continued)
Bank
Total
EUR
GBP
USD
Other
€ 000
€ 000
€ 000
€ 000
€ 000
At 31 December 2020
Financial assets
Balances with Central Bank of Malta,
treasury bills and cash
168,648
138,529
14,281
15,825
13
Investments measured at FVOCI
157,863
141,229
6,428
10,206
-
Loans and advances to banks
93,641
27,632
24,508
37,701
3,800
Loans and advances to customers
621,132
617,554
3,031
534
13
Other assets
4,591
4,466
58
67
-
Total financial assets
1,045,875
929,410
48,306
64,333
3,826
Financial liabilities
Amounts owed to banks
5,602
5,602
-
-
-
Amounts owed to customers
948,478
835,813
47,169
61,643
3,853
Other liabilities
25,285
21,593
1,047
2,633
12
Total financial liabilities
979,365
863,008
48,216
64,276
3,865
Net currency exposure in financial assets/liabilities
66,402
90
57
(39)
Commitments and contingent liabilities
208,983
208,442
142
399
-
Under the scenario that the euro appreciates by 20% against all currencies the effect would be a decrease
of €13,000 (2020: €19,000) in the carrying amount of financial instruments with the adverse impact
recognised in profit or loss. Should the euro depreciate against all currencies by 20%, the effect would be
a gain of €19,000 (2020: €27,000) in the carrying amount of financial instruments and the favourable
impact would be recognised in profit or loss.
2.4.6 Equity price risk
The exposure of the Group to this risk is not significant in view of the extent of the Group’s holdings of
equity investments measured at FVOCI (refer to note 6) which are not deemed material in the context of
the Group’s statement of financial position. These investments are principally locally quoted equity
instruments issued by local well-known corporates. Frequent management reviews are carried out to
ensure continued high quality of the portfolio.
2.5 Liquidity risk
Liquidity risk is defined as the risk of losses due to:
- the Group’s funding costs increasing disproportionately;
- lack of funding preventing the Group from establishing new business; and
- lack of funding which will ultimately prevent the Group from meeting its obligations.
In relation to the Bank’s operations, liquidity risk is the risk that the Bank is unable to meet its obligations
when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual
commitments, or other cash outflows. The Group is exposed to daily calls on its available cash resources
from overnight deposits, current and call deposits, maturing term deposits, loan draw-downs and
guarantees together with other related off-balance sheet instruments. Such outflows would deplete
available cash resources for client lending and investments. In extreme circumstances, lack of liquidity
could result in sales of assets, or potentially an inability to fulfil lending commitments. The risk that the
Group will be unable to do so is inherent in all banking operations and can be affected by a range of
institution-specific and market-wide events including, but not limited to, credit events, systemic shocks
and natural disasters.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
119
2. Financial risk management (continued)
The objective of the Group’s liquidity and funding management is to ensure that all foreseeable funding
commitments and deposit withdrawals can be met when due. It is the Bank’s objective to maintain a
diversified and stable funding base with the objective of enabling it to respond quickly and smoothly to
unforeseen liquidity requirements.
The Group manages this risk by ensuring that its assets and liabilities are matched in terms of maturities
as much as is practicable. However, the Bank ought to manage its net interest spread by investing funds in
a portfolio of assets with a longer term than the liabilities funding them (therefore giving rise to a
negative maturity gap position). To mitigate exposures arising in this respect, the Bank holds significant
liquid assets in the form of Malta Government treasury bills, money market placements and other short-
term instruments for managing liquidity risk to support payment obligations and contingent funding in a
stressed market environment.
The Bank’s Advances-to-Deposit ratio of 65.7% (2020: 65.5%) at the end of the reporting period reflects
management’s prudent stance in the context of liquidity management.
Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) is designed to promote the short-term resilience of a bank’s liquidity
profile. This ratio became a minimum regulatory standard under the European Commission Delegated
Regulation 2015/61.
The LCR aims to ensure that a bank has adequate unencumbered high-quality liquid assets (HQLA) to
meet its liquidity requirements within a 30-calendar-day liquidity stress scenario. Generally, HQLA
consists of cash or assets that can be converted into cash at little or no loss of value in markets.
The Bank’s LCR as at 31 December 2021 was 225.3% (2020: 180.0%). During the financial years ended 31
December 2021 and 2020, the LCR was in excess of both the regulatory minimum and the risk appetite
thresholds set by the bank.
Net Stable Funding Ratio
The Net Stable Funding Ratio (NSFR) is a metric showing how a bank is able to maintain sufficient stable
funding relative to required stable funding, and reflects a bank’s long-term funding profile (typically, with
a term of more than one year).
This ratio became a minimum regulatory standard from June 2021, under the European Commission
Regulation 2019/876. As at 31 December 2020 the Bank calculated its NSFR ratio in line with the Basel
Committee on Banking Supervision (publication 295), given that the European calibration was still subject
to implementation by the European Commission.
The Bank’s NSFR as at 31 December 2021 was 148.4% (2020: 135.6%). During the financial years ended
31 December 2021 and 2020, the NSFR was in excess of both the regulatory minimum and the risk
appetite thresholds set by the bank.
The Bank’s ALCO focuses on the Bank’s management process with respect to market and funding liquidity
risks.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
120
2. Financial risk management (continued)
The Group’s liquidity management process, focusing on the liquidity of the Bank and that of its principal
subsidiary, includes:
• management of day-to-day funding, by monitoring future cash flows to ensure that requirements can
be met. This includes replenishment of funds as they mature or are borrowed by customers. The
starting point for those projections is an analysis of the contractual maturity of the financial liabilities
and the expected collection date of the financial assets;
• maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against
any unforeseen interruption to cash flow;
• monitoring the liquidity ratios of the Bank against internal and regulatory requirements; and
• managing the concentration and profile of debt maturities.
The Bank also monitors the level and type of undrawn lending commitments and the impact of contingent
liabilities such as guarantees as part of the liquidity management process previously referred to. As at 31
December 2021, the Bank had outstanding guarantees on behalf of third parties amounting to €9,320,000
(2020: €8,681,000), which are cancellable upon the request of the third parties. The Group’s liquidity
exposures arising from these commitments and contingencies are expected to expire principally within a
period of twelve months from the end of the reporting period.
The following tables analyse the Group’s principal financial assets and liabilities into relevant maturity
groupings based on the remaining period at the end of the reporting period to the contractual maturity
date.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
121
2. Financial risk management (continued)
Between
Between
Less than
3 months
1 year and
More than
No maturity
Group
3 months
and 1 year
5 years
5 years
date
Total
As at 31 December 2021
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
105,362
14,033
-
-
6,884
126,279
Investments measured at FVOCI
531
4,092
88,095
125,362
9,421
227,501
Loans and advances to banks
75,779
2,500
-
-
-
78,279
Loans and advances to customers
166,537
38,216
117,555
320,585
-
642,893
Other assets
13,394
459
-
-
-
13,853
Total financial assets
361,603
59,300
205,650
445,947
16,305
1,088,805
Financial liabilities
Amounts owed to banks
1,224
1,224
Amounts owed to customers
667,873
66,210
183,384
59,676
-
977,143
Other liabilities
24,465
203
1,467
8,042
8,119
42,296
Total financial liabilities
693,562
66,413
184,851
67,718
8,119
1,020,663
Maturity gap
(331,959)
(7,113)
20,799
378,229
-
-
Cumulative gap
(331,959)
(339,072)
(318,273)
59,956
-
-
Group
As at 31 December 2020
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
148,043
14,029
-
-
7,615
169,687
Investments measured at FVOCI
237
3,706
45,276
102,963
9,242
161,424
Loans and advances to banks
95,485
1,500
-
-
-
96,985
Loans and advances to customers
170,456
84,679
126,475
239,519
-
621,129
Other assets
8,605
439
-
-
-
9,044
Total financial assets
422,826
104,353
171,751
342,482
16,857
1,058,269
Financial liabilities
Amounts owed to banks
5,602
-
-
-
-
5,602
Amounts owed to customers
668,467
69,660
158,805
44,178
-
941,110
Other liabilities
29,579
242
733
7,237
3,610
41,401
Total financial liabilities
703,648
69,902
159,538
51,415
3,610
988,113
Maturity gap
(280,822)
34,451
12,213
291,067
-
-
Cumulative gap
(280,822)
(246,371)
(234,158)
56,909
-
-
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
122
2. Financial risk management (continued)
Between
Between
Less than
3 months
1 year and
More than
No maturity
Bank
3 months
and 1 year
5 years
5 years
date
Total
As at 31 December 2021
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
105,362
14,033
-
-
6,157
125,552
Investments measured at FVOCI
531
4,066
87,371
123,211
9,421
224,600
Loans and advances to banks
68,424
-
-
-
-
68,424
Loans and advances to customers
166,540
38,216
117,555
320,584
-
642,895
Other assets
3,589
459
-
-
-
4,048
Total financial assets
344,446
56,774
204,926
443,795
15,578
1,065,519
Financial liabilities
Amounts owed to banks
1,224
-
-
-
-
1,224
Amounts owed to customers
668,896
66,409
183,384
59,676
-
978,365
Other liabilities
9,275
203
1,467
6,546
4,552
22,043
Total financial liabilities
679,395
66,612
184,851
66,222
4,552
1,001,632
Maturity gap
(334,949)
(9,838)
20,075
377,573
-
-
Cumulative gap
(334,949)
(344,787)
(324,712)
52,861
-
-
Bank
As at 31 December 2020
Financial assets
Balances with Central Bank of Malta, treasury bills and cash
148,043
14,029
-
-
6,576
168,648
Investments measured at FVOCI
-
3,364
44,733
100,524
9,242
157,863
Loans and advances to banks
93,641
-
-
-
-
93,641
Loans and advances to customers
170,458
84,680
126,475
239,519
-
621,132
Other assets
4,152
439
-
-
-
4,591
Total financial assets
416,294
102,512
171,208
340,043
15,818
1,045,875
Financial liabilities
Amounts owed to banks
5,602
-
-
-
-
5,602
Amounts owed to customers
673,835
71,660
158,805
44,178
948,478
Other liabilities
15,203
242
733
5,497
3,610
25,285
Total financial liabilities
694,640
71,902
159,538
49,675
3,610
979,365
Maturity gap
(278,346)
30,610
11,670
290,368
-
-
Cumulative gap
(278,346)
(247,736)
(236,066)
54,302
-
-
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
123
2. Financial risk management (continued)
Amounts owed to customers of €620,071,000 (2020: €626,844,000) as at 31 December 2021 are repayable on demand and included in the “within 3 months” bucket in the
tables. However, the Bank’s experience is that a significant portion of such deposits remains stable. Additionally, a significant part of other deposits maturing within 3 months
from the end of the reporting period is typically renewed.
The tables below analyse the Group’s and Bank’s principal non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the end of the
reporting period to the contractual maturity date. The amounts disclosed in the tables are the contractual undiscounted cash flows.
Group
Between
Between
Less than
3 months
1 year
More than
3 months
and 1 year
and 5 years
5 years
Total
As at 31 December 2021
€ 000
€ 000
€ 000
€ 000
€ 000
Financial liabilities
Amounts owed to banks
1,224
-
-
-
1,224
Amounts owed to customers
667,887
66,930
196,949
70,328
1,002,094
Total financial liabilities
669,111
66,930
196,949
70,328
1,003,318
As at 31 December 2020
Financial liabilities
Amounts owed to banks
5,602
-
-
-
5,602
Amounts owed to customers
669,960
71,009
170,317
51,232
962,518
Total financial liabilities
675,562
71,009
170,317
51,232
968,120
Bank
Between
Between
Less than
3 months
1 year
More than
3 months
and 1 year
and 5 years
5 years
Total
As at 31 December 2021
€ 000
€ 000
€ 000
€ 000
€ 000
Financial liabilities
Amounts owed to banks
1,224
-
-
-
1,224
Amounts owed to customers
668,907
67,133
196,949
70,328
1,003,317
Total financial liabilities
670,131
67,133
196,949
70,328
1,004,541
As at 31 December 2020
Financial liabilities
Amounts owed to banks
5,602
-
-
-
5,602
Amounts owed to customers
675,330
73,012
170,317
51,232
969,891
Total financial liabilities
680,932
73,012
170,317
51,232
975,493
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
124
2. Financial risk management (continued)
2.6 Operational risk
Operational risk is the risk of losses due to:
- deficient or erroneous internal procedures;
- human or system errors;
- external events, including legal events;
- internal and external fraud;
- employment practices and workplace safety;
- clients, products and business practices;
- damage to physical assets;
- business disruption and system failures; and
- execution, delivery and process management.
Operational risk is thus often associated with specific and one-off events, such as failure to observe
business or working procedures, defects or breakdowns of the technical infrastructure, criminal acts, fire
and storm damage or litigation. Operational risks are, thus, non-financial risks. Operational risk
management relies on a framework of policies implemented by the different operational functions and
which implementation is overseen by the Risk Management Function.
A financial measurement of this risk is arrived at by the Group for the purpose of allocating risk capital
using the Basic Indicator Approach under the European Union Directive on Capital Requirements (CRD)
rules. The capital requirement for operational risk under this method was calculated at €4,107,000 (2020:
€3,997,000).
In 2021, the COVID-19 pandemic situation was constantly monitored and when COVID-19 cases started to
rise, the pandemic business contingency plan was triggered. Where possible, employees were asked to
work remotely, and the remaining staff were working on a rotation basis and dispersed to allow sufficient
social distance. Contingency sites and equipment were tested regularly. The Executive Committee
maintained regular meetings to analyse the situation and provide direction accordingly. No major
disruption to the business was experienced.
2.7 Capital risk management
The Group’s objectives when managing capital, which is a broader concept than the ‘equity’ on the
consolidated statement of financial position, are:
- to comply with the capital requirements set by the MFSA with respect to the Bank’s operations;
- to safeguard the Group’s ability to continue as a going concern so that it can continue to provide
returns for shareholders and benefits for other stakeholders; and
- to maintain a strong capital base to support the development of its business.
Accordingly, the purpose of the Group’s capital management is essentially that of ensuring efficient use of
capital taking cognisance of the Group’s risk appetite and profile as well as its objectives for business
development. The Group is subject to externally imposed capital requirements only in respect of the
Bank’s activities as a credit institution. The Bank is a licensed financial services provider and must
therefore comply with the capital requirements under the relevant laws and regulations.
The Bank’s Executive Team and ALCO are responsible for managing the Bank’s regulatory capital. The
Bank aims to maintain a strong capital base to support the risks inherent in its business, investing in
accordance with its strategy and meeting regulatory capital requirements at all times. Internal capital
adequacy assessments are aligned with the regulatory and supervisory requirements and with the Bank’s
assessment of risk, including credit, market and operational risks.
The Bank manages its capital requirements based on internal targets, which are set above the prescribed
minimum capital requirements, i.e. levels established within the Capital Requirement Regulation (‘CRR’) and the
additional capital requirements established by the MFSA for supervisory purposes.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
125
2. Financial risk management (continued)
The following is an analysis of the Bank’s Capital Base in accordance with the CRD’s requirements:
2021
2020
€ 000
€ 000
Common Equity Tier 1 (CET1) capital
Share capital
11,192
11,044
Share premium
18,530
18,530
Revaluation and other reserves
20,828
17,076
Retained earnings
81,452
74,692
132,002
121,342
Adjustments:
Final dividend (note 36)
(873)
(861)
Depositor Compensation Scheme
(2,959)
(2,925)
Intangible assets
(122)
(246)
Other regulatory adjustments
2,097
2,483
Total CET1 capital
130,145
119,793
Total own funds
130,145
119,793
Minimum capital requirements are computed for credit, market and operational risks. The Banking Act,
1994 requires a bank to maintain a ratio of total regulatory capital to risk-weighted assets and
instruments (the Capital requirements ratio) at or above the prescribed minimum of 8%.
The Bank is compliant with the CRD IV capital requirements and in addition to the prescribed minimum,
Banking Rule BR/15: ‘Capital Buffers of Credit Institutions authorised under the Banking Act 1994’
requires Banks to hold additional buffers, namely the‘ capital conservation buffer’and the‘
countercyclical buffer’. Automatic restrictions on capital distributions apply if the Bank’s CET1 capital
falls below the level of its CRD IV combined buffer.
The Bank is required to maintain a capital conservation buffer of 2.5% and the institution-specific
countercyclical buffer as determined by Article 140 (1) of Directive 2013/36/EU which is composed of
CET1 capital. These buffers were phased in over the period from 1 January 2016 to 31 December 2020.
CRD IV contemplates a countercyclical buffer in line with Basel III, in the form of an institution-specific
countercyclical buffer and the application of increased requirements to address macro-prudential or
systemic risk. This is expected to be set in the range of 0-2.5% of relevant credit exposure risk-weighted
assets, whereby the rate shall consist of the weighted average of the‘countercyclical buffer’ rates that
apply in the jurisdiction where the relevant exposures are located. Given that the local group’s exposures
are all contained within Malta, this buffer was set at 0%.
In June 2021, the Bank received from the MFSA a SREP Decision letter, whereby in addition to the
regulatory requirements stated above, the Bank is expected to maintain a Pillar 2 Requirement (P2R) of
3.25% to be held in excess of the minimum own funds requirement and to be maintained at all times in
accordance with Article 104a of the EU’s Capital Requirements Directive (CRD V). In addition, a Pillar 2
Guidance (P2G) of 1% and made up entirely of CET 1 Capital is to be held over and above the Overall
Capital Requirement (OCR) of 13.75%.
During the financial years ended 31 December 2021 and 31 December 2020, the bank has met all external
capital requirements at all times.
The Capital requirements ratio expresses Own funds as a proportion of risk-weighted assets and off-
balance sheet instruments in relation to Credit Risk together with notional risk-weighted assets in respect
of Operational Risk and Market Risk.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
126
2. Financial risk management (continued)
The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the
nature of – and reflecting an estimate of credit, market and other risks associated with – each asset and
counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for
off-balance sheet instruments, with some adjustments to reflect the more contingent nature of the
potential losses. Risk-weighted assets are measured using the ’Standardised Approach’ for credit risk with
risk-weights being assigned to assets and off-balance sheet instruments according to their asset class and
credit risk mitigation. For the determination of credit assessments, independent rating agencies are
nominated as required.
Total risk-weighted assets are determined by multiplying the capital requirements for market risk and
operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting
figures to the sum of risk-weighted assets for credit risk.
2.8 Fair values of financial assets and liabilities
2.8.1 Financial instruments measured at fair value
The Group’s financial instruments which are carried at fair value include the Group’s financial assets
measured at FVOCI (note 6). The Group is required to disclose fair value measurements by level of the
following fair value measurement hierarchy for financial instruments that are measured in the statement
of financial position at fair value:
- Quoted prices (unadjusted) in active markets for identical assets (Level 1).
- Inputs other than quoted prices included within Level 1 that are observable for the asset either
directly i.e. as prices, or indirectly i.e. derived from prices (Level 2).
- Inputs for the asset that are not based on observable market data i.e. unobservable inputs (Level 3).
The IFRS 7 hierarchy of valuation techniques is based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs reflect market data obtained from independent
sources; unobservable inputs reflect the Bank’s market assumptions.
The Bank considers only relevant and observable market prices in its valuations. Fair values of financial
assets and financial liabilities that are traded in active markets are based on quoted market prices or
dealer price quotations.
The fair value of the Bank’s financial assets measured at FVOCI, which are principally traded in active
markets, is mainly based on quoted market prices. Hence, as at 31 December 2021 and 2020, the principal
financial instruments that are measured at fair value, consisting of the investments measured at FVOCI,
were valued using principally Level 1 inputs.
No transfers of financial instruments between different levels of the fair value hierarchy have occurred
during the financial years ended 31 December 2021 and 2020.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
127
2. Financial risk management (continued)
2.8.2 Financial instruments not measured at fair value
Loans and advances to banks and customers
These categories of assets are presented net of impairment allowances to reflect the estimated
recoverable amounts. As at 31 December 2021, the Group’s aggregate carrying amount in this respect
was €721,172,000 (2020: €718,114,000). The loans and advances to customers, which are principally
subject to floating interest rates, are measured at the amount of €545,126,000 (2020: €512,930,000). This
carrying value approximates to fair value in view of the fact that these loans and advances are repriceable
at the Group’s discretion. The loans and advances to banks, comprising term placements maturing within
one month from the end of the reporting period, are carried at the amount of €42,255,000 (2020:
€49,726,000). Rates on advances reflect current market rates, and the Directors consider the carrying
amounts to be a reasonable estimate of their fair value principally in view of the relatively short periods to
repricing or maturity from the end of the reporting periods. The current market interest rates utilised for
fair value estimation, which reflect essentially the respective instruments’ contractual interest rates, are
deemed observable and accordingly these fair value estimates have been categorised as Level 2.
Trade and other receivables
This category principally represents short-term trade receivables arising from postal operations in respect
of which the carrying amount is a reasonable approximation of its fair value.
Amounts owed to banks and customers
These categories of financial liabilities are carried at amortised cost and amount to €978,367,000 as at 31
December 2021 (2020: €946,712,000), 15.7% (2020: 14.2%) of this liability is non-interest bearing, 52.7%
(2020: 57.0%) of the liability has a contractual repricing term of three months or less, 6.8% (2020: 7.4%)
reprices between three months and one year, 18.7% (2020: 16.8%) reprices between one year and five
years while 6.1% (2020: 4.7%) is repriceable after more than five years. Accordingly, in view of their
profile, the fair value of these financial liabilities is not deemed to be significantly different from their
carrying amounts. This applies to variable rate deposits in view of the short periods to repricing, but also
applies to liabilities subject to fixed interest rates, based on discounting future contractual cash flows at
current market interest rates, taking into account the short periods to maturity. The current market
interest rates utilised for discounting purposes, which were almost equivalent to the respective
instruments’ contractual interest rates, are deemed observable and accordingly these fair value estimates
have been categorised as Level 2.
