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Annual Report and Financial Statements 2022
2022
MeDirect Bank (Malta) plc
Annual Report and
Financial Statements 2022
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Annual Report and Financial Statements 2022
contents
Chairman & Chief Executive Officer’s Review 3
Who we are 9
MeDirect at a Glance 12
From then till now... our history 13
Directors’ Report 14
Our Group Board 23
Group Leadership Team 25
Statement of Compliance with
the principles of Good Corporate Governance 27
Remuneration Report 38
Financial Statements 46
Statements of Financial Position 47
Statements of Comprehensive Income 48
Statements of Changes in Equity 49
Statements of Cash Flows 52
Notes to the Financial Statements 53
Five-Year Comparison 239
Company Information 244
Independent Auditor’s Report 247
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Annual Report and Financial Statements 2022
Chairman’s and Chief Executive Officer’s review
In 2022, MeDirect returned to profitability following the successful execution of a three-year business transformation plan, recording net profit after tax of €8.7 million. MeDirect’s management team, that joined in 2019, was almost immediately confronted with the extreme disruptions of the COVID-19 pandemic and the resulting economic and geo-political dislocations, including higher inflation, supply chain disruptions and increased international tensions. Notwithstanding the difficult environment, the management team de-risked and transformed MeDirect’s balance sheet, developed its WealthTech platform by launching and developing its Wealth SuperApp in both Malta and Belgium, launched several new asset classes including Belgian and Maltese mortgages while maintaining capital buffers at solid levels. The result has been a return to profitability, the creation of franchise value and the positioning of MeDirect for sustainable growth and continuing profitable operation.
MeDirect is working to create three separate sources of franchise value by:
• Building a pan-European WealthTech leader;
• Growing a complementary specialised mortgage platform; and
• Launching a software as a service business, offering MeDirect systems and processes to third parties on a white-labelled basis, focusing on the embedded-wealth segment.
MeDirect’s purpose is to empower people to manage their wealth with confidence and autonomy. Our mission is to build highly convenient digital investment journeys, leveraging on cutting-edge technology and innovative solutions. As a pan-European wealth neo-bank operating currently in Malta, Belgium and the Netherlands, MeDirect aspires to give retail customers more choice, access to better wealth services and quality support when using the MeDirect digital platform.
Michael Bussey
Chairman
Arnaud Denis
Group CEO
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Annual Report and Financial Statements 2022
Chairman’s and Chief Executive Officer’s review
MeDirect has based the implementation of that strategy on four pillars and has made significant progress on each one:
Four Pillar approach to strategy implementation
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4
Building the
WealthTech platform
Growing
the retail franchise
De-risking
and
diversifying
the balance sheet
Strengthening the operating
model
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Annual Report and Financial Statements 2022
Building the WealthTech platform
MeDirect’s ambition is to disrupt the retail digital investment space. In order to achieve this ambition, MeDirect offers a wide and continually growing portfolio of digital wealth and banking services.
MeDirect’s SuperApp has been deployed in Malta and Belgium and is scheduled to launch in the Netherlands in 2023. It is designed to meet the needs of the underserved affluent market segment for wealth services. MeDirect’s aim is to offer, on a single platform with open architecture, a broad range of online investment solutions, superior user experience and attractive pricing, combined with high quality transactional banking capabilities. The starting point is to ensure fast and seamless client onboarding. Customers can onboard quickly, while complying with all relevant KYC and other regulatory requirements.
Once onboarded, wealth customers can invest in a wide range of financial instruments, with the ability to choose from amongst approximately 1,750 mutual funds, as well as 480 ETFs, 250 bonds and 3,000 equities, trading on 17 stock exchanges around the world as at March 2023. MeDirect also offers model portfolios from different asset managers.
To complement this, MeDirect recently launched its MeManaged product, offering discretionary portfolio management services for its customers, managed by MeDirect in partnership with BlackRock. During 2023