Other financial instruments
The fair values of certain other financial assets, including balances with the Central Bank of Malta and
accrued income, are considered to approximate their respective carrying values due to their short-term
nature.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
128
3. Accounting estimates and judgements
3.1 Critical accounting estimates and judgements in applying the Group’s accounting policies
Estimates and judgements are continually evaluated and based on historical experience and other factors
including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates
will, by definition, seldom equal the related actual results. These estimates and assumptions present a risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year. The Group’s management also makes judgements, apart from those involving estimations, in the
process of applying the entity's accounting policies that may have a significant effect on the amounts
recognised in the financial statements.
3.2 Measurement of Expected Credit Losses
The measurement of the Expected Credit Loss allowance for financial assets measured at amortised cost
and FVOCI is an area that requires the use of complex models and significant assumptions about future
economic conditions and credit behaviour. Explanation of the inputs, assumptions and estimation
techniques used in measuring ECL is further detailed in note 2.
A number of significant judgements are required in measurement of Expected Credit Loss, such as:
• Determining criteria for significant increase in credit risk;
• Choosing appropriate models and assumptions for the measurement of ECL; and
• Establishing the number and relative weightings of forward-looking scenarios and associated ECL.
As previously explained, the level of uncertainly in the estimation of the Bank’s expected credit loss
allowances has increased in the financial years ended 31 December 2021 and 2020 as a result of the
economic effects of the outbreak of the COVID-19 pandemic.
Detailed information about the judgements and estimates made by the Bank in the above areas is set out
in note 2.
3.3 Assessment of estimates and judgements
In the opinion of the Directors, the accounting estimates and judgements made in the course of preparing
these consolidated financial statements, which have been highlighted above, are not difficult, subjective
or complex to a degree which would warrant their description as critical in terms of the requirements of
IAS 1.
However, the Directors would like to draw attention to these accounting judgements that have a
significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within
the next financial year. In this respect these primarily comprise assumptions and estimates relating to the
calculation of impairment allowances in respect of loans and advances to customers (see notes 2.3, 8 and
31).
The COVID-19 pandemic and the economic distress it created has elevated the level of estimation
uncertainty and judgement, especially in light of the inability to track observable historical trends which
can be reflected in ECL modelling that could accurately represent the financial implications brought about
by the pandemic. Hence, the level of subjectivity underlying the ECL model parameters, including how
these react to forward-looking economic conditions remains high.
The exercise of judgement in making estimations requires the use of assumptions that are highly
subjective and very sensitive to the risk factors, detailed in note 2.3.4. In addition, many of the factors
have a high degree of interdependency and there is no single factor to which loan impairment allowances
as a whole is sensitive.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
129
3. Accounting estimates and judgements (continued)
A key judgement in the context of the COVID-19 pandemic is whether the heightened level of
macroeconomic uncertainty and its effects are more likely to be temporary or prolonged. The shape of
recovery is also a significant uncertainty. This in turn increases significantly the level of subjectivity around
the estimation of credit loss allowances in respect of loans and advances to customers. Although the
effective implementation of vaccination roll-out programmes has amongst other factors, led to an
economic recovery during 2021, the level of subjectivity around the estimation of credit loss allowances
remains significant, particularly due to successive waves of infections, the potential mutation of COVID-19
variants, the efficacy of such vaccines/boosters upon the emergence of new virus strains, and the
unwinding of Government support schemes and regulatory relief measures.
In this regard, management applied a higher level of expert judgement in order to assess the impact of
the pandemic on the Bank’s level of defaults, including evaluating the impact of government support
schemes and regulatory relief measures on both the incidence of default events and the severity of losses
as described below.
The identification of customers experiencing significant increase in credit risk or credit impairment in the
context of the elevated level of uncertainty is highly judgemental due to limitations in available credit
information on customers. This is particularly relevant in those instances where customers have accepted
payment deferrals and other relief designed to address short-term liquidity issues or have extended those
deferrals. In response to such limitations, management used segmentation techniques for the purposes of
identifying indicators of significant increase in credit risk within both corporate and retail portfolios.
As previously explained in view of the nature of the Bank’s portfolio, where a relatively small number of
loans comprise a significant proportion of the loan book value, during the past two years the Bank
continued to apply an individual-debtor-focused credit management process.
In relation to retail portfolios, ECL models are generally reliant on the assumption that default emergence
is directly impacted by delinquency related indicators since less information is available at asset level to
enable the timely identification of a SICR or UTP events. In this respect, a set of criteria which considered
the current level of income of the borrower, the economic sector in which the same borrower is
employed and the LTV of the exposure were established to determine if borrowers which were granted a
general payment moratorium (note 2.3.9) exhibited signs of SICR or UTP. With respect to borrowers who
have not requested a moratorium, the Bank continued to apply rigorously its credit assessment and
oversight processes, which include monitoring of arrears and exposure LTV.
Judgement was also required in determining whether corporate loans experienced a SICR or a UTP event.
In this respect, as part of management’s response to the COVID-19 pandemic, the Bank assessed all
borrowers which were granted a general payment moratorium (note 2.3.9) within the corporate portfolio.
As part of these credit assessments, judgement is exercised in evaluating all relevant information on
indicators of impairment, particularly where factors indicate deterioration in the financial condition and
outlook of borrowers affecting their ability to pay. The Bank also considered potential heightened credit
risk factors emanating from exposures not subject to a general payment moratorium in the process of its
ongoing credit review process and through focused economic concentration exposure.
For individually significant credit impaired loans, management determines the size of the allowance
required based on a range of factors such as the realisable value of security, the viability of the customer’s
business model and the capacity to generate cash flow to service debt obligations, under different
scenarios. Judgement is applied in estimating the expected future cash flows from each borrower and the
time to recover these cash flows under the different scenarios as well as to attach probabilities to those
scenarios.
The assumptions around forecasted recoveries from the sale of collateralised properties, including around
valuation haircuts and time to recovery, are key drivers in the estimation of credit loss allowances in
respect of individually assessed loans. The heightened level of uncertainty within the local property
market, driven by the pandemic, increases the level of expert judgement required to predict with
reasonable accuracy the recoverability of exposures through the sale of collateral, since the real impact of
the pandemic will not be fully known until market conditions stabilise.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
130
3. Accounting estimates and judgements (continued)
As previously explained, following the expiration of all general payment moratoria during 2021, a post-
model mechanism was enhanced to estimate the impact of delayed emergence of default in view of
government support measures which were still in force during the current financial year and also the
potential economic impact of Malta’s grey-listing by the FATF.
Specifically, the mechanism devised by management considers an overlay which increases the level of
expected credit losses on performing (Stage 1) exposures within both the corporate and retail portfolios,
which allowances would have otherwise being subjected to a higher decrease in expected credit losses,
driven by the forecasted macroeconomic model inputs (note 2.3.4.4). The overlay, which is in the region
of €3 million, is based on specific expert-based assumptions intended to account for expected losses
which could arise on performing exposures, after taking cognisance of the prevailing level of uncertainty
in respect of the duration and economic impact of the pandemic, the other developments referred to
above, and the level of coverage of expected credit losses on Stage 1 exposures.
To reflect the volatile economic conditions associated with the COVID-19 pandemic, judgemental overlays
were also applied by management in respect of individually significant credit-impaired loans in order to
overcome limitations in respect of determining collateral valuations, and the uncertainty around the time
to repossess properties held as collateral and to resell such properties in the open market.
The level of expert judgement required in selection of macroeconomic scenarios and the respective
probability weights is exacerbated by the heightened level of uncertainty around predictions in respect of
the potential impacts of epidemiological assumptions in relation to the pandemic, of the efficacy of
vaccines/boosters upon the emergence of new virus strains, and of the effectiveness of government
support schemes and regulatory relief measures together with the impacts of their unwinding, on key
macroeconomic variables and, as a result on forward-looking PDs and LGDs. As alluded to earlier, there is
an absence of an observable historical trend that can accurately represent the severity and speed of the
economic impacts brought about by the pandemic. The complexities of government support schemes and
their unwinding, regulatory guidance on the treatment of customer impacts (such as forbearance) and the
unpredictable pathways of the pandemic taking cognisance of potential new virus strains, have never
been modelled. Consequently, in some cases, the bank’s IFRS 9 models generate outputs that appear
overly sensitive when compared with other credit risk metrics and as a result, modelled assumptions and
linkages between economic factors and credit losses may underestimate or overestimate ECL in these
conditions.
In addition to the above, Malta’s grey-listing by the FATF during the financial year ended 31 December
2021 has compounded the level of economic uncertainty within the local market. The estimated economic
impact of the grey-listing remains difficult to gauge, since this is highly dependent on the speed at which
Malta exits grey-listing, the effectiveness of national efforts to address the findings, as well as the
response from foreign investors. Significant judgement is required in order to assess the potential impact
of the FATF grey-listing on the local economy.
Accordingly, in view of the matters highlighted above, expert judgement was applied by management
when determining the appropriateness of selected macroeconomic scenarios and their respective
probability weights.
The model limitations have been addressed through the enhancements described in note 2.3.4.4. In view
of the above, management considered the sensitivity of the ECL outcome to the macro-economic
forecasts by recalculating the ECL under the different scenarios, applying a 100% weighting to each
scenario. The effect of economic uncertainty on the ECL outcome is disclosed in the sensitivity analysis
presented in note 2.3.4.4 within the section entitled ‘Economic scenarios sensitivity analysis of ECL
estimates’. The ECL calculated for the upside and downside scenarios should not be taken to represent
the upper and lower limits of possible ECL outcomes as there is a high degree of estimation uncertainty in
the numbers representing tail risk scenarios when assigned a 100% weighting.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
131
4. Segmental information
The Group has two reporting segments, as described below, which are the Group’s strategic business
units and cash-generating units. The strategic business units offer different services and are managed
separately because they require different technology and marketing strategies. For each of the strategic
business units, the Board of Directors reviews internal management reports. The following summary
describes the operations in each of the Group’s reportable segments:
- Banking services comprise the Group’s banking services and other activities carried out as a licensed
credit institution, an authorised currency dealer and financial intermediary. Stockbroking activities
may also be carried out since the Bank is a member of the Malta Stock Exchange; and
- Postal services comprise the Group’s postal services activities, being the sole licensed Universal Service
Provider of postal services in Malta.
The Group’s internal reporting to the Board of Directors and senior executives is analysed according to the
below segments. Information about reportable segments:
Banking services
Postal services
Total
2021
2020
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Interest receivable
25,586
24,749
139
149
25,725
24,898
Interest expense
(6,115)
(5,964)
(54)
(62)
(6,169)
(6,026)
Postal sales and other revenue
180
626
37,190
33,519
37,370
34,145
Net fee and commission income
4,126
3,623
1,085
1,116
5,211
4,739
Other operating
income/(expense)
902
2,653
25
(67)
927
2,586
Segment operating income
24,679
25,687
38,385
34,655
63,064
60,342
Depreciation and amortisation
(917)
(772)
(1,802)
(1,495)
(2,719)
(2,267)
Credit impairment
reversals/(losses)
1,464
(3,946)
(2)
(27)
1,462
(3,973)
Employee compensation
and benefits
(8,195)
(7,646)
(16,165)
(15,112)
(24,360)
(22,758)
Other costs
(6,557)
(5,732)
(17,849)
(15,089)
(24,406)
(20,821)
Operating profit
10,474
7,591
2,567
2,932
13,041
10,523
Share of loss of investment
accounted for using the equity
method, net of tax
(185)
-
(217)
(151)
(402)
(151)
Profit before taxation
10,289
7,591
2,350
2,781
12,639
10,372
Income tax expense
(3,809)
(2,213)
(951)
(1,017)
(4,760)
(3,230)
Profit for the year
6,480
5,378
1,399
1,764
7,879
7,142
Segment total assets
1,123,219
1,084,409
52,172
46,546
1,175,391
1,130,955
Capital expenditure during the
year
3,728
6,610
3,374
2,327
7,102
8,937
Segment total liabilities
1,006,210
977,815
23,411
19,378
1,029,621
997,193
There are no material inter-segment transactions.
The Group mainly provides banking and postal services within the local market and economic sectors.
From a customers’ perspective, during 2021 MaltaPost p.l.c. generated 53.4% (2020: 48.4%) of its revenue
internationally.
The Group’s reliance on any single customer is not considered significant for disclosure purposes.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
132
5. Balances with Central Bank of Malta, treasury bills and cash
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Balances with Central Bank of Malta
71,805
68,417
71,805
68,417
Malta Government treasury bills
47,590
93,655
47,590
93,655
Cash in hand
6,884
7,615
6,157
6,576
126,279
169,687
125,552
168,648
The balances with the Central Bank of Malta include a reserve deposit amounting to €50,104,000 (2020:
€36,216,000) held in terms of Regulation (EC) No.1745/2003 of the European Central Bank. The average
reserve deposit balance held for the relevant maintenance period amounted to €7,396,000 (2020:
€7,068,000).
At 31 December 2021, the Bank had pledged a deposit with the Central Bank of Malta amounting to
€2,139,000 (2020: €2,809,000) in favour of the Depositor Compensation Scheme to comply with local
regulatory requirements.
As at 31 December 2021 and 2020, the credit loss allowance on balances with Central Bank of Malta and
Malta Government treasury bills was insignificant.
6. Investments
Financial investments measured at FVOCI include the following:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Debt and other fixed income instruments
218,080
152,182
215,179
148,621
Equity instruments
9,421
9,242
9,421
9,242
227,501
161,424
224,600
157,863
Debt and other fixed income instruments measured at FVOCI are analysed as follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Issued by public bodies:
- local government
168,145
104,389
166,483
102,310
- foreign government
8,679
6,468
8,679
6,468
Issued by public issuers:
- local banks
13,020
12,738
12,440
12,170
- local corporates
5,714
5,334
5,055
4,420
- foreign banks
14,169
12,949
14,169
12,949
- foreign corporates
8,353
10,304
8,353
10,304
218,080
152,182
215,179
148,621
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
133
6. Investments (continued)
As at 31 December 2021, the credit loss allowance measured in accordance with IFRS 9 expected loss
model was €464,000 (2020: €808,000).
At 31 December 2021, the Bank held Malta Government Stocks investments measured at FVOCI pledged
with the Central Bank of Malta, with a carrying amount of €10,575,000 (2020: €9,874,000), in terms of
Directive No.8 (Chapter 204 of the Central Bank of Malta Act) as security for a facility that was not utilised
during the reporting period.
The debt securities held by the Group are listed on the Malta Stock Exchange, a regulated market in
Malta, or on other recognised exchanges.
Equity instruments measured at FVOCI consist of equities listed on the Malta Stock Exchange, except for
investments with a carrying amount of €366,000 (2020: €342,000) which are measured at cost in view of
the absence of a reliable fair valuation of these investments.
The movement in debt and other fixed income financial investments measured at FVOCI is summarised as
follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
At 1 January
152,182
100,945
148,621
97,020
Amortisation
(1,103)
(807)
(1,101)
(807)
Acquisitions
75,271
67,811
75,271
67,814
Redemptions/disposals
(6,819)
(13,566)
(6,219)
(13,335)
Fair value movement
(2,711)
(1,659)
(2,653)
(1,529)
Other movements
1,260
(542)
1,260
(542)
At 31 December
218,080
152,182
215,179
148,622
The movement in equity financial investments measured at FVOCI is summarised as follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
At 1 January
9,242
10,786
9,242
10,786
Acquisitions
-
51
-
51
Redemptions/disposals
-
(1,501)
-
(1,501)
Fair value movement
149
(14)
149
(14)
Other movements
30
(80)
30
(80)
At 31 December
9,421
9,242
9,421
9,242
The disclosure requirements emanating from IFRS 13 in respect of equity investments measured at FVOCI
were not deemed necessary by the directors taking cognisance of the immateriality of the carrying
amount of these equity investments as at 31 December 2021 and 2020.
7. Loans and advances to banks
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Repayable on call and at short notice
59,253
77,062
55,398
75,218
Term loans and advances
19,026
19,923
13,026
18,423
78,279
96,985
68,424
93,641
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
134
8. Loans and advances to customers
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Repayable on call and at short notice
97,898
102,543
97,900
102,546
Term loans and advances
570,617
544,500
570,617
544,500
Gross loans and advances to customers
668,515
647,043
668,517
647,046
Credit loss allowances
(25,622)
(25,914)
(25,622)
(25,914)
Net loans and advances to customers
642,893
621,129
642,895
621,132
Credit loss allowances
Stage 1
5,187
6,200
5,187
6,200
Stage 2
3,361
2,799
3,361
2,799
Stage 3
17,074
16,915
17,074
16,915
25,622
25,914
25,622
25,914
Assets acquired in settlement of debt amounting to €661,000 (2020: €134,000) are presented as assets
classified as held for sale.
9. Investment in subsidiaries
Name of company
Country of
incorporation
Nature of business
Equity interest
Carrying amount
2021
2020
2021
2020
%
%
€ 000
€ 000
Redbox Limited
Malta
Holding company
100
100
15,732
15,732
Lombard Capital Asset
Management Limited
Malta
Asset management
100
-
125
-
Lombard Select SICAV p.l.c.
Malta
Asset management
100
-
1
-
At 31 December 2021, Redbox Limited held 71.5% (2020: 71.5%) of the equity share capital and voting
rights of MaltaPost p.l.c., a listed company incorporated and operating in Malta, comprising the Group’s
postal services reportable segment (see note 4). The remaining 28.5% (2020: 28.5%) is held by the general
public.
The profit or loss allocated to non-controlling interests of MaltaPost p.l.c. during the financial year under
review, accumulated non-controlling interests of the subsidiary at the end of the reporting period and
dividends paid to non-controlling interests are presented within the Group’s statement of changes in
equity. Financial information about the assets, liabilities, revenues, profit or loss, total comprehensive
income and cash flows of the subsidiary are disclosed within the annual report and financial statements
of MaltaPost p.l.c., which are publicly available in view of the company’s listed status. Financial
information about the subsidiary is also disclosed within note 4 to these financial statements dealing with
segmental information. The non-controlling interests of this subsidiary are not deemed material to the
reporting entity with respect to the Bank’s consolidated financial statements for the purpose of
disclosures in terms of the requirements of IFRS 12 “Disclosure of interests in other entities”.
The end of the reporting period of the audited financial statements of MaltaPost p.l.c. and its associate
IVALIFE Insurance Limited that have been utilised in the preparation of these consolidated financial
statements is 30 September 2021, since the financial statements prepared as of this date constitute the
most recent audited financial statements of the respective companies.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
135
9. Investment in subsidiaries (continued)
Acquisition of controlling stake in subsidiaries
Ciantar Brothers Limited
On 26 April 2021, MaltaPost p.l.c. entered into a share purchase agreement with the shareholders of
Ciantar Brothers Limited (CBL), a limited liability company registered in Malta, with registration number C
577 and registered office at 22, Warehouse il-Moll tal-Pont, Marsa MRS1400, for the purchase of 100% of
the entity’s issued share capital for a cash consideration of €140,000. The transfer of shares was effected
on 6 May 2021. The purchase consideration was deemed equivalent to the fair value of the 100% equity
holding in CBL and accordingly of the identifiable assets and liabilities of CBL as at date of acquisition,
which principally comprised intangible assets.
CBL did not operate during the twelve-month period to 30 September 2021. CBL is principally engaged in
leasing warehouse space, a service offering that is ancillary to services currently provided by MaltaPost
p.l.c. This acquisition is expected to give rise to synergies within the Group. The impact of this acquisition
on the Bank’s consolidated financial statements for the year ended 31 December 2021 is considered
insignificant.
PostaInsure Agency Limited
On 5 November 2020, MaltaPost p.l.c. entered into a share purchase agreement with PostaInsure Agency
Limited (PostaInsure), formerly Untours Insurance Agents Limited, a limited liability company registered in
Malta under the Companies Act (Cap.386), with registration number C 5655 and registered office at 4, Old
Bakery Street, Valletta, for the purchase of 49% of the issued share capital for a consideration of
€275,000. The transfer of shares was effected on 9 December 2020, at which date MaltaPost p.l.c. also
acquired control over the entity in view of its rights to appoint 60% of the members of PostaInsure’s
Board of Directors.
The purchase consideration was deemed equivalent to the fair value of the 49% equity holding in
PostaInsure.
The assets and liabilities recognised as a result of the acquisition are as follows:
Fair value
€ 000
Property, plant and equipment
4
Deferred tax
103
Trade and other receivables
439
Current tax receivable
5
Cash and cash equivalents
1,108
Trade and other payables
(996)
Net identifiable assets acquired
662
Less: non-controlling interest
(387)
Net assets acquired
275
Non-controlling interests have been measured at the related proportion of the net identifiable assets at
acquisition.
Net cash inflow arising from acquisition of subsidiary is as follows:
€ 000
Cash consideration
(275)
Balances acquired
Cash and cash equivalents
1,108
833
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
136
9. Investment in subsidiaries (continued)
PostaInsure is principally engaged in providing general insurance services, a service offering that is
ancillary to services currently provided by MaltaPost p.l.c. This acquisition is expected to give rise to
synergies within the Group. The impact of this acquisition on the Bank’s consolidated financial
statements for the years ended 31 December 2020 and 2021 is considered insignificant.
Lombard Select SICAV p.l.c. and Lombard Capital Asset Management Limited
In February 2021, the Bank established two wholly-owned subsidiaries, namely Lombard Select SICAV
p.l.c. and Lombard Capital Asset Management Limited. The impact of these additional investments on the
Group’s financial results and financial position as reflected in the financial statements for the current
financial year is insignificant, as by 31 December 2021 the entities had not yet started operating.
Lombard Select SICAV p.l.c. will be a Retail Collective Investment Scheme in terms of applicable law on
undertakings for collective investment in transferable securities. Lombard Capital Asset Management
Limited will be a UCITS management company which will primarily provide investment management
services to collective investment schemes, carry on such other investment services business in terms of its
licence and provide any ancillary services.
10. Investment in associates
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
At 1 January
1,932
1,684
1,645
1,645
Additions
1,476
399
-
-
Share of results
(402)
(151)
-
-
At 31 December
3,006
1,932
1,645
1,645
At 31 December
Cost
3,520
2,044
1,645
1,645
Share of results
(514)
(112)
-
-
Carrying amount
3,006
1,932
1,645
1,645
The Group's associates at 31 December 2021 and 2020 are shown below:
Name of company
Country of
incorporation
Nature of
business
Group
Equity interest carrying amount
2021
2020
2021
2020
%
%
€ 000
€ 000
Gozo Hotels
Company Limited
Malta
Accommodation
33.3
33.3
1,499
1,684
IVALIFE Insurance
Limited
Malta
Insurance
25.0
25.0
1,507
248
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
137
10. Investment in associates (continued)
MaltaPost p.l.c. controls 25% of the share capital (and holds an equivalent amount of voting rights) of
IVALIFE Insurance Limited, an unlisted company which was incorporated in Malta towards the end of 2019
and commenced operations in 2021. The company was established to provide Class I and Class III long
term business of insurance within Malta with a registered office at ‘Gaba Buildings’, Level 2, Naxxar Road,
Iklin, Malta. During 2021 financial year, MaltaPost p.l.c. further injected capital amounting to €1,476,000
in its associate IVALIFE Insurance Limited. The Group’s 25% share of the losses registered by the associate
during the current financial year, amounting to €368,000, was reflected within the Group’s 2021 financial
results.
The associate’s capital and reserves as at 30 September 2021 stood at €6,029,000 (2020: €897,735) and
the entity registered a loss for the year amounting to €861,000 (2020: €602,265).
In previous financial years the exposure with Gozo Hotels Company Limited with a carrying amount of
€1,645,000 had been recognised as an investment in associate on the basis that the Bank controls 33.3%
of the shares (and holds an equivalent amount of voting rights). The Group is deemed to have significant
influence over the investee in accordance with the requirements of IAS 28 ‘Investments in Associates’. The
Group’s share of losses registered by the entity during the current year, amounting to €146,000, was
reflected within the Group’s 2021 financial result in respect of this investment.
Gozo Hotels Company Limited is an unlisted company incorporated and operating in Malta. Its principal
activity is the operation of the Hotel Calypso in Marsalforn, Gozo, and its registered address is ‘Calypso’,
Ghar Qawqla Street, Zebbug, Gozo.
The associate’s capital and reserves as at 31 December 2020 stood at €4,496,254 (2019: €5,067,967) and
the entity registered a loss for the year amounting to €571,713 (2019: €88,434).
These associates are not considered material for the reporting entity, with respect to the Bank’s
consolidated financial statements, as at 31 December 2021 for the purposes of disclosures in terms of the
requirements of IFRS 12 “Disclosure of interests in other entities”.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
138
11. Intangible assets
Group
Bank
Computer
Other
intangible
Computer
Goodwill
software
assets
Total
software
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January 2020
Cost
857
6,363
-
7,220
3,388
Accumulated amortisation
-
(5,220)
-
(5,220)
(2,989)
Net book amount
857
1,143
-
2,000
399
Year ended 31 December 2020
At 1 January 2020
857
1,143
-
2,000
399
Additions
-
617
-
617
30
Disposal
-
(490)
-
(490)
-
Amortisation for the year
-
(567)
-
(567)
(183)
Amortisation release on disposal
-
490
-
490
-
At 31 December 2020
857
1,193
-
2,050
246
At 31 December 2020
Cost
857
6,490
-
7,347
3,418
Accumulated amortisation
-
(5,297)
-
(5,297)
(3,172)
Net book amount
857
1,193
-
2,050
246
Year ended 31 December 2021
At 1 January 2021
857
1,193
-
2,050
246
Additions
-
635
-
635
3
Acquisition of subsidiary
-
-
140
140
-
Amortisation for the year
-
(662)
(18)
(680)
(127)
At 31 December 2021
857
1,166
122
2,145
122
At 31 December 2021
Cost
857
7,125
140
8,122
3,422
Accumulated amortisation
-
(5,959)
(18)
(5,977)
(3,300)
Net book amount
857
1,166
122
2,145
122
11.1 Impairment test for the cash-generating unit to which goodwill has been allocated
The recognised goodwill represents payments made by the Group in anticipation of future economic
benefits from assets that are not capable of being individually identified and separately recognised. As at
31 December 2021 and 2020 the recognised goodwill amounted to €857,000 and related to the
acquisition of MaltaPost p.l.c.
In applying the requirements of IAS 36, ‘Impairment of assets’, in relation to goodwill arising in business
combinations, the Directors carried out an impairment test at the end of the reporting period to obtain
comfort that the recoverable amount of the cash-generating unit to which goodwill has been allocated is
at least equal to its carrying amount.
The recoverable amount of the cash-generating unit is based on fair value less costs to sell.
This calculation takes into account the market capitalisation of MaltaPost p.l.c. based on the quoted price
of its equity on the Malta Stock Exchange at a price per share of €1.22 as at 31 December 2021 (2020:
€1.33). On this basis, the recoverable amount of the cash-generating unit is higher than its carrying
amount.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
139
12. Property, plant and equipment
Group
Land and
Computer
buildings
equipment
Other
Total
€ 000
€ 000
€ 000
€ 000
Year ended 31 December 2020
At 1 January 2020
38,712
760
3,876
43,348
Additions
7,602
367
1,051
9,020
Disposals
(2)
(950)
(966)
(1,918)
Depreciation charge for the year
(450)
(368)
(622)
(1,440)
Depreciation released on disposals
2
950
966
1,918
At 31 December 2020
45,864
759
4,305
50,928
At 31 December 2020
Cost or valuation
48,189
4,035
12,900
65,124
Accumulated depreciation
(2,325)
(3,276)
(8,595)
(14,196)
Net book amount
45,864
759
4,305
50,928
Year ended 31 December 2021
At 1 January 2021
45,864
759
4,305
50,928
Revaluation surplus arising during the year:
Effect on cost or valuation
7,998
-
-
7,998
Effect on accumulated depreciation
479
-
-
479
Additions
6,779
393
691
7,863
Acquisition of subsidiary
-
-
116
116
Disposals
-
(20)
(8)
(28)
Depreciation charge for the year
(848)
(371)
(818)
(2,037)
Depreciation released on disposals
-
19
8
27
At 31 December 2021
60,272
780
4,294
65,346
At 31 December 2021
Cost or valuation
62,958
4,407
13,703
81,068
Accumulated depreciation
(2,686)
(3,627)
(9,409)
(15,722)
Net book amount
60,272
780
4,294
65,346
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
140
12. Property, plant and equipment (continued)
Bank
Land and
Computer
buildings
equipment
Other
Total
€ 000
€ 000
€ 000
€ 000
Year ended 31 December 2020
At 1 January 2020
22,735
456
345
23,536
Additions
7,036
266
207
7,509
Disposals
-
(7)
(67)
(74)
Depreciation charge for the year
(292)
(201)
(106)
(599)
Depreciation released on disposals
-
7
67
74
At 31 December 2020
29,479
521
446
30,446
At 31 December 2020
Cost or valuation
30,767
2,431
2,756
35,954
Accumulated depreciation
(1,288)
(1,910)
(2,310)
(5,508)
Net book amount
29,479
521
446
30,446
Year ended 31 December 2021
At 1 January 2021
29,479
521
446
30,446
Revaluation surplus arising during the year:
Effect on cost or valuation
6,513
-
-
6,513
Effect on accumulated depreciation
330
-
-
330
Additions
4,635
289
171
5,095
Disposals
-
(11)
(8)
(19)
Depreciation charge for the year
(441)
(232)
(126)
(799)
Depreciation released on disposals
-
11
8
19
At 31 December 2021
40,516
578
491
41,585
At 31 December 2021
Cost or valuation
41,910
2,709
2,919
47,538
Accumulated depreciation
(1,394)
(2,131)
(2,428)
(5,953)
Net book amount
40,516
578
491
41,585
Land and buildings presented in the tables above include improvements to leasehold properties as
follows:
Group
Bank
2021
€ 000
2020
€ 000
2021
€ 000
2020
€ 000
At 1 January
2,318
2,357
1,578
1,632
Additions
17
120
-
-
Depreciation charge for the year
(214)
(159)
(49)
(54)
At 31 December
2,121
2,318
1,529
1,578
Property, plant and equipment of the Group and the Bank includes right-of-use assets of €4,613,000
(2020: €3,759,000) and €3,141,000 (2020: €2,026,000) respectively, as disclosed in note 13.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
141
12. Property, plant and equipment (continued)
12.1 Fair valuation of land and buildings
The Bank’s land and buildings were revalued on 25 May 2021 while the subsidiary’s land and buildings
were revalued on 30 September 2021, by an independent firm of property valuers having appropriate
recognised professional qualifications and experience in the location and category of the property being
valued. The Directors have reviewed the carrying amounts of the Group’s properties, on the basis of the
valuations carried out by the independent property valuers.
Valuations were made on the basis of open market value taking cognisance of the specific location of the
properties, the size of the sites, the availability of similar properties in the area, and whenever possible,
having regard to recent market transactions for similar properties in the same location. During 2021, the
carrying values of the properties, classified within property, plant and equipment, have been adjusted to
the valuations and the net resultant adjustment comprised an increase of €8,478,000 in the carrying
values for the Group and an increase of €6,844,000 in the carrying values for the Bank, to reflect the
property’s estimated open market value on an individual asset level. This increase was recognised in other
comprehensive income in the property revaluation reserve.
The revaluation surplus net of applicable deferred income taxes is accordingly shown in ‘other reserves’ in
shareholders’ equity (note 19).
The Group is required to analyse non-financial assets carried at fair value by level of the fair value
hierarchy within which the recurring fair value measurements are categorised in their entirety (Level 1, 2
or 3). The different levels of the fair value hierarchy have been defined as fair value measurements using:
- Quoted prices (unadjusted) in active markets for identical assets (Level 1);
- Inputs other than quoted prices included within Level 1 that are observable for the asset, either
directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2);
- Inputs for the asset that are not based on observable market data (i.e. unobservable inputs) (Level
3).
The Bank’s land and buildings comprise various offices and operational premises, including the Bank’s
head office. The subsidiary’s land and buildings, within property, plant and equipment, comprises the
head office, mail delivery hubs and retail outlets. All the Group’s recurring property fair value
measurements use significant unobservable inputs and are accordingly categorised within Level 3 of the
fair valuation hierarchy.
The Group’s policy is to recognise transfers into and out of fair value hierarchy levels as of the beginning
of the reporting period. There were no transfers between different levels of the fair value hierarchy
during the years ended 31 December 2021 and 2020.
A reconciliation from the opening balance to the closing balance of land and buildings for recurring fair
value measurements categorised within Level 3 of the value hierarchy, is reflected in the table above. The
principal movements reflect changes in fair value, additions and depreciation charge for the years ended
31 December 2021 and 2020.
For all Group properties, their current use equates to the highest and best use.
12.2 Valuation processes
The valuations of the properties are performed on a periodic basis taking into consideration the valuation
reports prepared by independent and qualified valuers. These reports are based on both:
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
142
12. Property, plant and equipment (continued)
- information provided by the Bank such as current terms and conditions of lease agreements. This
information is derived from the Bank’s systems and is subject to the Bank’s overall control
environment; and
- assumptions and valuation models used by the valuers – the assumptions are typically market related,
such as rental yields, discount rates and sales prices. These are based on professional judgement and
market observation.
The information provided to the valuers – and the assumptions and the valuation models used by the
valuers – are reviewed by management.
When management considers that the valuation report is appropriate, the valuation report is considered
by the Audit & Risk Committee as part of its monitoring responsibility for effective financial reporting.
12.3 Valuation techniques
The Level 3 fair valuation of the Bank’s property was determined using discounted cash flow (DCF)
projections based on significant unobservable inputs. These inputs include estimated rental values per
square metre, estimated growth rate in rental values and the discount rate applied.
The external valuations of the subsidiary’s Level 3 property have been performed using an adjusted sales
comparison approach for the land component and the replacement cost approach for the buildings
component.
In view of a limited number of similar sales in the local market, the valuations have predominately been
performed using unobservable inputs. The significant input to the adjusted sales comparison approach is
generally a sales price per square metre related to transactions in comparable properties located in
proximity to the subsidiary’s property, with significant adjustments for differences in size, age, exact
location and condition of the property. The significant input to the replacement cost approach is the
estimated development costs per square metre.
12.4 Information about fair value measurements using significant unobservable inputs (Level 3)
Range of significant unobservable inputs
Description by class based on
highest and best use
Fair value
Valuation
technique
Weighted
average
rental value
€/sqm
Growth
rate
%
Discount
rate
%
Current use as Bank’s offices
and operational premises
€26.4 million
Discounted cash
flow approach
370
2
5
Description by class based on
highest and best use
Fair value
Valuation
technique
Significant
unobservable
input
Range of
unobservable inputs
€
Current use as subsidiary’s
office premises, retail outlets
and mail delivery hubs
€17.8 million
Adjusted sales
comparison
approach
Sales price per
square metre
1,200-4,400
The higher the rental value or the growth rate, the higher the resultant fair value. Conversely, the lower
the discount rate, the higher the resultant fair value.
The higher the sales price per square metre or the development costs per square metre, the higher the
resultant fair valuation.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
143
12. Property, plant and equipment (continued)
12.5 Historical cost of land and buildings
If the land and buildings were stated on the historical cost basis, the carrying amounts would be as
follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Cost
37,105
31,871
23,581
20,316
Accumulated depreciation
(2,788)
(2,450)
(2,263)
(2,000)
Net book amount at 31 December
34,317
29,421
21,318
18,316
13. Leases
The Group leases various locations for offsite ATMs, offices and branches as well as low value items such
as IT equipment. Rental contracts are typically made for fixed periods but may have extension options.
Extension and termination options are included in a number of property leases across the Group. These
are used to maximise operational flexibility in terms of managing the assets used in the Group’s
operations. The majority of extension and termination options held are exercisable only by the Group and
not by the respective lessor. Most extension options in property and motor vehicle leases have been
included in the lease liability as the lease term reflects the exercise of such options.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and
conditions. The lease agreements do not impose any covenants other than the security interests in the
leased assets that are held by the lessor. Leased assets may not be used as security for borrowing
purposes.
Leases are recognised as a right-of-use asset within ‘Property, plant and equipment’ (note 12) and a
corresponding liability at the date at which the leased asset is available for use by the Group within
‘Other liabilities’ (note 23).
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
144
13. Leases (continued)
Group
Bank
Buildings
Other
Total
Buildings
€ 000
€ 000
€ 000
€ 000
Year ended 31 December 2020
At 1 January 2020
2,891
313
3,204
1,239
Additions
970
2
972
930
Depreciation charge for the year
(360)
(57)
(417)
(143)
At 31 December 2020
3,501
258
3,759
2,026
At 31 December 2020
Cost or valuation
3,900
315
4,215
2,219
Accumulated depreciation
(399)
(57)
(456)
(193)
Net book amount
3,501
258
3,759
2,026
Year ended 31 December 2021
At 1 January 2021
3,501
258
3,759
2,026
Additions
1,396
-
1,396
1,370
Depreciation charge for the year
(480)
(61)
(541)
(255)
At 31 December 2021
4,417
197
4,614
3,141
At 31 December 2021
Cost or valuation
5,290
315
5,605
3,582
Accumulated depreciation
(873)
(118)
(991)
(441)
Net book amount
4,417
197
4,614
3,141
The Group and the Bank’s lease liabilities are presented below:
Group
Bank
2021
€ 000
2020
€ 000
2021
€ 000
2020
€ 000
Lease liabilities
Current
366
352
104
97
Non-current
4,015
3,484
2,781
1,999
4,381
3,836
2,885
2,096
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
145
13. Leases (continued)
Group
Bank
2021
€ 000
2020
€ 000
2021
€ 000
2020
€ 000
Lease liabilities
At beginning of year
3,836
3,269
2,096
1,261
Additions
945
929
920
929
Payments
(523)
(480)
(203)
(152)
Interest charge
123
118
72
58
At end of year
4,381
3,836
2,885
2,096
Group
Bank
2021
€ 000
2020
€ 000
2021
€ 000
2020
€ 000
The income statement reflects the following
amounts relating to leases:
Depreciation charge of right-of-use assets
541
417
255
143
Interest expense
123
118
72
58
Expense relating to short-term leases (included
in administrative expenses)
473
565
83
194
Expense relating to leases of low-value assets
that are not shown above as short-term leases
(included in administrative expenses)
293
265
50
44
The total cash payments for leases, included short-term and low-value leases, in 2021 was €1,227,000
(2020: €1,244,000) for the Group and €318,000 (2020: €285,000) for the Bank.
There were no expenses relating to variable lease payments which were not included in the measurement
of lease liabilities.
In 2021 and 2020 no income was earned from subleasing of right-of-use assets and no gains or losses
were made from sale and leaseback transactions.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
146
14. Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
Assets
Liabilities
Net
2021
2021
2021
2020
2020
2020
Group
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Differences between depreciation and
capital allowances
86
(117)
(31)
95
(105)
(10)
Provisions for liabilities and charges
441
-
441
633
-
633
Impairment allowances
9,252
-
9,252
9,389
-
9,389
Revaluation of property
-
(4,099)
(4,099)
-
(2,661)
(2,661)
Fair value movements on investments
-
(2,628)
(2,628)
-
(3,682)
(3,682)
9,779
(6,844)
2,935
10,117
(6,448)
3,669
Bank
Differences between depreciation and
capital allowances
-
(117)
(117)
-
(106)
(106)
Provisions for liabilities and charges
128
-
128
316
-
316
Impairment allowances
9,155
-
9,155
9,353
-
9,353
Revaluation of property
-
(2,800)
(2,800)
-
(1,633)
(1,633)
Fair value movements on investments
-
(2,628)
(2,628)
-
(3,682)
(3,682)
9,283
(5,545)
3,738
9,669
(5,421)
4,248
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
147
14. Deferred tax assets and liabilities (continued)
Movement in deferred tax assets and liabilities relate to:
At 1
January
2020
Recognised
in profit
or loss
Recognised
in other
comprehensive
income
At 31
December
2020
Recognised
in profit
or loss
Recognised
in other
comprehensive
income
Acquisition of
subsidiaries
At 31
December
2021
Group
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Differences between depreciation and capital
allowances
22
(32)
-
(10)
(64)
-
42
(32)
Provisions for liabilities and charges
796
(116)
(47)
633
(192)
-
-
441
Credit loss allowances
8,874
515
-
9,389
(198)
-
61
9,252
Revaluation of property
(2,661)
-
-
(2,661)
-
(1,438)
-
(4,099)
Fair value movements on investments
(4,062)
-
380
(3,682)
-
1,054
-
(2,628)
2,969
367
333
3,669
(454)
(383)
103
2,935
Bank
Differences between depreciation and capital
allowances
(109)
3
-
(106)
(13)
-
-
(119)
Provisions for liabilities and charges
411
(95)
-
316
(187)
-
-
129
Credit loss allowances
8,847
506
-
9,353
(199)
-
-
9,154
Revaluation of property
(1,633)
-
-
(1,633)
-
(1,166)
-
(2,799)
Fair value movements on investments
(4,062)
-
380
(3,682)
-
1,055
-
(2,627)
2
3,454
414
380
4,248
(399)
(111)
-
3,738
The recognised deferred tax assets and liabilities are expected to be recovered or settled principally after more than twelve months from the end of the reporting period. The
deferred tax liabilities reflected in other comprehensive income relate principally to the revaluation of property, plant and equipment and the fair valuation of investments
measured at FVOCI (note 34).
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
148
15. Inventories
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Postal supplies and materials
288
282
-
-
Merchandise
411
437
-
-
Stocks for resale
567
509
567
509
Other stock items
58
46
58
46
1,324
1,274
625
555
16. Trade and other receivables
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Trade receivables - net of expected
credit loss allowances
5,004
3,409
-
-
Others
5,783
5,727
1,606
1,761
10,787
9,136
1,606
1,761
The Expected Credit Loss allowances in respect of trade receivables are analysed as follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Loss allowance as at 1 January
104
77
-
-
Acquisition of subsidiary
172
-
-
-
Net charge recognised in profit
or loss during the year
1
27
-
-
Loss allowance as at 31 December
277
104
-
-
17. Accrued income and other assets
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Accrued income
1,946
2,204
1,912
2,164
Prepayments
1,171
1,054
581
494
Other assets
1,053
1,079
1,053
1,079
4,170
4,337
3,546
3,737
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
149
18. Share capital
Bank
2021
2020
No. of
No. of
shares
shares
000s
€ 000
000s
€ 000
Authorised
Ordinary shares of 25 cent each
80,000
20,000
80,000
20,000
Issued
Ordinary shares of 25 cent each
44,767
11,192
44,178
11,044
By virtue of a resolution dated 28 May 2021, the shareholders of the Bank approved the allotment of
589,047 ordinary shares of 25 cents each as a bonus issue of one (1) share for every (75) shares held by
shareholders on the Company’s Register of Shareholders as at close of business on 23 June 2021, and
thereby increased the issued and fully paid share capital to 44,766,961 shares of 25 cent each, resulting
in a paid up share capital of €11,191,740.
19. Reserves
These reserves are non-distributable.
19.1 Share premium
The share premium arises on premium attributable to the scrip issue of ordinary shares. Utilisation of
the share premium account is governed by the requirements of Article 114 within the Companies’ Act,
Chapter 386 of the Laws of Malta.
19.2 Revaluation and other reserves
The Group and the Bank had the following reserves as at end of the reporting period:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Property revaluation reserve
13,041
6,383
10,122
4,444
Investment revaluation reserve
5,179
7,181
4,845
6,805
Reserve for General Banking Risks
2,903
2,903
2,903
2,903
Other reserve
2,545
2,511
2,958
2,924
23,668
18,978
20,828
17,076
The property revaluation reserve relates to the fair valuation of the land and buildings component of
property, plant and equipment, and the balance represents the cumulative net increase in fair value of
such property, net of related deferred tax.
The investment revaluation reserve represents the cumulative net change in fair values of financial
assets measured at FVOCI held by the Group and by the Bank, net of related deferred tax impacts.
Banking Rule BR 09 ‘Measures addressing credit risks arising from the assessment of the quality of asset
portfolios of credit institutions authorised under the Banking Act 1994’, issued by the MFSA, requires
banks in Malta to hold additional reserves for general banking risks in respect of non-performing loans.
This reserve is required to be funded from planned dividends.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
150
19. Reserves (continued)
The other reserve represents amounts set aside by the Bank from its retained earnings in relation to the
Depositor Compensation Scheme reflecting the carrying amount of assets pledged in favour of the
Scheme to comply with local regulatory requirements.
20. Amounts owed to banks
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Term deposits with agreed maturity dates or
periods of notice
23
23
23
23
Repayable on demand
1,201
5,579
1,201
5,579
1,224
5,602
1,224
5,602
21. Amounts owed to customers
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Term deposits with agreed maturity dates
358,094
317,534
358,294
321,634
Repayable on demand
619,049
623,576
620,071
626,844
977,143
941,110
978,365
948,478
22. Provisions for liabilities and other charges
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Obligation to Government
1,678
1,728
-
-
Legal
366
616
366
615
Other Expected Credit Losses on off-balance
sheet items
69
288
69
288
2,113
2,632
435
903
These provisions are predominantly non-current in nature.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
151
22. Provisions for liabilities and other charges (continued)
Group
2021
2020
Obligation to
Expected
Credit Loss
Obligation to
Expected
Credit Loss
Government
Legal
allowance
Total
Government
Legal
allowance
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January
1,728
616
288
2,632
2,009
1,186
41
3,236
Exchange differences
recognised in profit
or loss
-
-
-
-
-
(37)
-
(37)
Actuarial gains -
recognised in other
comprehensive
income
-
-
-
-
(133)
-
-
(133)
Charge/(reversal) -
recognised
in profit or loss
115
(250)
-
(135)
35
80
-
115
Crystallised obligations
(165)
-
-
(165)
(183)
(613)
-
(796)
Change in ECL provision
on off-balance sheet
items
-
-
(219)
(219)
-
-
247
247
At 31 December
1,678
366
69
2,113
1,728
616
288
2,632
The obligation to Government arises in terms of Article 8A of the Pensions Ordinance (Chapter 93 of the
Laws of Malta), covering former Government employees who opted to become full-time employees of
MaltaPost p.l.c., and who continued to be entitled to pension benefits which go beyond the National
Insurance Scheme. The pension benefits scheme is a final salary defined benefit plan and is unfunded.
Obligation to Government recognised in the statement of financial position is derived as follows:
2021
2020
€ 000
€ 000
Present value of unfunded obligations
3,988
3,873
Crystallised obligations
(1,611)
(1,446)
Fair value of obligations to be reimbursed by Government
(699)
(699)
1,678
1,728
The amounts recognised in other comprehensive income are as follows:
2021
2020
€ 000
€ 000
Net actuarial gains
- attributable to financial assumptions
-
133
-
133
In computing the provision, the Group used a weighted average discount rate of 1.46% (2020: 1.41%).
Assumptions regarding future mortality experience are based on published mortality tables in Malta,
which translate into an average life expectancy of 83 (2020: 83) depending on age and gender of the
beneficiaries.
These factors are deemed to be the main assumptions used in the computation of the liability. The
sensitivity of the obligation to changes in these assumptions is considered immaterial for disclosure
purposes.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
152
22. Provisions for liabilities and other charges (continued)
Bank
2021
2020
Expected
Credit Loss
Expected
Credit Loss
Legal
allowance
Total
Legal
allowance
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
At 1 January
616
287
903
1,132
41
1,173
Exchange differences recognised
in profit or loss
-
-
-
18
-
18
(Reversal)/charge - recognised in
profit or loss
(250)
-
(250)
79
-
79
Crystallised obligations
-
-
-
(613)
-
(613)
Change in ECL provision on off-
balance sheet items
-
(218)
(218)
-
246
246
At 31 December
366
69
435
616
287
903
In addition, the Bank is also a defendant in legal actions by other customers as a result of which the
Directors are of the opinion that no liability will be incurred.
23. Other liabilities
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Trade payables
7,762
5,697
-
-
Bills payable
3,248
5,169
3,248
5,169
Cash collateral
969
1,253
969
1,253
Lease liabilities
4,381
3,836
2,885
2,096
Other payables
14,289
13,710
7,670
10,324
30,649
29,665
14,772
18,842
24. Accruals and deferred income
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Accrued interest
5,674
5,125
5,674
5,126
Other
5,165
5,767
1,597
1,317
10,839
10,892
7,271
6,443
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
153
25. Commitments and contingent liabilities
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Contingent liabilities
Guarantee obligations incurred on behalf of
third parties
9,155
8,549
9,320
8,681
Documentary credits
4,040
2,302
4,040
2,302
13,195
10,851
13,360
10,983
Commitments
Credit facilities and other commitments to lend
195,264
197,180
196,372
198,288
Capital commitments
584
3,690
41
1,929
195,848
200,870
196,413
200,217
Credit facilities and other commitments to lend funds to customers are granted at prevailing market
interest rates at drawdown date.
Capital commitments as at 31 December 2021 and 2020 mainly relate to the acquisition of property,
plant and equipment.
Total future minimum lease net payments under non-cancellable property operating leases, with a lease
term of less than 12 months, are as follows:
2021
2020
€ 000
€ 000
Current
Within 1 year
608
572
Specific lease agreements include an option to renew the lease after the original term but the amounts
presented in the table above do not reflect payments subsequent to renewal.
The Group is also committed to pay a licence fee of 1.50% (2020: 1.50%) of its total gross revenue from
postal services within the scope of the universal services.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
154
26. Net interest income
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Interest income
On loans and advances to banks
(5)
230
(42)
199
On loans and advances to customers
23,826
22,984
23,826
22,984
On balances with Central Bank of Malta
42
54
42
54
On Malta Government treasury bills
(412)
(469)
(412)
(469)
23,451
22,799
23,414
22,768
On debt and other fixed income instruments
3,377
2,906
3,275
2,788
Net amortisation of premiums and discounts
(1,103)
(807)
(1,101)
(805)
2,274
2,099
2,174
1,983
Total interest income
25,725
24,898
25,588
24,751
Interest expense
On amounts owed to customers
(6,046)
(5,908)
(6,048)
(5,910)
On leases
(123)
(118)
(72)
(58)
Total interest expense
(6,169)
(6,026)
(6,120)
(5,968)
Net interest income
19,556
18,872
19,468
18,783
27. Net fee and commission income
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Fee and commission income
Retail banking customer fees
3,007
2,754
3,007
2,754
Brokerage
53
81
53
81
Other
2,364
2,165
1,281
1,052
Total fee and commission income
5,424
5,000
4,341
3,887
Fee and commission expense
Inter-bank transaction fees
(198)
(247)
(198)
(247)
Other
(15)
(14)
(15)
(14)
Total fee and commission expense
(213)
(261)
(213)
(261)
Net fee and commission income
5,211
4,739
4,128
3,626
28. Postal sales and other revenues
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Stamps, parcel post and postal stationery
including income from foreign inbound mail
32,552
29,436
-
-
Collectibles and philatelic sales
882
1,026
518
786
Other
3,937
3,683
-
-
37,371
34,145
518
786
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
155
29. Dividend income
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Subsidiary undertaking
-
-
1,657
1,657
Equity shares measured at FVOCI
80
105
81
105
80
105
1,738
1,762
30. Net trading income
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Gains on foreign exchange activities
615
539
590
607
31. Employee compensation and benefits
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Staff costs
Wages, salaries and allowances
22,756
21,229
7,772
7,254
Social security costs
1,604
1,529
423
392
24,360
22,758
8,195
7,646
Group
Bank
2021
2020
2021
2020
Average number of employees
Executives and senior managerial
44
45
36
37
Other managerial, supervisory and clerical
468
237
160
148
Others
496
631
7
8
1,008
913
203
193
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
156
32. Credit impairment losses
Credit impairment losses during 2021 were as follows:
Group
Bank
Write-
downs
Reversals
of write-
downs
Total
Write-
downs
Reversals
of write-
downs
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Trade receivables
Stage 3
(2)
-
(2)
-
-
-
Total trade receivables
(2)
-
(2)
-
-
-
Loans and advances to
customers
Stage 1
-
1,013
1,013
-
1,013
1,013
Stage 2
(562)
-
(562)
(562)
-
(562)
Stage 3
-
453
453
-
453
453
Total loans and advances
to customers
(562)
1,466
904
(562)
1,466
904
Financial investments
measured at FVOCI
Stage 1
-
344
344
-
344
344
Total financial investments
measured at FVOCI
-
344
344
-
344
344
Off-balance sheet items
Stage 1
-
228
228
-
228
228
Stage 2
(11)
-
(11)
(11)
-
(11)
Stage 3
-
1
1
-
1
1
Total off-balance sheet items
(11)
229
218
(11)
229
218
Credit impairment losses
(575)
2,039
1,464
(573)
2,039
1,466
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
157
32. Credit impairment losses (continued)
Credit impairment losses during 2020 were as follows:
Group
Bank
Write-
downs
Reversals
of write-
downs
Total
Write-
downs
Reversals
of write-
downs
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Trade receivables
Stage 3
(27)
-
(27)
-
-
-
-
Total trade receivables
(27)
-
(27)
-
-
-
Loans and advances to
customers
Stage 1
(2,368)
-
(2,368)
(2,368)
-
(2,368)
Stage 2
(1,453)
-
(1,453)
(1,453)
-
(1,453)
Stage 3
-
747
747
-
747
747
Total loans and advances
to customers
(3,821)
747
(3,074)
(3,821)
747
(3,074)
Financial investments
measured at FVOCI
Stage 1
(625)
-
(625)
(625)
-
(625)
Total financial investments
measured at FVOCI
(625)
-
(625)
(625)
-
(625)
Off-balance sheet items
Stage 1
(245)
-
(245)
(245)
-
(245)
Stage 3
(2)
-
(2)
(2)
-
(2)
Total off-balance sheet items
(247)
-
(247)
(247)
-
(247)
Credit impairment losses
(4,720)
747
(3,973)
(4,693)
747
(3,946)
33. Profit before taxation
Profit before taxation is stated after charging and crediting the following:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
After charging
Directors' emoluments
- fees
93
73
69
49
- other emoluments
392
393
388
389
After crediting
Net income from investment services
380
222
380
222
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
158
33. Profit before taxation (continued)
Other operating costs are analysed as follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Foreign outbound mail
11,269
8,901
-
-
Utilities and insurance
1,430
1,164
1,031
747
IT support and telecommunication costs
459
470
282
278
Repairs and maintenance
2,256
2,095
937
869
Operating lease rental charges
1,223
1,127
615
554
Other administrative expenses
7,907
6,949
4,264
3,721
Total other operating costs
24,544
20,706
7,129
6,169
Other administrative expenses mainly comprise professional expenses, subcontracted services and
other services or expense items which are incurred in the course of the operations of the Group and the
Bank.
Fees charged by the parent company auditor for services rendered during the financial years ended 31
December 2021 and 2020 relate to the following:
Audit
Other assurance/
advisory services
Tax compliance
services
€ 000
€ 000
€ 000
Bank
2021
90
-
4
2020
98
-
5
Subsidiary companies
2021
71
38
5
2020
29
18
5
During the current year fees amounting to €75,800 (2020: €1,200) have been charged to the Bank by
connected undertakings of the Bank’s auditor, in respect of regulatory advisory services and compliance
services.
During the current year fees amounting to €23,500 (2020: nil) have been charged to the subsidiary
companies by connected undertakings of the subsidiaries’ auditor, in respect of regulatory advisory
services and tax advisory and compliance services.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
159
34. Income tax expense
Recognised in profit or loss:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Current taxation
Current tax expense
4,305
3,597
3,990
3,206
Deferred taxation
Deferred tax charge/(income) (note 14)
454
(367)
399
(414)
4,759
3,230
4,389
2,792
The tax on the profit before income tax differs from the theoretical amount that would arise using the
tax rate applicable as follows:
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Profit before tax
12,638
10,372
12,193
9,251
Tax on profit at 35%
4,507
3,630
4,267
3,238
Tax effect of:
Income not subject to tax
(24)
(23)
(10)
(23)
Expenses non-deductible for tax purposes
236
156
208
134
Income taxed at different tax rates
(31)
(454)
(1)
(419)
Share of results of associate
76
53
-
-
Other differences
(5)
(132)
(75)
(138)
4,759
3,230
4,389
2,792
The tax impacts, which are entirely attributable to deferred taxation, relating to components of other
comprehensive income and accordingly presented directly in equity are as follows:
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
160
34. Income tax expense (continued)
2021
2020
Before
tax
Tax credit/
(charge)
Net of tax
Before
tax
Tax credit/
(charge)
Net of
tax
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Group
Fair valuation of land and
buildings
8,486
(1,438)
7,048
-
-
-
Fair valuation of financial
assets measured at FVOCI:
- Net changes in fair value
(2,562)
876
(1,686)
(170)
15
(155)
- Reclassification
adjustments to profit or
loss upon disposal
(168)
58
(110)
(167)
59
(108)
- Net movement attributable
to change in credit risk
(344)
121
(223)
625
(219)
406
Remeasurements of defined
benefit obligations
-
-
-
133
(47)
86
Other
-
-
-
18
-
18
5,412
(383)
5,029
439
(192)
247
2021
2020
Before tax
Tax credit/
(charge)
Net of tax
Before tax
Tax credit/
(charge)
Net of tax
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Bank
Fair valuation of land and
buildings
6,844
(1,166)
5,678
-
-
-
Fair valuation of financial
assets measured at FVOCI:
- Net changes in fair value
(2,504)
876
(1,628)
(42)
15
(27)
- Reclassification
adjustments to profit or
loss upon disposal
(168)
59
(109)
(167)
59
(108)
- Net movement attributable
to change in credit risk
(343)
120
(223)
625
(219)
406
3,829
(111)
3,718
416
(145)
271
35. Earnings per share
Earnings per share is based on the net profit for the year divided by the weighted average number of
ordinary shares in issue during the year.
Group
2021
2020
Restated
Net profit attributable to equity holders of the Bank (€ 000)
7,481
6,640
Number of ordinary shares in issue
44,484,541
44,484,541
Earnings per share (€ cent)
16c8
14c9
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
161
35. Earnings per share (continued)
The comparative information in the table above has been restated to reflect the bonus issue effected
during the current financial year and the impact on the number of shares in issue, referred to in note 18,
retrospectively.
The Bank has no instruments or arrangements which give rise to dilutive potential ordinary shares, and
accordingly diluted earnings per share is equivalent to basic earnings per share.
36. Dividends
2021
2020
Dividends declared and paid by the Bank (€ 000)
862
-
€ per share – gross
3c0
-
On 27 July 2020, the European Central Bank (‘ECB’) issued a Recommendation on dividend distributions
during the COVID-19 pandemic and repealing Recommendation ECB/2020/19 (ECB/2020/35), which
inter-alia recommended that no dividends be paid out by credit institutions until 1 January 2021 and
that no irrevocable commitment to pay out dividends be undertaken by credit institutions for the
financial years 2019 and 2020.
On the basis of this, during August 2020 the Board of Directors resolved to withdraw its
recommendation of 23 March 2020 for the payment of a final gross dividend of 7 cent per nominal 25
cent share (net dividend of 4.55 cent for a total amount of €2,010,095) for the twelve months ended 31
December 2019.
On 15 December 2020, the ECB issued another Recommendation on dividend distributions during the
COVID-19 pandemic repealing Recommendation ECB/2020/35 (ECB/2020/62), which encourages
prudence on the part of credit institutions when deciding on or paying out dividends. In this respect, the
ECB generally considers distributions exceeding the lower of 15% of accumulated profit for the financial
years ended 31 December 2019 and 2020 and 20 basis points in terms of the Common Equity Tier 1 ratio
to lack prudence. On the basis of this, a gross dividend of 3 cent per nominal 25 cent share (net dividend
of 1.95 cent for a total amount of €861,469) for the twelve months ended 31 December 2020 was paid
during the current financial year.
On 23 July 2021, the ECB issued another Recommendation repealing Recommendation ECB/2020/62
(ECB/2021/31) with effect from 30 September 2021.
The Board has resolved that a gross dividend of 3 cent per nominal 25 cent share (net dividend of 1.95
cent for a total amount of €872,956) in respect of the financial year ended 31 December 2021 is being
proposed. The final dividend will be paid to shareholders who are on the Bank’s register of shareholders
at 26 April 2022 subject to approval by the Annual General Meeting scheduled for 28 May 2022. This
dividend will be reflected as an appropriation of retained earnings during the financial year ending 31
December 2022.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
162
37. Cash and cash equivalents
Cash and cash equivalents comprise balances with less than three months’ maturity from the date of
acquisition, including cash in hand, deposits held at call with banks and other short-term highly liquid
investments with original maturities of three months or less.
Group
Bank
2021
2020
2021
2020
€ 000
€ 000
€ 000
€ 000
Malta Government treasury bills (note 5)
26,029
93,655
26,029
93,655
Loans and advances to banks (notes 5 and 7)
134,548
114,437
130,694
112,594
Cash (note 5)
6,885
7,615
6,157
6,576
Amounts owed to banks (note 20)
(1,202)
(5,580)
(1,202)
(5,580)
Cash and cash equivalents
166,260
210,127
161,678
207,245
38. Related parties
38.1 Identity of related parties
The Bank considers that it has a related party relationship with the National Department and Social Fund
(as from 10
th
August 2018), its associated companies, the Bank’s Directors and Chief Officers (deemed to
be key management personnel, which category comprises Chief Executive Officer, Chief Officer – Credit,
Chief Operations Officer, Chief Financial Officer, Chief Information Officer) and other related parties,
principally entities controlled by key management personnel.
The Government of Malta is also considered to be a related party, through its control over the National
Development and Social Fund. Nevertheless, in its Company Announcement dated 10 August 2018, the
Bank reported that the NDSF had reaffirmed that:
Quote
- it does not intend to increase its holdings in the Bank;
- it shall not act in concert with any other shareholders;
- it will seek to reduce its shareholding in the Bank in an orderly manner, at the right market
conditions and by agreement with the regulatory authorities;
- it has no intention of exerting any influence on the operations of the Bank; and
- this acquisition will not result in a change in control of the Bank.
Unquote
The Group’s exposure with the Government of Malta arises through its investment in Government debt
securities and treasury bills which are disclosed in note 6 and other obligations disclosed in note 22.
Related party transactions with government owned/controlled entities were carried out on an arm’s
length basis and on normal commercial terms.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
163
38. Related parties (continued)
38.2 Transaction arrangements and agreements involving key management personnel and entities controlled
by the latter
2021
2020
€ 000
€ 000
Income statement
Interest payable
5
5
Interest receivables
400
311
Administrative expenses
950
916
2021
2020
€ 000
€ 000
Statement of financial position
Loans and advances to customers
11,123
9,674
Trade and other receivables
10
13
Amounts owed to customers
1,970
1,416
Accruals and deferred income
2
3
Contingent liabilities
9
7
Commitments
1,512
1,945
Loans and
advances
Commitments
Loans and
advances
Commitments
2021
2021
2020
2020
€ 000
€ 000
€ 000
€ 000
At 1 January
9,674
(1,952)
6,678
(4,428)
Additions
3,396
(273)
4,015
(301)
Reductions/ repayments
(1,946)
704
(1,019)
2,777
At 31 December
11,123
(1,521)
9,674
(1,952)
The above banking facilities are part of long-term commercial relationships and were made in the
ordinary course of business on substantially the same terms, including rates and security, as for
comparable transactions with persons of a similar standing or, where applicable, with other
employees. The transactions did not involve more than the normal risk of repayment or present other
unfavourable features.
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
164
38. Related parties (continued)
38.3 Compensation to key management personnel
Directors’ remuneration and salaries to executive officers amounts to €549,402 (2020: €514,548).
38.4 Transactions with other related parties
38.4.1 Subsidiaries
Information relating to transactions undertaken by the Bank with its subsidiary companies during the
year:
2021
2020
€ 000
€ 000
Income statement
Fee and commission income
1
2
Postal sales and other income
24
1
Other operating income
56
369
Interest payable
2
2
Administrative expenses
540
162
Statement of financial position
Loans and advances to customers
2
2
Trade and other receivables
83
366
Amounts owed to customers
1,222
7,369
Accruals and deferred income
37
69
Contingent liabilities
165
132
Commitments
1,108
1,108
During the year, Redbox Limited received gross dividends from MaltaPost p.l.c. amounting to €1,657,000
(2020: €1,657,000).
38.4.2 Associates
Information relating to transactions undertaken by the Bank with its associates during the year:
2021
2020
€ 000
€ 000
Income statement
Interest receivable and similar income
19
19
Statement of financial position
Loans and advances to customers
1,900
1,900
Investments in associate
1,645
1,645
Prepayments and accrued income
470
450
Lombard Bank Malta p.l.c.
Notes to the Financial Statements for the year ended 31 December 2021
165
39. Investor compensation scheme
In accordance with the requirements of the Investor Compensation Scheme Regulations, 2003 issued
under the Investment Services Act, 1994 (Chapter 370 of the Laws of Malta) 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. Lombard Bank Malta p.l.c. has
elected to pay the amount of the variable contribution directly to the Scheme.
40. Statutory information
Lombard Bank Malta p.l.c. is a limited liability company domiciled and incorporated in Malta.
41. Events subsequent to the reporting period
Subsequent to the reporting date, an armed conflict between Russia and Ukraine commenced as a
result of which economic sanctions were imposed by the EU, the US and other countries on Russia and
Belarus as well as a number of Russian and Belarussian individuals. The war and related sanctions are
expected to contribute to global economic dislocation, including potentially, disruption of energy
supplies, higher inflation and additional credit and market risks.
The Group performed an initial assessment of the effects the current situation may have on its business.
This considered impacts on the valuation of its investments, that were deemed immaterial, as well as
the effect on the Group's processes and on its borrowers' business models and supply chains. The
Group has virtually no direct exposure to assets in Russia, Belarus or Ukraine and concluded that there
should not be material effects on the Group or its businesses. The Group will ensure compliance with
any applicable sanctions and will continue to follow closely the developing situation and any potential
effects on its customers and operations.
There were no other events after the reporting date that would have a material effect on the financial
statements of the Bank or the Group.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
166
Additional Regulatory Disclosures
1. Risk management
1.1 Overview of risk disclosures
The Additional Regulatory Disclosures seek to increase public disclosure with respect to a bank’s capital
structure and adequacy as well as its risk management policies and practices. These disclosures have been
prepared by the Bank in accordance with the Pillar III quantitative and qualitative disclosure requirements
as governed by Banking Rule BR/07: Publication of Annual Report and Audited Financial Statements of
Credit Institutions authorised under the Banking Act, 1994, issued by the Malta Financial Services
Authority. These disclosures are published by the Bank on an annual basis as part of the Annual Report.
The rule follows the disclosure requirements of Directive 2013/36/EU (Capital Requirements Directive)
and EU Regulation No. 575/2013 (Capital Requirements Regulation) of the European Parliament and of
the Council of 26 June 2013.
Consistent with the requirements of banking regulations, these disclosures are not subject to an external
audit, except to the extent that any disclosures are equivalent to those made in the Financial Statements
which have been prepared in accordance with the requirements of International Financial Reporting
Standards (‘IFRS’) as adopted by the EU. The Bank is satisfied that internal verification procedures ensure
that these Additional Regulatory Disclosures are presented fairly.
1.2 Risk Management Framework
The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk
management framework.
To enhance its risk oversight efforts, the Board of Directors established an Audit & Risk Committee with a
mandate to supervise and monitor inter alia, the Bank’s compliance with its risk management policies and
procedures, review any financial information, statements and disclosures to be issued and the adequacy
of the Bank’s risk management framework, including its risk appetite statement and strategy.
The Bank has also established the Assets & Liabilities Committee (ALCO) and the Credit Committee that
are responsible for developing the Bank’s risk management policies in their specific areas.
The Bank also has an independent Risk Management function as the Bank's second line of defence and
independent of operations which also reports directly to the ARC and is represented during meetings of
the above-mentioned committees. It is responsible for ensuring that the Bank's Risk Management Policy,
Risk Appetite Statement and any other guidelines support the Bank’s objectives. It is also responsible for
further identifying any unmitigated risks and for formulating suitable action plans for their treatment. The
function monitors the high-level principles that guide staff in its day-to-day management of risk through
oversight of policies, limits, procedures, processes and systems as well as by using methods and tools for
risk measuring, monitoring, controlling and reporting.
The Bank considers risk management a core competency that helps produce consistently high returns for
its various stakeholders. The Bank’s business involves taking on risks in a targeted manner and managing
them professionally. The Bank aims to manage all major types of risk by applying methods that meet best
practice. The Bank considers it important to have a clear distribution of responsibilities within risk
management. One of the main tasks of the Bank’s executive management is to set the framework for this
area. The core functions of the Bank’s risk management are to identify all key risks for the Bank, measure
these risks, manage the risk positions and determine capital allocations. The Bank regularly reviews its risk
management policies and systems to reflect changes in markets, products and best market practice.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
167
1. Risk management (continued)
An understanding of risk-taking and transparency in risk-taking are key elements in the Bank’s business
strategy and thus in its ambition to be a strong financial institution. The Bank’s internal risk management
processes support this objective.
Risk management within the Bank is mainly carried out on a unified basis, using an integrated and global
framework. This framework is based on local and international guidelines, such as the Basel III Accord and
corresponding Directives and Regulations of the European Union, including technical standards, as well as
on contemporary international banking practices guided by the Basel Committee on Banking Supervision.
The Bank has adopted the Standardised Approach and the Basic Method with respect to the calculation of
capital requirements and management of credit and foreign exchange risk respectively, as well as the
Basic Indicator Approach with respect to operational risk.
The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank,
to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management
policies and systems are reviewed regularly to reflect changes in market conditions, products and services
offered. The Bank, through its training and management standards and procedures, aims to develop a
disciplined and constructive control environment, in which all employees understand their roles and
obligations.
The Board deems the risk management framework adopted by the Bank to be adequate and gives
assurance to the Bank’s stakeholders that the risk management systems are appropriate in relation to the
Bank’s risk profile and strategy.
The Bank’s different operational functions, on an entity-wide basis, are primarily responsible for risk
management procedures and activities in their respective areas. All the operational functions have a
primary role in risk management at Bank-wide level. The Risk Management Function provides oversight,
independently from operations. The Bank’s risk management is implemented and handled properly by the
operational functions. The Bank’s Internal Audit Function, through verification, ensures that effective risk
management procedures and activities are adequately designed and operating as prescribed.
1.3 Board and Senior Management Committees
The Bank’s Board of Directors is responsible for ensuring that adequate processes and procedures exist to
ensure effective internal control systems for the Bank. These internal control systems ensure that
decision-making capability and the accuracy of the reporting and financial results are maintained at a high
level at all times. The Board assumes responsibility for:
- setting business objectives, goals and the general strategic direction for Management with a view to
maximise value;
- selecting and appointing the Chief Executive Officer who is entrusted with the day-to-day operations
of the Bank;
- management of the Bank’s operations, as well as appointment of members of Management;
- ensuring that significant business risks are identified and appropriately managed; and
- setting the highest business standards and code for ethical behaviour, and monitoring performance in
this respect.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
168
1. Risk management (continued)
In deciding how best to discharge its responsibilities, the Board upholds a policy of clear demarcation
between its role and responsibilities and those of Management. It has defined the level of authority that it
retains over strategy formulation and policy determination, and delegated authority and vested
accountability for the Bank’s day-to-day business in the Assets & Liabilities Committee and Credit
Committee and, for the Bank’s day-to-day operations, in an Executive Team comprising the Chief
Executive Officer and Chief Officers. The Audit & Risk Committee reviews the processes and procedures to
ensure the effectiveness of the Bank’s system of internal control, as well as the implementation of the
Board’s risk strategy by Management. The Audit & Risk Committee is supported by the Internal Audit, Risk
Management and Compliance functions.
The ALCO monitors the Bank’s financial performance, considers investment policy and overseas
counterparty limits. Membership of this Committee is made up of a number of Chief Officers and Senior
Managers including managers from Finance and Treasury Departments. The Chief Executive Officer is
Chairman of ALCO and retains primary responsibility for asset and liability management. The ALCO
oversees risk management practices in relation to asset and liability management.
The Credit Committee considers the development of general lending principles and oversees risk
management practices in lending operations. The Credit Committee is chaired by the Chief Executive
Officer and is composed of other Chief Officers as well as other Senior Officers.
The Audit & Risk Committee assists the Board in fulfilling its supervisory and monitoring responsibility by
reviewing the financial statements and disclosures, the system of internal control established by
management as well as the external and internal audit processes. The Audit & Risk Committee is also
responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for
reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.
The Bank’s independent Internal Audit Department reviews the adequacy and proper operation of
internal controls in individual areas of operation and reports its findings to the Audit & Risk Committee.
The Internal Audit Function carries out both regular and ad-hoc reviews of risk management controls and
procedures, in both cases reporting its findings.
The Bank has an appropriate organisational structure for planning, executing, controlling and monitoring
business operations in order to achieve the Bank’s objectives.
Authority to operate the Bank and its subsidiaries is delegated to the Chief Executive Officer within the
limits set by the Board. The Board is ultimately responsible for the Bank’s system of internal control and
for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can provide only reasonable, and not absolute, assurance
against material misstatement or loss.
The Bank is committed to the highest standards of business conduct and seeks to maintain these
standards across all of its operations. Bank policies and procedures are in place for the reporting and
resolution of fraudulent activities.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
169
1. Risk management (continued)
1.4 Key risk components
The Bank’s Board of Directors is empowered to set out the overall risk policies and limits for all material
risk types. The Board also decides on the general principles for managing and monitoring risks.
To ensure coherence between the Bank’s strategic considerations regarding risk-taking and day-to-day
decisions, from time to time, the Bank establishes its risk appetite as a strategic tool. Risk appetite is the
maximum risk that the Bank is willing to assume to meet business targets. The Bank’s risk appetite is set
in a process based on a thorough analysis of its current risk profile. The Bank identifies a number of key
risk components and for each determines a target that represents the Bank’s views on the component in
question.
In terms of the Capital Requirements Regulation (CRR), an ‘exposure’ is the amount at risk arising from
the reporting credit institution's assets and off-balance sheet instruments. Consistent with this, an
exposure would include the amount at risk arising from the Bank’s:
- claims on a customer including actual and potential claims which would arise from the drawing down
in full of undrawn advised facilities, which the Bank has committed itself to provide;
- contingent liabilities arising in the normal course of business, and those contingent liabilities which
would arise from the drawing down in full of undrawn advised facilities which the Bank has committed
itself to provide; and
- other on and off-balance sheet financial assets and commitments.
The Bank is exposed to a number of risks, which it manages at different organisational levels.
The main categories of risk are:
- Credit risk: Credit risk stems from the possible non-prompt repayment or non-payment of existing and
contingent obligations by the Bank’s counterparties, resulting in the loss of equity and profit. It
comprises the risk that deterioration in the financial condition of a borrower will cause the asset value
to decrease or be extinguished. Country risk and Settlement risk are included in this category. Country
risk refers to the risk of losses arising from economic or political changes that affect the country from
which the asset originates. Settlement risk refers to the risk of losses through failure of the
counterparty to settle outstanding dues on the settlement date owing to bankruptcy or other causes.
- Market risk: Risk of losses arising from unfavourable changes in the level and volatility of interest
rates, foreign exchange rates or investment prices.
- Liquidity risk: Liquidity risk may be divided into two sub-categories:
o Market (product) liquidity risk: Risk of losses arising from difficulty in accessing a product or
market at the required time, price and volume.
o Funding liquidity risk: Risk of losses arising from a timing mismatch between investing,
placements and fund raising activities resulting in obligations missing the settlement date or
satisfied at higher than normal rates.
- Operational risk: Risk of loss resulting from the lack of skilful management or good governance within
the Bank and the inadequacy of internal control, which might involve internal operations, staff,
systems or external occurrences that in turn affect the income and capital funds of financial
institutions. The Bank has adopted an operational risk management framework and procedures, which
provide for the identification, assessment, management, monitoring and reporting of the Bank’s
operational risks.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
170
1. Risk management (continued)
1.5 Risk statement by the Board of Directors
The Bank’s business model throughout the years has been that of retaining a stable deposit base and
granting credit principally to the commercial real estate sector, particularly because the Board strongly
believes that despite the increased capital requirements introduced by the CRR, an active commercial real
estate market is a fundamental source of employment and economic growth in Malta. Nonetheless, the
Bank is conscious of the risks involved in commercial real estate lending, and thus ensures it prices loans
by reference to underlying risks. In this respect, the Bank’s return on assets, expressed as a percentage of
profit after tax to average total assets, for the reporting period ended 31 December 2021 amounts to
0.7%.
In this respect, the loan loss coverage ratio, calculated as provisions for impairment on non-performing
exposures to total non-performing exposures, which as at 31 December 2021, amounted to 33.0% differs
from that experienced within the sector, which generally tends to fluctuate between 50% to 55%. This
clearly illustrates the robustness of the Bank’s risk management practices particularly in respect of credit
risk.
2. Credit risk
2.1 Introduction to Credit risk
Credit risk is the risk of suffering financial loss, should any of the Bank’s customers, clients or market
counterparties fail to fulfil their contractual obligations to the Bank. Credit risk arises mainly from
commercial and consumer loans and advances and loan commitments arising from such lending activities,
but can also arise from credit enhancement provided, such as financial guarantees, letters of credit,
endorsements and acceptances.
Credit risk constitutes the Bank’s largest risk in view of its significant lending and securities portfolios,
which are monitored in several ways. The Bank is fully aware of such risk and places great importance on
its effective management.
The Bank allocates considerable resources in ensuring the ongoing compliance with approved credit limits
and to monitor its credit portfolio. In particular, the Bank has a fixed reporting cycle to ensure that the
relevant management bodies, including the Board of Directors and the Executive Team, are kept informed
on an ongoing basis of developments in the credit portfolio, non-performing loans and other relevant
information.
2.2 Credit risk management
The Board of Directors has delegated the responsibility for the monitoring of management of credit risk to
the Credit Committee. The granting of a credit facility is based on the Bank’s insight into the customer’s
financial position, which is reviewed regularly to assess whether the basis for the granting of credit has
changed. Furthermore, the customer must be able to demonstrate a reasonable ability to repay the debt.
Approval limits are graded starting from authorised staff members and leading up to the Credit
Committee and the Board of Directors depending on the size and the particular risk attached to the loan.
Facilities are generally adequately secured either by property and/or guarantees and are reviewed
periodically by Management both in terms of the exposure to the Bank and to ensure that security is still
valid.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
171
2. Credit risk (continued)
The Bank’s Credit Department is responsible for undertaking and managing credit risk in relation to the
entity’s lending activities; covering all the stages in the lending cycle comprising credit proposal, loan
approval, effecting advances, credit and collateral monitoring, processing repayments and credit recovery
procedures. The Bank manages, limits and controls concentrations of credit risk arising from loans and
advances wherever they are identified − in particular, to individual customers and groups, and to industry
sectors. Such risks are monitored on a revolving basis and subject to frequent review, as considered
necessary. The exposure to any one borrower is further restricted by sub-limits covering on and off-
balance sheet exposures. Actual exposures against limits are monitored at end of day on a daily basis and
on a real-time basis too. As highlighted previously, the Bank’s reporting framework with respect to
lending credit risk is comprehensive with regular reporting by the Credit Department to the Board, Credit
Committee and Executive Team on adherence to limits, activity levels, performance measures and specific
credit risk events.
In order to minimise the credit risk undertaken, counterparty credit limits may be defined, which consider
a counterparty’s creditworthiness, the value of collateral and guarantees which can reduce the overall
credit risk exposure, as well as the type and the duration of the credit facility. In order to examine a
counterparty’s creditworthiness, the following are considered: country risk, quantitative and qualitative
characteristics, as well as the industry sector in which the counterparty operates. The Bank has set limits
of authority and has segregated duties so as to maintain impartiality and independence during the
approval process and control for new and existing credit facilities.
The Bank’s maximum exposure amount to credit risk before taking account of any collateral held or other
credit enhancements can be classified in the following categories:
- Financial assets recognised on-balance sheet comprising principally balances with Central Bank of
Malta, Malta Government treasury bills, cheques in course of collection, financial assets measured at
FVOCI as well as loans and advances to banks and customers. The maximum exposure of these
financial assets to credit risk equals their carrying amount.
- Guarantee obligations incurred on behalf of third parties. The maximum exposure to credit risk is the
full amount that the Bank would have to pay if the guarantees are called upon.
- Loan commitments and other credit related commitments that are irrevocable over the life of the
respective facilities. The maximum exposure to credit risk is the full amount of the committed
facilities.
The Bank’s credit risk exposure amounts reflect the maximum exposure to credit risk before collateral
held or other credit enhancements in accordance with the regulatory information submitted to the MFSA
and are as follows:
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
172
2. Credit risk (continued)
2021
2021
Average value
Year end
Exposure value
€ 000
€ 000
Central governments or central banks
306,072
298,887
Public sector industries
538
545
Multilateral development banks
3,432
3,453
International organisations
878
896
Institutions
107,104
98,663
Corporates
74,084
69,557
Retail
19,911
18,177
Secured by mortgages on immovable property
423,599
449,337
Exposures in default
37,108
26,865
Exposures associated with particularly high risk
115,167
112,833
Equity
22,022
22,481
Other items
52,732
54,710
1,162,647
1,156,404
The exposures set out in the table above are based on the sum of on-balance sheet exposures and off-
balance sheet exposures adjusted for the credit conversion factors stipulated in Article 166(10) of the
CRR.
The following is an analysis of the Bank’s exposure to credit risk split by on-balance sheet assets and off-
balance sheet instruments:
2021
€ 000
On-balance sheet assets
1,139,614
Other adjustments
(4,748)
Off-balance sheet instruments
21,538
1,156,404
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
173
2. Credit risk (continued)
As set out in the Financial Statements under ‘Accounting estimates and judgements’, the measurement of
the Expected Credit Loss allowance for financial assets measured at amortised cost and Fair Value through
Other Comprehensive Income (FVOCI) is an area that requires the use of complex models and significant
assumptions about future economic conditions and credit behaviour. The COVID-19 pandemic gave rise to
levels of uncertainty that required increased use of estimation and judgement since 31 December 2020,
especially in relation to effects that the pandemic will be having on the local and international economy.
Judgement in this context, to name a few, would include assumptions as to duration of the pandemic,
change in collateral value, central support to business, availability of medical facilities and solutions and
level of response to central authority directives. The situation is still highly fluid and there is little to no
visibility on the extent of the impact on the economy by the end of 2021. Stressed probabilities of default
(PDs) used in the sectorial macroeconomic variables were adjusted to reflect the forecasted severe
Central Bank of Malta forecasts. However, at the reporting date the asset quality of the Bank’s financial
assets remains sound and there is no evidence of an increase in credit risk. The Bank will continue to
closely monitor its exposures in the light of developments so as to align the Expected Credit Loss
accordingly.
On 25 March 2021 the European Banking Authority (EBA) issued guidance 'Statement on the application
of the prudential framework regarding Default, Forbearance and IFRS9 in light of COVID-19 measures'
clarifying that the application of moratoria or deferral of payments, aimed at addressing the adverse
systemic economic impact of the COVID-19 pandemic, should not by itself act as a trigger to conclude that
a significant increase in credit risk occurred. Credit institutions are, however, still obliged to assess the
credit quality of exposures benefitting from these measures and identifying any situation of unlikeliness to
pay of the borrower.
On 13 April 2021 the Central Bank of Malta issued Directive 18 (in terms of Legal Notice 142) specifying
parameters for granting of COVID-19 measures and other Government guaranteed assistance. Following
the outbreak of the pandemic the Bank contacted its borrowing customers offering assistance. The Bank
set aside €12.5 million as assistance for working capital requirements at favourable terms to its
commercial customers. The Bank also considered requests for loan repayment moratoria on a case-by-
case basis and also in line with the parameters laid down in CBM Directive 18. Since May 2021 the Bank is
also offering working capital loans under the MDB COVID-19 Guarantee Scheme. With regard to retail
borrowers, particularly Home Loan customers, the Bank offered a moratorium on up to 80% of loan
repayment for a twelve-month period. This initiative was introduced by the Bank before the coming into
force of CBM Directive 18 on loan repayment moratoria.
As at 31 December 2021, there were no outstanding gross loans and advances subject to general
payment moratoria as established within Directive No. 18 and the EBA guidelines.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
174
2. Credit risk (continued)
The gross carrying amount of the loans and advances to customers for which moratorium was offered or granted is analysed below:
Number of obligors
Total
Of which:
legislative
moratoria
Of which:
expired
€ 000
€ 000
€ 000
At 31 December 2021
Loans and advances for which moratorium was offered
98
72,150
-
-
Loans and advances subject to moratorium (granted)
96
71,873
71,873
71,873
of which: Households
13,363
13,363
13,363
of which: Collateralised by residential immovable property
12,184
12,184
12,184
of which: Non-financial corporations
30,793
30,793
30,793
of which: Small and Medium-sized Enterprises
13,030
13,030
13,030
of which: Collateralised by commercial immovable property
26,429
26,429
26,429
The gross carrying amount of newly originated loans and advances subject to public guarantee schemes are analysed below:
Total
of which:
forborne
Public
guarantees
received
Inflows to
non-performing
exposures
€ 000
€ 000
€ 000
€ 000
At 31 December 2021
Newly originated loans and advances subject to public guarantee schemes
10,956
3,452
4,930
-
of which: Households
-
-
-
-
of which: Collateralised by residential immovable property
-
-
-
-
of which: Non-financial corporations
10,491
3,452
4,721
-
of which: Small and Medium-sized Enterprises
2,360
-
-
-
of which: Collateralised by commercial immovable property
228
-
-
-
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
175
2. Credit risk (continued)
2.3 Concentration risk
Concentration risk arises as a result of the concentration of exposures within the same category, whether
the category relates to geographical location, industry sector or counterparty type.
As at 31 December 2021, no loans and advances to customers were deemed to be prohibited large
exposures, prior to any eligible exemptions, in accordance with the requirements of Part Four of the CRR,
Large Exposures. A limited number of customers account for a certain percentage of the Bank’s loans and
advances.
Credit risk attributable to concentration of investments is not considered by the Directors to be significant
in view of the credit standing of the issuers.
The following tables analyse the concentration of credit risk by geographical region, industry sector and
residual maturity at the end of the reporting period.
2.3.1 Credit risk exposures analysed by geographical region
The Bank monitors concentration of credit risk by geographical region. The following table summarises
the country of risk by exposure class:
At 31 December 2021
Total
Malta
Eurozone
Other European
countries
Other
€ 000
€ 000
€ 000
€ 000
€ 000
Central governments or central banks
298,887
291,117
-
1,612
6,158
Public Sector entities
545
-
545
-
-
Multilateral Development Banks
3,453
-
1,499
-
1,954
International Organisations
896
-
896
-
-
Institutions
98,663
13,259
52,779
29,574
3,051
Corporates
69,557
68,003
930
624
-
Retail
18,177
18,177
-
-
-
Secured by mortgages on immovable property
449,337
449,337
-
-
-
Exposures in default
26,865
26,865
-
-
-
Items associated with particularly high risk
112,833
112,833
-
-
-
Equity
22,481
21,608
-
-
873
Other items
54,710
54,710
-
-
-
1,156,404
1,055,909
56,649
31,810
12,036
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
176
2. Credit risk (continued)
2.3.2 Credit risk exposures analysed by industry sector
The following are the exposure amounts split by exposure class according to the respective industry concentration:
At 31 December 2021
Property and
Personal,
professional and
Financial
Other
Total
Manufacturing
Tourism
Trade
construction
home loans
Institutions
sectors
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Central governments or central banks
298,887
-
-
-
-
-
298,887
-
Public Sector entities
545
-
-
-
-
-
545
-
Multilateral Development Banks
3,453
-
-
-
-
-
3,453
-
International Organisations
896
-
-
-
-
-
896
-
Institutions
98,663
-
-
-
-
-
98,472
191
Corporates
69,557
4,123
5,526
21,641
5,393
805
25,876
6,193
of which: SME
7,053
2
-
3,118
29
56
3,832
16
Retail
18,177
3,401
3,751
188
749
8,445
14
1,629
of which: SME
8,611
3,350
3,722
123
554
754
12
96
Secured by mortgages on immovable property
449,337
1,573
46,782
15,241
130,036
146,399
97,645
11,661
of which: SME
66,279
-
2,783
3,190
31,913
6,286
17,609
4,498
Exposures in default
26,865
141
1,104
3,768
13,018
2,942
5,133
759
of which: SME
14,132
138
-
3,545
10,400
-
1
48
Items associated with particularly high risk
112,833
332
1,046
757
91,068
3,363
7,962
8,305
of which: SME
29,109
68
816
-
28,221
4
-
-
Equity
22,481
259
1,645
-
-
-
2,287
18,290
Other items
54,710
-
459
-
41,179
-
7,107
5,965
1,156,404
9,829
60,313
41,595
281,443
161,954
548,277
52,993
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
177
2. Credit risk (continued)
2.3.3 Credit risk exposures analysed by residual maturity
The residual maturity breakdown by exposure class at the end of the reporting period was as follows:
Over 1 but
Carrying
Less than
less than
Over
Amount
1 year
5 years
5 years
At 31 December 2021
€ 000
€ 000
€ 000
€ 000
Central Government or central banks
298,887
128,175
74,015
96,697
Public sector entities
545
-
545
-
Multilateral Development Banks
3,453
-
2,868
585
International Organisations
896
896
-
-
Institutions
98,663
69,838
7,336
21,489
Corporates
69,557
29,609
16,939
23,009
Retail exposures
18,177
8,502
3,027
6,648
Secured by mortgages on immovable property
449,337
120,138
39,550
289,649
Exposures in default
26,865
19,193
4,738
2,934
Exposures associated with particularly high risk
112,833
54,439
56,306
2,088
Equity exposures
22,481
22,481
-
-
Other items
54,710
54,710
-
-
1,156,404
507,981
205,324
443,099
2.3.4 Counterparty banks’ risk
The Bank runs the risk of loss of funds due to the possible delay in the repayment of existing and future
obligations by counterparty banks.
Within its daily operations, the Bank transacts with banks and other financial institutions. By conducting
these transactions, the Bank is running the risk of losing funds due to the possible delays in the
repayment to the Bank of the existing and future obligations of the counterparty banks. The Bank
primarily places short-term funds with pre-approved banks subject to the limits in place and subject to
the respective institutions’ credit rating being within controlled parameters. The positions are checked
against the limits in real time and at end of day on a daily basis.
2.3.5 Country risk
The Bank runs the risk of loss of funds due to the possible political, economic and other events in a
particular country where funds have been placed or invested with several counterparties. Countries are
assessed according to their size, economic data and prospects and their credit ratings from international
rating agencies. Existing country credit risk exposures are monitored and reviewed periodically. The
Bank’s assets are predominantly in Malta. The Bank’s exposures to other countries are mainly limited to
bank balances and money market placements with a total carrying amount of €93,639,000 (2020:
€115,673,000) at the end of the reporting period.
2.4 Use of External Credit Assessment Institutions
In calculating its risk-weighted exposure amounts, the Bank uses an External Credit Assessment Institution
(ECAI) for Central governments, Institutions, Corporates and Items associated with particularly high risk
for which a credit assessment is available. The credit quality of such exposures is determined by reference
to external credit ratings applicable to issuers or counterparties. The Bank maps the external ratings to
the credit quality steps prescribed in the CRR as required by CEBS publication ‘Standardised Approach:
Mapping of ECAIs’ credit assessments to credit quality steps’.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
178
2. Credit risk (continued)
The following are the exposure values for which an ECAI is used:
Credit
quality
step
Central
governments
or central
banks
Public
Sector
entities
Multilateral
Development
Banks
International
organisations
Institutions
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
At 31 December 2021
AAA to AA-
1
5,749
545
2,680
896
2,540
12,410
A+ to A-
2
291,656
-
773
-
60,937
353,366
BBB+ to BBB-
3
1,482
-
-
-
30,906
32,388
BB+ to BB-
4
-
-
-
-
-
-
B+ to B-
5
-
-
-
-
-
-
CCC+ and below
6
-
-
-
-
4,280
4,280
298,887
545
3,453
896
98,663
402,444
2.5 Credit quality of the Bank’s lending portfolio
The Bank manages the credit quality of its loans and advances to customers by using internal risk grades,
which provide a progressively increasing risk profile ranging from ‘P1’ (best quality, less risky) to ‘NP’.
These risk grades are an essential tool for the Bank to identify both non-performing exposures and better-
performing customers. The internal risk grades used by the Bank are as follows:
- Performing: Internal grade ‘P1’;
- Under performing: Internal grades ‘P2’ and ‘P3’; and
- Non-performing: Internal grade ‘NP’.
P1
The Bank’s loans and advances to customers which are categorised as ‘P1’ are principally debts in respect
of which the payment of interest and/or capital is not overdue by 30 days and with no recent history of
customer default. Management does not expect any losses from non-performance by these customers.
P2
Loans and advances which attract a ‘P2’ grading are those which are receiving the close attention of the
Bank’s Management and are being reviewed periodically in order to determine whether such advances
should be reclassified to either ‘P1’ or ‘P3’ classification. Credit facilities that attract this category include
those where the payment of interest and/or capital becomes overdue by 30 days and over but not
exceeding 60 days.
P3
Loans and advances which attract a ‘P3’ grading are those having the weaknesses inherent in those loans
and advances classified as ‘P2’ with the added characteristics that repayment is inadequately protected
by the current sound worth and paying capacity of the borrower. Loans and advances so graded have a
well-defined weakness or weaknesses that could jeopardise the repayment of the debt. They are
characterised by the distinct possibility that the Bank will sustain some loss if the deficiencies are not
corrected. Credit facilities that attract this category include those where the payment of interest and/or
capital becomes overdue by 60 days and over but not exceeding 90 days.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
179
2. Credit risk (continued)
NP
Loans and advances which attract a ‘NP’ grading are those facilities where the Bank deems the
recoverability of principal to be remote as a result of worsening conditions of loans and advances
classified as ‘P3’. Credit facilities that attract this category include those where the payment of interest
and/or capital becomes overdue by more than 90 days. These loans and advances are generally past due by
more than 90 days and comprise those exposures which are deemed by the Bank as credit-impaired (see
definition in note 2.3.10).
The following table provides a detailed analysis of the credit quality of the Bank’s lending portfolio.
2021
€ 000
Gross loans and advances to customers
Performing (‘Stage 1’ assets)
504,477
Under-performing (‘Stage 2’ assets)
112,283
Non-performing (‘Stage 3’ assets)
51,757
668,517
2.5.1 Credit-impaired loans and advances to customers
Credit-impaired loans and advances are advances which are either more than 90 days past due, or for
which the Bank determines as probable that it will be unable to collect all principal and interest due
according to the contractual terms of the loans and advances agreement(s). The Bank’s credit-impaired
loans and advances mainly relate to a number of independent customers which are not meeting
repayment obligations or deemed by the Bank as unlikely to pay their obligations to the Bank without
recourse by the Bank to realising the collateral.
2.5.2 Past due but not credit-impaired loans
Past due but not credit-impaired loans include loans and advances where contractual interest or principal
payments are past due. Credit losses that may arise are covered through the Bank’s assessment of
Expected Credit Loss allowances.
Loans and advances to customers are analysed into credit-impaired, past due and other exposures as
follows:
2021
€ 000
Gross loans and advances to customers
Credit-impaired
51,757
Past due but not credit-impaired
4,983
Neither past due nor credit-impaired
611,777
668,517
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
180
2. Credit risk (continued)
The table below analyses the impaired and the past due but not impaired gross loans and advances to
customers by industry sector.
Past due but
At 31 December 2021
Impaired
not impaired
€ 000
€ 000
Manufacturing
446
303
Tourism
2,483
51
Trade
3,923
205
Property and construction
35,785
1,075
Personal, professional and home loans
3,185
983
Financial institutions
5,173
2,250
Other sectors
762
116
51,757
4,983
The majority of the impaired and past due but not impaired loans and advances to customers were
concentrated within Malta.
2.5.3 Collateral
The Bank holds collateral against exposures in the form of hypothecs over property, other registered
securities over assets and guarantees. 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. Collateral is an important mitigant of credit risk. Nevertheless, it is
the Bank’s policy to establish that facilities are within the customer’s capacity to repay rather than to over
rely on security. In certain cases, depending on the customer’s standing and the type of product, facilities
may be unsecured. The Bank applies various measures to reduce the risk on individual transactions,
including collateral in the form of physical assets and guarantees.
The principal collateral types used as credit risk mitigants are mortgages on residential properties and
commercial real estate. For regulatory purposes, none of the Bank’s collateral in the form of commercial
real estate qualifies as eligible collateral, as these properties fail to meet the conditions of Article 126(2)
of the CRR.
Out of the €642.9million exposures arising from the Bank’s lending, €435.7million are secured by
mortgages on immovable property, while €108.3million are secured by mortgages on immovable
property but are classified within the high risk exposures since these are associated with speculative
immovable property financing. From the €435.7million exposures secured by mortgages on immovable
property, €128.8million qualify as fully and completely secured by mortgages on residential immovable
property, and accordingly attract a risk-weight of 35%.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
181
2. Credit risk (continued)
2.5.4 Loss allowances
The Bank assesses on a forward-looking basis the Expected Credit Losses associated with its loans and advances portfolio. The Bank recognises a loss allowances for such losses
at each reporting date.
Total
Manufacturing
Tourism
Trade
Property and
construction
Personal,
professional and
home loans
Financial
institutions
Other sectors
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
Expected Credit Losses
At 1 January 2021
25,914
599
1,771
1,718
15,775
1,269
3,560
1,222
Additions
4,394
15
267
355
2,336
560
844
17
Reversals
(4,686)
(80)
(152)
(791)
(618)
(983)
(938)
(1,124)
At 31 December 2021
25,622
534
1,886
1,282
17,493
846
3,466
115
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
182
2. Credit risk (continued)
2.5.5 Write-off policy
The Bank writes off loan or advance balances (and any related allowances for impairment losses) when it
determines that these are uncollectible. This decision is reached after considering information such as the
occurrence of significant changes in the borrower’s financial position, such that the borrower can no
longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire
exposure.
3. Market risk
The Bank takes on exposure to market risk, which is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices. Market risks arise from open
positions in interest rate, currency and equity products, all of which are exposed to general and specific
market movements and changes in the level of volatility of market rates or prices such as interest rates,
credit spreads, foreign exchange rates and equity prices.
Accordingly, market risk for the Bank consists of three elements:
- Interest rate risk, which is the risk of losses because of changes in interest rates;
- Exchange rate risk, which is the risk of losses on the Bank’s positions in foreign currency because of
changes in exchange rates; and
- Equity price risk, which is the risk of losses because of changes in investment prices.
3.1 Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market
interest rates. The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that
interest-earning assets and interest-bearing liabilities mature or reprice at different times or at different
amounts. The Bank accepts deposits from customers at both fixed and floating rates and for varying
maturity periods. This risk is managed through the matching of the interest resetting on repricing dates
on assets and liabilities as much as it is practicable. The Bank monitors on a continuous basis the level of
mismatch of interest rate repricing taking cognisance of the terms of the Bank’s principal assets,
comprising loans and advances to customers, that are repriceable at the Bank’s discretion. Accordingly,
the Bank is in a position to manage the interest rate terms of its financial assets and simultaneously
modify the interest terms of its liabilities. The Bank seeks to manage its net interest spread, taking
cognisance of the cost of capital, by investing funds in a portfolio of loans and advances and securities
with a longer tenure than the funding liabilities (therefore normally giving rise to a negative maturity gap
position) through the effective management of shorter term deposit liabilities with a view to securing
steady base deposits with differing terms over the medium to longer term.
Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-
approved limits for repricing bands which are set by ALCO. ALCO is the monitoring body for compliance
with these limits and is assisted by Treasury through its day-to-day operational activities. The
management of interest rate risk against interest rate gap limits is supplemented by monitoring the
sensitivity of the Bank’s financial assets and liabilities to interest rate movements.
Accordingly, the Bank’s ALCO is primarily responsible for the interest rate risk management process and
for monitoring actively the interest rate risk measures utilised by the Bank. Reporting of interest rate risk
measures exposures vis-à-vis limits flows to the ALCO and Board on a regular systematic basis. The Bank’s
independent Risk Management Function provides oversight in respect of the interest rate risk
management process ensuring that it is designed in an appropriate manner and is functioning properly.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
183
3. Market risk (continued)
The Bank’s repricing gaps at 31 December 2021 are disclosed in the tables within note 2.4.1 to the
financial statements. The measures applied for the monitoring of the fair value sensitivity of the fixed rate
instruments and the cash flow sensitivity for variable rate instruments are disclosed within notes 2.4.3
and 2.4.4 to the financial statements.
3.2 Currency risk
The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange
rates on its financial position and cash flows. Foreign exchange risk is the risk to earnings and value
caused by a change in foreign exchange rates. Foreign exchange risk arises when financial assets or
liabilities are denominated in currencies which are different from the Bank’s functional currency.
The Bank manages this risk principally by ensuring that its foreign currency denominated liabilities are
matched with corresponding assets in the same currency.
Accordingly, foreign currency liabilities are utilised to fund assets denominated in the same foreign
currency thereby matching asset and liability positions as much as is practicable. This mechanism is
reflected in the figures reported in the table below which presents this matching process.
The Bank’s foreign exchange risks are managed actively and monitored by the Treasury Function, which
process ensures that the Bank maintains its exposure to foreign currencies within prescribed limits set by
the Bank’s ALCO. ALCO sets limits on the level of exposure by currency and in aggregate for both
overnight and intra-day positions which are monitored on a real-time basis. Reporting of exposures vis-à-
vis limits flows to the ALCO and Board on a regular systematic basis. The Bank’s independent Risk
Management Function is responsible for assuring that the foreign exchange risk management process is
designed in an appropriate manner and is functioning effectively.
The Bank enters into forward foreign currency exchange contracts with customers in the normal course of
its business. Generally, it is the Bank’s policy to cover these contracts by other forward positions. As a
result, the Bank is not open to any significant exchange risk in respect of derivative contracts. The Bank
also takes a deposit margin of the nominal value from the customer thereby reducing its credit risk should
the client default. The Bank had no open forward foreign currency contracts at the end of the reporting
period.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
184
3. Market risk (continued)
The following table summarises the Bank’s net exchange position by currency taking into account the
Bank’s financial assets and liabilities as well as off-balance sheet instruments exposing the Bank to foreign
exchange risk.
Bank
Total
EUR
GBP
USD
Other
€ 000
€ 000
€ 000
€ 000
€ 000
At 31 December 2021
Financial assets
Balances with Central Bank of Malta,
treasury bills and cash
125,552
105,379
11,080
9,081
12
Investments measured at FVOCI
224,600
206,753
6,668
11,179
-
Loans and advances to banks
68,424
12,237
20,354
32,482
3,351
Loans and advances to customers
642,895
639,445
3,118
302
30
Other assets
4,048
3,913
59
76
-
Total financial assets
1,065,519
967,727
41,279
53,120
3,393
Financial liabilities
Amounts owed to banks
1,224
1,224
-
-
-
Amounts owed to customers
978,365
882,951
40,232
51,809
3,373
Other liabilities
22,043
19,742
995
1,244
62
Total financial liabilities
1,001,632
903,917
41,227
53,053
3,435
Net currency exposure in financial
assets/liabilities
63,810
52
67
(42)
Commitments and contingent liabilities
209,663
207,790
1,195
678
-
3.3 Equity price risk
The exposure of the Bank to this risk is not significant given the low holdings of equity instruments by the
Bank, which are not deemed material in the context of the Bank’s statement of financial position. Such
holdings are limited to locally quoted equity instruments issued by local well-known corporate issuers.
Frequent management reviews are carried out to obtain comfort on the high quality of the portfolio.
4. Liquidity risk
4.1 Management of liquidity risk
Liquidity risk is defined as the risk of losses due to:
- the Bank’s funding costs increasing disproportionately;
- lack of funding preventing the Bank from establishing new business; and
- lack of funding ultimately preventing the Bank from meeting its obligations.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
185
4. Liquidity risk (continued)
Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value. The Bank
is exposed to daily calls on its available cash resources from overnight deposits, current and call deposits,
maturing term deposits, loan drawdowns and guarantees.
The objective of the Bank’s liquidity and funding management is to ensure that all foreseeable funding
commitments and deposit withdrawals can be met when due. It is the Bank’s objective to maintain a
diversified and stable funding base with the objective of enabling the Bank to respond quickly and
smoothly to unforeseen liquidity requirements.
The Bank manages this risk by ensuring that its assets and liabilities are matched in terms of maturities as
much as is practicable. However, the Bank ought to manage its net interest spread by investing funds in a
portfolio of assets with a longer term than the liabilities funding them. To mitigate exposures arising in
this respect, the Bank holds significant liquid assets in the form of Malta Government treasury bills,
money market placements and other short-term instruments for managing liquidity risk to support
payment obligations and contingent funding in a stressed market environment.
The Bank maintains internal liquidity buffers established by ALCO made up of cash and financial assets
which are also eligible for collateral against borrowing from the European Central Bank. In order to
ensure that maturing funds are always available to meet unexpected demand for cash, the Board sets
parameters within which maturities of assets and liabilities may be mismatched in line with the stance
referred to previously. Unmatched positions potentially enhance profitability, but also increase risks. The
Bank’s ALCO focuses on the entity’s management process with respect to market and funding liquidity
risks. ALCO maintains ongoing oversight of forecast and actual cash flows, by monitoring the availability of
funds to meet commitments associated with financial instruments. ALCO is supported by the Bank’s
Executive Team and Treasury Function in this respect, at operational level. ALCO monitors the Bank’s
Liquidity Gap analysis on a monthly basis. The Bank’s liquidity management process comprises
management of day-to-day funding, by monitoring future cash flows to ensure that requirements can be
met and that funds are replenished as they mature or are borrowed by customers. This implies a
structured ongoing analysis of the contractual maturity of the financial liabilities and the expected
collection date of the financial assets. The Bank’s liquidity management focuses on maintaining a portfolio
of highly marketable assets, subject to pre-established limits, that can easily be liquidated in case of any
unforeseen interruption to cash flow; and monitoring the liquidity ratios of the Bank against internal and
regulatory requirements. In this respect, the Bank’s advances-to-deposit ratio of 65.7% at the end of the
reporting period reflects management’s prudent stance in the context of liquidity management. Also, the
Liquidity Coverage ratio at 31 December 2021 is 225.3%, which is significantly higher than the prudential
parameters set by Regulation.
Reporting of measures of liquidity risk and liquidity ratios vis-à-vis internal limits flows to the ALCO and
Board on a regular basis. The Bank’s Risk Management Function provides oversight in respect of the
liquidity risk management process ensuring that it is functioning effectively.
The Bank also monitors the level and type of undrawn lending commitments and the impact of contingent
liabilities such as guarantees as part of the liquidity management process previously referred to.
As at 31 December 2021, the Bank had outstanding guarantees on behalf of third parties amounting to
€9,320,000 (2020: €8,681,000), which are cancellable upon the request of the third parties. The Bank’s
liquidity exposures arising from these commitments and contingencies are expected to expire principally
within a period of twelve months from the end of the reporting period.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
186
4. Liquidity risk (continued)
4.2 Asset Encumbrance
The disclosure on asset encumbrance is a requirement introduced in Banking Rule BR/07 transposing the
provisions of the EBA Guidelines on Disclosure of Encumbered and Unencumbered Assets
(EBA/GL/2014/03).
The objective of this disclosure is to facilitate an understanding of available and unrestricted assets that
could be used to support potential future funding and collateral needs. An asset is defined as
encumbered if it has been pledged as collateral against an existing liability, and as a result is no longer
available to the Bank to secure funding, satisfy collateral needs or be sold to reduce the funding
requirement.
The disclosure 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.
In accordance with the EBA ‘Guidelines on Disclosure of Encumbered and Unencumbered Assets’, the
amounts disclosed in the table below represent median values, being the rolling quarterly amounts over
the previous 12 months.
Carrying
amount of
encumbered
assets
Fair value of
encumbered
assets
Carrying amount
of unencumbered
assets
Fair value of
unencumbered
assets
€ 000
€ 000
€ 000
€ 000
At 31 December 2021
Assets of the reporting institution
13,007
13,007
1,137,854
1,137,854
Loans on demand
2,122
2,122
96,299
96,299
Equity instruments
-
-
8,676
8,676
Debt securities
10,064
10,064
262,877
262,877
Loans and advances
-
-
689,204
689,204
Other assets
820
820
80,798
80,798
The Bank does not encumber any of the collateral received. Moreover, as at 31 December 2021, the Bank
did not have any outstanding liabilities associated with encumbered assets and collateral received.
The Bank undertakes encumbrance by pledging debt securities against the provision of credit lines by the
Central Bank of Malta and in favour of the Depositor Compensation Scheme.
5. Operational risk
Operational risk is the risk of loss resulting from the lack of skilful management or good governance
within the Bank and the inadequacy of internal control, which might involve internal operations, staff,
systems or external occurrences that in turn affect the income and capital funds of financial institutions.
The Bank has adopted an operational risk management framework and procedures, which provide for the
identification, assessment, management, monitoring and reporting of the Bank’s operational risks.
Operational risk is also addressed through proper insurance cover.
Operational risk management relies on a framework of policies and procedures implemented by the
different operational functions within the Bank through transaction processing and business execution.
Regular reporting of operational risk events to the Board of Directors is carried out as required. The
implementation of such policies and procedures by the Bank’s operational functions is overseen by the
Risk Management Function.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
187
5. Operational risk (continued)
The Bank currently uses the Basic Indicator Approach to assess the operational risk capital requirements
and accordingly allocates 15% of average gross income for a three year period in accordance with
regulatory requirements. The operational risk capital regulatory requirement as at 31 December 2021
amounted to €4,107,000.
6. Capital risk management
The Bank is a licensed credit institution and must therefore comply with the capital requirements under
the relevant capital requirements within laws and regulations. Maltese law and regulations on capital
adequacy are naturally based on EU capital requirements.
The prudent and efficient management of capital remains one of the Bank’s top priorities. The Bank must
have sufficient capital to comply with regulatory capital requirements. The purpose of the Bank’s capital
management is to ensure an efficient use of capital in relation to risk appetite as well as business
development. Capital management is managed primarily through the capital planning process that
determines the optimal amount and mix of capital that should be held by the Bank, subject to regulatory
limits.
Capital adequacy and the use of regulatory capital are monitored regularly by the Bank’s management,
employing techniques based on the guidelines developed by the Basel Committee, European Union
Regulations and Directives, as implemented by the MFSA for supervisory purposes. The Bank’s capital
management is based on the regulatory requirements established within the CRR and by local regulations
which are modelled on the requisites of the CRD rules.
The Bank’s Executive Team and ALCO are predominately responsible for the Bank’s capital risk
management process. Capital adequacy ratios together with the level and quality of Own funds are
reported on a regular basis to the Board and the ALCO by the Finance Function.
6.1 Own funds
Own funds represent the Bank’s available capital and reserves for the purposes of capital adequacy.
Capital adequacy is a measure of the financial strength of a bank, expressed as a ratio of its capital to its
assets. The Bank adopts processes to ensure that the minimum regulatory requirements are met at all
times, through the assessment of its capital resources and requirements given current financial
projections. During the year ended 31 December 2021, the Bank complied with all of the externally
imposed capital requirements to which it was subject.
In July 2013, the European Banking Authority (EBA) issued its final draft Implementing Technical
Standards (ITS) on Own funds disclosures. The disclosure requirements of these technical standards have
been integrated within the Bank’s disclosures set out below.
The Bank’s capital base comprises Common Equity Tier 1 (CET1) capital, which includes the following
items:
• ordinary share capital;
• share premium;
• retained earnings;
• revaluation and other reserves; and
• other regulatory adjustments relating to items that are included in equity but are treated differently
for capital adequacy purposes including deductions relating to amounts pledged in favour of the
Depositor Compensation Scheme.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
188
6. Capital risk management (continued)
(a) Share capital
The Bank’s share capital as at 31 December 2021 is analysed as follows:
2021
No. of
shares
000s
€ 000
Authorised
Ordinary shares of 25 cent each
80,000
20,000
Issued
Ordinary shares of 25 cent each
44,767
11,192
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are
entitled to one vote per share at meetings of the Bank. All shares rank equally with regard to the Bank's
residual assets.
The following table describes the terms and conditions of the ordinary share capital issued by the Bank.
Capital Instruments
Ordinary share capital and
share premium
Unique Identifier
MT0000040106
Governing law(s) of the instrument
Maltese Law
Regulatory treatment
Transitional CRR rules
Common Equity Tier 1
Post-transitional CRR rules
Common Equity Tier 1
Eligible at solo/(sub)-consolidated/ solo&(sub-) consolidated
Solo
Amount recognised in regulatory capital
€ 11,191,740
Nominal amount of instrument
€ 11,191,740
Nominal amount of each share
€0.25
Accounting classification
Share capital
Issuer call subject to prior supervisory approval
No
Position in subordination hierarchy in liquidation
Subordinated to creditors
and depositors
Non-compliant transitioned features
No
(b) Share premium
The share premium represents the amounts at which ordinary shares were issued in excess of their
nominal value, normally arising as a result of rights issues approved by the shareholders during the
Annual General Meetings. The amount is not distributable by way of dividend to shareholders.
(c) Retained earnings
The retained earnings represent earnings not paid out as dividends.
Retained earnings form part of Own funds only if those profits have been verified by the Bank’s
independent external auditor. The Bank has demonstrated to the satisfaction of the competent authority
that any foreseeable charge or dividend has been deducted from the amount of those profits.
On 27 July 2020, the European Central Bank (‘ECB’) issued a Recommendation on dividend distributions
during the COVID-19 pandemic and repealing Recommendation ECB/2020/19 (ECB/2020/35), which inter
alia recommended that no dividends be paid out by credit institutions until 1 January 2021 and that no
irrevocable commitment to pay out dividends be undertaken by credit institutions for the financial years
2019 and 2020.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
189
6. Capital risk management (continued)
On the basis of this, during August 2020 the Board of Directors resolved to withdraw its recommendation
of 23 March 2020 for the payment of a final gross dividend of 7 cent per nominal 25 cent share (net
dividend of 4.55 cent for a total amount of €2,010,095) for the twelve months ended 31 December 2019.
On 15 December 2020, the ECB issued another Recommendation on dividend distributions during the
COVID-19 pandemic repealing Recommendation ECB/2020/35 (ECB/2020/62), which encourages
prudence on the part of credit institutions when deciding on or paying out dividends. In this respect, the
ECB generally considers distributions exceeding the lower of 15% of accumulated profit for the financial
years ended 31 December 2019 and 2020 and 20 basis points in terms of the Common Equity Tier 1 ratio
to lack prudence. On the basis of this, a gross dividend of 3 cent per nominal 25 cent share (net dividend
of 1.95 cent for a total amount of €861,469) for the twelve months ended 31 December 2020 was paid
during the current financial year.
On 23 July 2021, the ECB issued another Recommendation repealing Recommendation ECB/2020/62
(ECB/2021/31) with effect from 30 September 2021. A gross dividend of 3 cent per nominal 25 cent share
(net dividend of 1.95 cent for a total amount of €872,956) in respect of the financial year ended 31
December 2021 is being proposed. The final dividend will be paid to shareholders who are on the Bank’s
register of shareholders at 26 April 2022 subject to approval by the Annual General Meeting scheduled for
28 May 2022.
(d) Reserve for General Banking Risks
Banking Rule BR/09 ‘Measures addressing credit risks arising from the assessment of the quality of asset
portfolios of credit institutions authorised under the Banking Act 1994’, issued by the MFSA, requires
banks in Malta to hold additional reserves for general banking risks in respect of non-performing loans.
This reserve is required to be funded from planned dividends. As at the reporting date, this reserve
amounted to €2,903,000 (representing 100% of the total estimated amount). The amount has not
changed during the year under review.
(e) Property revaluation reserve
This represents the surplus arising on the revaluation of the Bank's freehold property net of related
deferred tax effects. The revaluation reserve is not available for distribution.
(f) Investment revaluation reserve
This represents the cumulative net change in fair values of assets measured at FVOCI held by the Bank,
net of related deferred tax effects.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
190
6. Capital risk management (continued)
The Bank’s Own funds and capital ratio calculations are set out below:
At 31 December 2021
€ 000
Common Equity Tier 1 (CET1) capital
Common Equity Tier 1 (CET1) capital: instruments and reserves
Capital instruments and the related share premium accounts
29,722
Retained earnings
80,579
Accumulated other comprehensive income (and other reserves)
14,966
Reserve for General Banking Risks
2,903
CET1 capital before regulatory adjustments
128,170
Common Equity Tier 1 (CET1) capital: regulatory adjustments
Intangible assets
(122)
Other regulatory adjustments
2,097
Total regulatory adjustments to CET1
1,975
CET1 capital
130,145
Total risk-weighted assets
805,762
Capital ratios
CET1 capital
16.15%
Tier 1 capital
16.15%
Total capital
16.15%
Institution specific buffer requirement
7.00%
of which: capital conservation buffer requirement
2.50%
CET1 available to meet buffers in excess of the CRR 4.5% minimum requirement
11.65%
CET1 available to meet buffers
9.15%
€ 000
Items not deducted from own funds in accordance with Article 48 of CRR
3,737
6.2 Capital requirements
The allocation of capital between specific operations and activities is, to a large extent, driven by
optimisation of the return achieved on the capital allocated. The amount of capital allocated to each
operation or activity is based primarily upon the regulatory capital, though in some cases the regulatory
requirements do not reflect differing risk profiles, subject to the overall level of capital to support a
particular operation or activity not falling below the minimum required for regulatory purposes. The
process of allocating capital to specific operations and activities is undertaken independently of those
responsible for the operation.
Although maximisation of the return on risk-adjusted capital is the principal basis used in determining
how capital is allocated within the Bank to particular operations or activities, it is not the sole basis used
for decision-making. Account is also taken of synergies with other operations and activities, the
availability of management and other resources, and the fit of the activity with the Bank’s long-term
strategic objectives. The Bank’s policies in respect of capital management and allocation are reviewed
regularly by the Board of Directors.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
191
6. Capital risk management (continued)
The Pillar I minimum capital requirements are calculated for credit, market and operational risks. During
the year, the Bank continued to use the Standardised Approach for credit risk, the Basic Method for
foreign exchange risk and the Basic Indicator Approach for operational risk in order to calculate the Pillar I
minimum capital requirements. For credit risk, under the Standardised Approach, risk weights are
determined according to the asset class, credit risk mitigation and external credit ratings - or by using the
applicable regulatory risk weights for unrated exposures. 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. The Basic Indicator Approach requires that the Bank
allocates capital for operational risk by taking 15% of the average gross income of the preceding three
years.
The Total Capital Ratio is calculated using the definition of regulatory capital and risk-weighted assets. As
required by the CRR, the minimum level of the Capital Requirements Ratio stands at 8%. The Capital
Requirements Ratio expresses Own funds as a proportion of risk-weighted assets and off-balance sheet
instruments for credit risk purposes, together with notional risk-weighted assets in respect of operational
risk and market risk. Total risk-weighted assets are determined by multiplying the capital requirements
for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and
adding the resulting figures to the sum of risk-weighted assets for credit risk.
The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the business. The impact of the level of capital on
shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between
the higher returns that might be possible with greater gearing and the advantages and security afforded
by a sound capital position.
The Bank fully implemented the CRD IV capital requirements with effect from January 2020. Although it is
not yet certain whether the Bank will be required to maintain an additional countercyclical capital buffer
as required by the CRR, given that the Bank’s exposures are mainly contained within Malta, this buffer is
expected to be marginal, since the deviation of Malta’s credit-to-GDP ratio is not expected to be
significant taking cognisance of its long-term trend.
Additionally, the Bank is required to maintain a capital conservation buffer of 2.5%, made up of CET1
capital, on the risk-weighted exposures of the Bank as from 1 January 2021. This buffer was phased in
over the period from 1 January 2016 to 31 December 2021.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
192
6. Capital risk management (continued)
The Bank’s capital requirements and Total Capital Ratio computation are as follows:
At 31 December 2021
Exposure value
€ 000
Risk weighted
assets
€ 000
Capital required
€ 000
Central governments or central banks
298,887
7,245
579
Regional Government or Local Authorities
-
-
-
Public Sector Entities
545
109
9
Multilateral Development Banks
3,453
386
31
International Organisations
896
-
-
Institutions
98,663
28,051
2,244
Corporates
69,557
69,058
5,524
Retail
18,177
13,633
1,091
Secured by mortgage on immovable property
449,337
356,749
28,540
Exposures in default
26,865
40,298
3,224
Items associated with particularly high risk
112,833
169,249
13,540
Covered Bonds
-
-
-
Claim on Institutions and Corporate with a short-
term credit assessment
-
-
-
Claims in the form of CIU
Equity
22,481
22,481
1,798
Other items
54,710
47,121
3,770
Credit risk
1,156,404
754,380
60,350
Foreign exchange risk
45
4
Operational risk
51,337
4,107
Total capital required
805,762
64,461
Own funds
Common Equity Tier 1 capital
130,145
Total own funds
130,145
Total capital ratio
16.15%
6.3 Other disclosures on own funds
The Bank has opted for the transitional arrangements laid down in Regulation (EU) 575/2013 Article 473a
to mitigate the impact of IFRS9 on own funds. Under Regulation (EU) 2017/2395, during the transitional
period ending 31 December 2023, the Bank would have had the option to add back a proportion of:
• the Day 1 impact as a result of the introduction of IFRS 9, being the difference between IFRS 9
Expected Credit Losses (‘ECLs’) on 1 January 2018 and IAS 39 provisions determined at 31 December
2017; and
• on difference in the IFRS 9 ECLs determined at reporting date and the ECLs determined on ‘day 1’ of
the introduction of IFRS 9 (being 1 January 2018 for the Bank) for ‘Stage 1’ (12-months ECLs) and
‘Stage 2’ (lifetime ECLs) assets.
The factors used to adjust the above ECLs declines across the transitional period starting at 100% during
the financial year ended 31 December 2020 to 25% in the final transitional financial year ended 21
December 2024. The above treatment is in accordance with the requirements laid down in paragraph 2
and paragraph 4 of Regulation (EU) 2017/2395.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
193
6. Capital risk management (continued)
In line with Section 2 of the EBA ‘Guidelines on uniform disclosures under Article 473a of Regulation (EU)
No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9
on own funds’, the Bank is required to disclose a comparison of the institutions’ own funds, Common
Equity Tier 1 capital, Tier 1 capital, risk-weighted assets, Common Equity Tier 1 capital ratio, Tier 1 capital
ratio, total capital ratio and leverage ratio with and without the application of transitional arrangements
for IFRS 9 or analogous ECLs.
The comparison of Bank’s own funds and capital and leverage ratios with and without the application of
transitional arrangements for IFRS 9 or analogous ECLs, and with and without the application of the
temporary treatment in accordance with Article 468 of the CRR is presented below:
At 31 December 2021
€ 000
Available capital
CET1 capital
130,145
CET1 capital as if IFRS 9 or analogous ECLs transitional arrangements had not been applied
127,956
Tier1 capital
130,145
Tier 1 capital as if IFRS 9 or analogous ECLs transitional arrangements had not been applied
127,956
Total capital
130,145
Total capital as if IFRS 9 or analogous ECLs transitional arrangements had not been applied
127,956
Risk-weighted assets
Total risk-weighted assets
805,762
Total risk-weighted assets as if IFRS 9 or analogous ECLs transitional arrangements had not been
applied
805,811
Capital Ratios
CET1 (as a percentage of risk exposure amount)
16.15%
CET1 (as a percentage of risk exposure amount) as if IFRS 9 or analogous ECLs transitional
arrangements had not been applied
15.88%
Tier 1 (as a percentage of risk exposure amount)
16.15%
Tier 1 (as a percentage of risk exposure amount) as if IFRS 9 or analogous ECLs transitional
arrangements had not been applied
15.88%
Total capital (as a percentage of risk exposure amount)
16.15%
Total capital (as a percentage of risk exposure amount) as if IFRS 9 or analogous ECLs transitional
arrangements had not been applied
15.88%
€ 000
Leverage ratio
Leverage ratio total exposure measure
1,173,187
Leverage ratio
11.09%
Leverage ratio as if IFRS 9 or analogous ECLs transitional arrangements had not been applied
10.90%
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
194
6. Capital risk management (continued)
6.4 Internal Capital Adequacy Assessment Process (ICAAP)
The Bank considers the Internal Capital Adequacy Assessment Process (ICAAP) embedded in Pillar II as a
tool that ensures the proper measurement of material risks and capital and allows for better capital
management and improvements in risk management. Therefore, it facilitates a better alignment between
material risks and regulatory capital in order to have better capital deployment and improvements in the
risk management and mitigation techniques adopted by the Bank. The ICAAP as required by the MFSA
Banking Rule BR/12: The Supervisory Review Process of Credit Institutions authorised under the Banking
Act, 1994, is performed on an annual basis.
Therefore, ICAAP is a process that the Bank utilises to ensure that:
- there is adequate identification, measurement, aggregation and monitoring of the Bank’s risks;
- adequate internal capital is held by the institution in relation to its risk profile; and
- the Bank uses sound risk management systems and there is the intention to develop them further.
The Board and the Bank’s Executive Team take overall responsibility for the conceptual design and
technical details of the ICAAP document. Apart from the responsibility for the conceptual design, the
Board discussed, approved, endorsed and delivered the yearly ICAAP submission. The Bank’s independent
Risk Management Function is involved in the ICAAP with a view to ensuring that the process reflects and
takes cognisance of the Bank’s risk management activities and processes.
The ICAAP is an ongoing process which starts with defining risk strategy followed by identifying,
quantifying and aggregating risks, determining risk-bearing ability, allocating capital, establishing limits
and ongoing risk monitoring. The individual elements of the process are performed with varying
regularity. All the activities described are examined at least once a year to ensure that they are up to
date, adequate and also adjusted to current underlying conditions when necessary.
The process involves a quantitative assessment of individual types of risk and an assessment of the
existing methods and systems for monitoring and managing risk (qualitative assessment). The risk
assessment concept is based on a scoring procedure, thus providing a comprehensive overview of the risk
situation of the Bank.
The basis for the quantitative implementation of the ICAAP is the risk-bearing capacity calculation which
demonstrates that adequate capital is in place at all times to provide sufficient cover for risks that have
been entered into and which also ensures such cover is available for the future. The Bank’s ICAAP is based
upon a ‘Pillar I Plus’ approach whereby the Pillar I capital requirement for credit, market and operational
requirements are supplemented by the capital allocation for other material risks not fully addressed
within Pillar I. The risks considered for ICAAP include concentration, liquidity, reputational and strategic
risks, interest rate risk in the banking book, and risks arising from the macroeconomic environment.
The Bank’s ICAAP contains three year projections as well as the capital plan, and the Board monitors that
there are adequate capital resources to support the corporate goals contained within the Bank’s plan and
the associated risks.
The Bank also covers Pillar II capital requirements through stress testing processes to forecast the Bank’s
projected capital requirements and resources in a range of stress scenarios. This enables the Bank to
guarantee that it can meet its minimum regulatory capital requirements in a stressed environment. The
results of the ICAAP once again show that the Bank maintains a comfortable level of excess capital and
substantial liquidity that ensured the flexibility and resources needed to achieve the long-term strategic
objectives of the Bank, even in situations of market stress.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
195
7. Leverage
The leverage ratio is a regulatory and supervisory tool intended to provide a transparent and non-risk
based measurement of an institution to supplement the risk-based capital requirements.
The leverage ratio is calculated on the end of year capital position as a proportion of total exposures.
Capital is defined as Tier 1 capital in line with Article 25 of the CRR, while total exposure relates to the
total on- and off-balance sheet exposures less the deductions applied to Tier 1 capital.
During 2016, the European Commission published a Proposal to amend Regulation 575/2013 (CRR), which
included the introduction of a 3% leverage ratio as a binding Pillar I requirement by 2018. The Bank
complies with a 3% leverage ratio based on fully-transitioned Basel III standards.
The following table represents the Bank’s estimated leverage ratio determined in accordance with the
requirements stipulated by Implementing Regulation EU 2016/200.
2021
€ 000
Tier 1 capital
130,145
Leverage ratio total exposure measure
1,173,187
Leverage ratio
11.09%
The table shown hereunder represents the amounts making up the leverage ratio exposures.
2021
€ 000
On-balance sheet exposures (excluding derivatives and SFTs)
On-balance sheet items (excluding derivatives and SFTs, but including collateral)
1,135,080
Asset amounts deducted in determining Tier 1 capital
(213)
On-balance sheet exposures (excluding derivatives and SFTs)
1,134,867
Off-balance sheet exposures
Off-balance sheet exposures at gross notional amount
209,733
Adjustments for conversion to credit equivalent amounts
(171,412)
Off-balance sheet exposures
38,321
The following table provides a reconciliation of accounting assets and leverage ratio exposures.
2021
€ 000
Total assets as per published financial statements
1,139,614
Adjustment for off-balance sheet items
38,321
Other adjustments
(4,748)
Leverage ratio total exposure measure
1,173,187
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
196
7. Leverage (continued)
The table below shows the different on-balance sheet exposures in relation to the calculation of the
leverage ratio.
2021
€ 000
Total on-balance sheet exposures (excluding derivatives and SFTs), of which:
Exposures treated as sovereigns
298,887
Public sector entities
545
Multilateral Development Banks
3,453
International Organisations
896
Institutions
98,318
Secured by mortgages on immovable property
435,737
Retail
16,038
Corporate
64,156
Exposures in default
26,865
Other exposures
189,972
1,134,867
The leverage ratio is a regulatory and supervisory instrument used by the Regulator to limit the build-up
of excessive leverage. The leverage ratio at 31 December 2021 stood at 11.1%
The Bank is currently not at risk in curtailing excessive leverage since the growth in CET1 capital of 8.5%
was greater than the 3.3% increase in the Bank’s total exposure measure. As a result, the Leverage ratio
is expected to remain well above the mandatory requirement. Board limits to the leverage ratio are set
and reviewed annually and the ratio is monitored at every Audit & Risk Committee to ensure that it
remains above the tolerance limit set by the Board of Directors. This limit supports the Bank’s attitude
towards finding a suitable balance between risk and returns provided to shareholders.
8. Remuneration policy
Information on the Bank’s remuneration policy and practices is disclosed in the Remuneration Report
within the Annual Report located on page 35.
9. Other Directorships
In terms of Article 91 of Directive 2013/36/EU (CRD IV), directors of an institution that is significant in
terms of its size, internal organisation and the nature, scope and complexity of its activities shall not
hold more than one of the following combinations of directorships at the same time:
(a) one executive directorship with two non-executive directorships;
(b) four non-executive directorships.
According to the ‘Guide to banking supervision’ issued by the European Central Bank in November 2014,
a credit institution will be considered significant if any one of the following conditions is met:
- the total value of its assets exceeds €30 billion or – unless the total value of its assets is below €5
billion – exceeds 20% of national GDP;
- it is one of the three most significant credit institutions established in a Member State;
- it is a recipient of direct assistance from the European Stability Mechanism; or
- the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in
more than one other participating Member State to its total assets/liabilities is above 20%.
Lombard Bank Malta p.l.c.
Additional Regulatory Disclosures for the year ended 31 December 2021
197
9. Other Directorships (continued)
Lombard Bank Malta p.l.c. does not meet any of the above criteria, and therefore is currently not
considered significant by banking supervisors. Accordingly, the Bank is exempt from the requirements
of Article 91 of CRD IV.
The Bank is not disclosing the number of directorships held by the members of the Bank’s Board of
Directors on the basis of materiality in terms of Article 432 of the CRR.
10. Recruitment and Diversity policy
The Bank is aware that a vigorous and professional approach to recruitment and selection of prospective
staff members within the Bank helps it to attract and appoint those individuals having the necessary
skills and attributes compatible with achieving the Bank’s overall objectives. Thus, the Bank ensures that
appointments at all levels are based on each individual’s knowledge, skills, expertise and merit, as
required by laws, rules, regulations, etc. and in line with policy.
The Bank undertakes a rigorous selection process for all prospective staff members bearing in mind the
key activities, tasks and skills required. As part of the selection process, multiple interviews are
conducted, during which the individual’s knowledge, experience, skills and competence are evaluated
against those of other individual
The Bank continues to promote diversity with no discrimination as to gender, race, family, disability,
sexual orientation, identity or preference, etc.
Bearing its objectives in mind, the Bank, particularly by virtue of the Board appointed Suitabilities &
Evaluations Committee, endeavours to have a Board of Directors composed of members possessing
diverse skills and expertise that allow the Board to create value for shareholders by ensuring that the
specific risks pursued by the Bank as well as risks that are intrinsic to banking business are appropriately
managed and mitigated within the Bank’s risk appetite.
198
Five Year Summary
Statements of Financial Position
Group
2021
2020
2019
2018
2017
€ 000
€ 000
€ 000
€ 000
€ 000
Assets
Balances with Central Bank of Malta,
treasury bills and cash
126,279
169,687
182,348
128,726
215,133
Cheques in course of collection
530
666
1,214
1,422
1,755
Investments
227,501
161,424
111,731
100,070
75,895
Loans and advances to banks
78,279
96,985
121,060
140,581
97,048
Loans and advances to customers
642,893
621,129
552,043
511,124
428,611
Investment in associate
3,006
1,932
1,684
1,684
1,575
Intangible assets
2,145
2,050
2,000
1,701
1,648
Property, plant and equipment
65,346
50,928
43,348
38,554
31,753
Assets classified as held for sale
661
134
134
778
822
Current tax assets
2,691
1,156
193
865
1,557
Deferred tax assets
9,779
10,117
9,801
9,221
8,980
Inventories
1,324
1,274
1,468
1,360
1,164
Trade and other receivables
10,787
9,136
5,625
5,010
8,826
Accrued income and other assets
4,170
4,337
9,648
8,973
7,979
Total assets
1,175,391
1,130,955
1,042,297
950,069
882,746
Equity and liabilities
Equity
Share capital
11,192
11,044
11,044
11
1111
11,044
11,044
Share premium
18,530
18,530
18,530
18,530
18,530
Property revaluation reserve
13,040
6,383
6,384
6,384
2,420
Investment revaluation reserve
5,180
7,181
7,978
4,975
4,113
Reserve for General Banking Risks
2,903
2,903
2,903
2,903
2,903
Other reserves
2,545
2,510
2,567
3,094
3,226
Retained earnings
83,910
77,470
69,722
61,380
53,904
Equity attributable to equity holders
of the Bank
137,300
126,021
119,128
108,310
96,140
Non-controlling interests
8,470
7,741
7,674
7,525
6,734
Total equity
145,770
133,762
126,802
115,835
102,874
Liabilities
Amounts owed to banks
1,224
5,602
5,871
854
5,362
Amounts owed to customers
977,143
941,110
864,993
788,044
733,151
Provision for liabilities and other charges
2,113
2,632
3,236
3,135
3,177
Current tax liabilities
809
844
1,128
-
229
Deferred tax liabilities
6,844
6,448
6,832
5,264
3,914
Other liabilities
30,649
29,665
21,949
27,138
23,217
Accruals and deferred income
10,839
10,892
11,486
9,799
10,822
Total liabilities
1,029,621
997,193
915,495
834,234
779,872
Total equity and liabilities
1,175,391
1,130,955
1,042,297
950,069
882,746
Memorandum items
Contingent liabilities
13,195
10,851
11,671
14,148
9,078
Commitments
195,848
200,870
225,826
202,384
247,737
199
Five Year Summary
Income Statements
Group
2021
2020
2019
2018
2017
€ 000
€ 000
€ 000
€ 000
€ 000
Interest receivable and similar income
25,725
24,898
25,285
23,188
21,426
Interest expense
(6,169)
(6,026)
(5,605)
(5,677)
(5,992)
Net interest income
19,556
18,872
19,680
17,511
15,434
Other operating income
43,856
41,731
40,474
45,609
42,747
Other operating charges
(51,836)
(46,107)
(44,311)
(49,225)
(46,372)
Credit impairment losses
1,464
(3,973)
(549)
(234)
(2,835)
Share of (loss)/profit of investment
accounted for using equity method
(402)
(151)
-
109
(106)
Profit before taxation
12,638
10,372
15,294
13,770
8,868
Income tax expense
(4,759)
(3,230)
(5,424)
(4,831)
(3,165)
Profit for the year
7,879
7,142
9,870
8,939
5,703
Attributable to:
Equity holders of the Bank
7,481
6,640
9,320
8,447
5,129
Non-controlling interests
398
502
550
492
574
Profit for the year
7,879
7,142
9,870
8,939
5,703
200
Five Year Summary
Statements of Cash Flows
Group
2021
2020
2019
2018
2017
€ 000
€ 000
€ 000
€ 000
€ 000
Net cash flows generated from/
(used in) operating activities
31,636
14,475
53,125
(30,882)
(27,882)
Cash flows from investing activities
Dividends received
81
105
211
369
326
Interest received from investments
3,012
2,198
2,325
2,011
2,196
Proceeds on maturity/disposal
-
of investments
6,760
16,468
8,163
4,406
3,285
Purchase of investments
(75,270)
(67,862)
(15,905)
(27,850)
(905)
Purchase of property, plant
and equipment
(7,601)
(8,942)
(3,345)
(2,921)
(2,943)
Proceeds from disposal of property,
plant and equipment
-
18
-
-
-
Acquisition of non-controlling
Interests
-
-
-
-
(429)
Purchase of investment in associate
(1,500)
(399)
-
-
-
Net cash inflow arising from acquisition
of subsidiary
833
-
-
-
-
Net cash flows (used in)/from
investing activities
(73,685)
(58,414)
(8,551)
(23,985)
1,530
Cash flows from financing activities
Dividends paid to equity holders
of the Bank
(862)
-
(1,436)
(1,149)
(1,149)
Dividends paid to non-controlling
Interests
(429)
(427)
(429)
(427)
(244)
Payment from lease liability
(527)
(409)
-
-
-
Net cash flows used in financing
activities
(1,818)
(836)
(1,865)
(1,576)
(1,393)
Independent auditor’s report
To the Shareholders of Lombard Bank Malta p.l.c.
Report on the audit of the financial statements
Our opinion
In our opinion:
· The Group financial statements and Parent Company financial statements (the “financial statements”) give a true and fair view of the Group and the Bank’s financial position of Lombard Bank Malta p.l.c. as at 31 December 2021, and of the Group’s and 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 Companies Act (Cap. 386) and the Maltese Banking Act (Cap. 371).
Our opinion is consistent with our additional report to the Audit & Risk Committee.
What we have audited
Lombard Bank Malta p.l.c.’s financial statements, comprise:
· the Consolidated and Parent Company statements of financial position as at 31 December 2021;
· the Consolidated and Parent Company income statements and statements of comprehensive income for the year then ended;
· the Consolidated and Parent Company statements of changes in equity for the year then ended;
· the Consolidated and Parent Company statements of cash flows for the year then ended; and
· the notes to the financial statements, which include significant accounting policies 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 Group and 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 and its subsidiaries 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 and its subsidiaries, in the period from 1 January 2021 to 31 December 2021, are disclosed in note 33 to the financial statements.
Our audit approach
Overview
|
|
● Overall group materiality: €642,000, which represents approximately 5% of 3 years average profit before tax.
|
|
● The audit procedures carried out covered all the components within the Group namely Lombard Bank Malta p.l.c. (the parent company) and its subsidiaries Redbox Limited, MaltaPost p.l.c., Tanseana Limited, Lombard Select SICAV p.l.c. and Lombard Capital Asset Management Limited which are all based in Malta.
|
|
|
● Credit loss allowances in respect of loans and advances to customers of Lombard Bank Malta p.l.c. |
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated 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.
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 consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated 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 group materiality |
€642,000 |
|
How we determined it |
Approximately 5% of 3 years average profit before tax |
|
Rationale for the materiality benchmark applied |
We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose an average of 3 years as it was determined more appropriate in view of the fluctuations in results during the current year. We chose 5% which is within the range of quantitative materiality thresholds that we consider acceptable. |
We agreed with the Audit & Risk Committee that we would report to them misstatements identified during our audit above €64,000 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 Lombard Bank Malta p.l.c. 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 balance sheet 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. The outbreak of the COVID-19 pandemic has exacerbated the level of uncertainty around the calculation of ECLs, giving rise to heightened subjectivity in the determination of model assumptions used to estimate key model risk parameters and hence necessitating a higher level of expert judgement. Credit loss allowances relating to all loans and advances in the Bank’s 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 the COVID-19 pandemic. iii. Exposure at default (“EAD”): the expected exposure in the event of a default (including any expected drawdowns of committed facilities). 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 non-defaulted (Stage 1 and 2) loans and a number of defaulted (Stage 3) loans which are not individually significant, 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 haircut (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. For individually significant defaulted (Stage 3) exposures, discounted cash flow models are utilised in order to estimate ECLs. 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. The local impact of the pandemic has been mitigated by a number of government programmes and measures, including general payment moratoria which have given rise to the deferral of payments of capital and/or interest over time periods that potentially extended until the end of the current financial reporting period. This factor has increased the level of uncertainty around judgements made in determining the timing of defaults and in respect of staging. For the purposes of avoiding the cliff edge effect on ECLs upon expiry of the moratoria, the Bank reassessed the internal credit risk ratings of all exposures with approved moratoria on the basis of quantitative and qualitative characteristics to enable the identification of significant increase in credit risk (SICR) or Unlikeliness-to-Pay (UTP) events as early as possible. 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 macro-economic scenarios involving the use of significant judgements. The outbreak of COVID-19 and the government support and relief measures adopted to mitigate it have significantly impacted macroeconomic factors such as the gross domestic product (GDP), 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. The level of uncertainty has been exacerbated by Malta’s inclusion in the list of jurisdictions under increased monitoring, referred to as the grey-list, by the Financial Action Task Force (‘FATF’) during the year ended 31 December 2021. This gave rise to an elevated level of uncertainty in respect of judgements made in determining macroeconomic forecasts underlying the different economic scenarios used in ECL models. The Bank has applied overlays based on expert judgement to reflect risks that are not fully captured by the ECL models. 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 COVID-19, which has an unprecedented impact on the economy and has 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 with IFRS 9;
• Accounting interpretations and modelling assumptions used to build the models that calculate the ECL;
• Completeness and accuracy of data used to calculate the ECL;
• Inputs and assumptions used to estimate the impact of multiple macroeconomic scenarios; and
• Measurements of individually assessed provisions including the assessment of multiple scenarios.
Relevant references in the Annual Financial Report and Financial Statements:
• Accounting policy: note 1.7
• Credit risk management: note 2.3;
• Accounting estimates and judgements: note 3.2;
• Note on Credit impairment losses: note 32; and
• Note on Loans and advances to customers: note 8. |
During our audit of the financial statements for the year ended 31 December 2021, we continued to focus on the key drivers of the estimation of ECL. Apart from assessing the continuing appropriateness of management assumptions, updates to key parameters and model enhancements, largely driven by the outbreak of the COVID-19 pandemic, were evaluated and tested. Discussions with the Audit & Risk Committee and management were held on: · inputs, assumptions and adjustments to ECL, in particular changes to risk factors and other inputs within the Bank’s models, in respect of which we provided updates on the results of our testing procedures; · the application of forward economic scenarios, including the severity and magnitude of modelled downside scenarios, particularly in the context of the potential future impacts of the COVID-19 pandemic; · considerations around post-model adjustments, mainly in response to the impact of COVID-19 and Malta’s grey-listing, and the estimation uncertainty involved in determining ECLs on the basis of historical experience; and · individually significant loan impairments. With respect to the ECL models utilised by the Bank, the continued appropriateness of the modelling policies and methodologies used was independently assessed by reference to the requirements of IFRS 9. ECL calculation for non-defaulted loan exposures and a number of defaulted loans which are not individually significant We understood and critically assessed the models used for ECL estimation for the Bank’s loan portfolio. Since modelling assumptions and parameters are based on historic data, we assessed whether historic experience was representative of current circumstances and of the recent losses incurred within the portfolios. The appropriateness of management’s judgements was also independently considered in respect of calculation methodologies, calibration of PDs and LGDs, segmentation and selection of macro-economic variables. Model calculations were also tested independently. Substantive procedures were performed as follows: · Performed an overall assessment of the ECL provision levels by stage to determine if they were reasonable considering the Bank’s portfolio, risk profile, credit risk management practices and the macro-economic environment.
· Tested a sample of loans 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 COVID-19 on the repayment capabilities of the sampled borrowers.
· Challenged the criteria used to allocate an asset to stage 1, 2 or 3 in accordance with IFRS 9 and tested a sample of assets in stage 1, 2 and 3 to verify that they were allocated to the appropriate stage.
· Tested the completeness and accuracy of the critical data extracted from the underlying systems, that is utilised within the models for the purposes of the year end ECL calculation.
· Risk based testing of models, including a review of the continuing appropriateness of model assumptions. We tested the assumptions, inputs and formulas used in ECL models on a sample basis. This included assessing the appropriateness of model design and formulas used, and recalculating PDs, LGDs and EADs on a sample basis, through the involvement of subject matter experts.
· We assessed the reasonableness of modelled PDs through a comparison of historically predicted and observed default rates, taking into consideration the potential postponement in timing of defaults due to government support programmes and measures, and the adequacy of modelled LGDs in light of the potential impact of the pandemic and Malta’s grey-listing by the FATF on local property prices.
· We also assessed the reasonableness of market value haircuts and time to sell assumptions used as inputs to modelled LGDs, in light of the potential impact of the pandemic and Malta’s grey-listing on local property prices. Additionally, we assessed the appropriateness of the post model overlay intended to address early identification of SICR or UTP events in respect of those exposures to which the bank extended general payment moratoria or which benefitted from Government support schemes or measures.
· Tested the multiple macroeconomic scenarios and variables using our experts to assess their reasonableness. We assessed the appropriateness of changes effected to factor the impact of the pandemic, including the recalibration of probability weights. We assessed whether the severity of the forecasted macroeconomic variables was appropriate in view of the pandemic and the high level of uncertainty surrounding the economic conditions. We challenged the correlation and impact of the macroeconomic factors on the ECL. Our testing of models and model assumptions did not highlight material differences.
Based on the evidence obtained, we found that the model assumptions, data used within the models and overlays are reasonable.
ECL calculation for defaulted individually significant loan exposures For defaulted exposures within the loan portfolio, the appropriateness of the methodology and policy used to calculate ECLs was independently assessed. We understood and evaluated the processes for identifying default events within loan portfolios, as well as the impairment assessment process. 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 impacted by COVID-19 and for determining whether a UTP/default event had occurred by testing a sample of loans with characteristics that might imply a default event had occurred (for example a customer experiencing financial difficulty or material sector disruption) 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 sample of performing loans, including from within those sectors that we consider to have been significantly impacted by the pandemic, 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 amounts of the respective ECL provisions, as follows: · Reviewed the credit files of a selected sample of loans to understand the latest developments at the level of the borrower and the basis of measuring the ECL provisions and considered whether key judgements were appropriate taking cognisance of the pandemic. · Challenged the severity of scenarios being applied for these exposures, together with their respective probability weights by forming an independent view of the recoverability of the selected loan exposures under different scenarios, assigning probabilities independently and comparing the outcomes to that of the Bank. · Tested key inputs to and reperformed the impairment calculation used to derive expected cash flows under different scenarios. · Assessed the appropriateness of a sample of property valuations securing impaired loans through the use of 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. |
How we tailored our group audit scope
The Group is composed of six components: Lombard Bank Malta p.l.c. (the parent company), and its subsidiaries Redbox Limited, MaltaPost p.l.c., Tanseana Limited, Lombard Select SICAV p.l.c. and Lombard Capital Asset Management Limited. MaltaPost p.l.c. has been determined to be a financially significant entity. We tailored the scope of our audit in order to perform sufficient work on all components to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates, and local statutory requirements.
The Group audit team performed all of this work by applying the Group overall materiality, together with additional procedures performed on the consolidation. This gave us sufficient appropriate audit evidence for our opinion on the Group financial statements as a whole.
Other information
The directors are responsible for the other information. The other information comprises all of the information in the Annual Financial 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 Companies Act (Cap. 386) and the Maltese Banking Act (Cap. 371), 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 Group’s and 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 Group or the Bank or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s and 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 Group’s and 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 Group’s or 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, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s or the Bank’s ability to continue as a going concern. In particular, it is difficult to evaluate all of the potential implications that COVID-19 will have on the Group’s and the Bank’s operations, assets and liabilities, and the disruption to their business and the overall economy.
· 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 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 to 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 Lombard Bank Malta p.l.c. for the year ended 31 December 2021, 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 consolidated financial statements and the relevant mark-up requirements therein, 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 consolidated financial statements and the relevant electronic tagging therein, 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 accordance with the requirements of the ESEF RTS.
· Obtaining the Annual Financial Report and performing validations to determine whether the Annual Financial Report has been prepared in accordance with the requirements of the technical specifications of the ESEF RTS.
· Examining the information in the Annual Financial Report to determine whether all the required taggings therein have been applied and whether, in all material respects, they are in accordance with the requirements of the ESEF RTS.
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 2021 has been prepared, in all material respects, in accordance with the requirements of the ESEF RTS.
Other reporting requirements
The Annual Financial Report and Financial Statements 2021 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.
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Area of the Annual Financial Report and Financial Statements 2021 and the related Directors’ responsibilities |
Our responsibilities |
Our reporting |
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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 Company 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.
With respect to the information required by paragraphs 8 and 11 of the Sixth Schedule to the Act, our responsibility is limited to ensuring that such information has been provided. |
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.
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Statement of Compliance with the Principles of Good Corporate Governance
The Capital Market 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 Market Rules. The Statement’s required minimum contents are determined by reference to Capital Market Rule 5.97. The Statement provides explanations as to how the Company has complied with the provisions of the Code, presenting the extent to which the Company 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 Company 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 Market 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 Market 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 Company’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 Market Rules issued by the Financial Services Authority.
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section. |
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Remuneration report
The Capital Market Rules issued by the Financial Services Authority require the directors to prepare a Remuneration report, including the contents listed in Appendix 12.1 to Chapter 12 of the Capital Market Rules. |
We are required to consider whether the information that should be provided within the Remuneration report, as required in terms of Appendix 12.1 to Chapter 12 of the Capital Market Rules, has been included.
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In our opinion, the Remuneration report has been properly prepared in accordance with the requirements of the Capital Market Rules issued by the Financial Services Authority. |
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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. |
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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 Market 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 10 April 2010. Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 12 years.
PricewaterhouseCoopers
78, Mill Street
Zone 5, Central Business District
Qormi
Malta
Fabio Axisa
Partner
20 April 2022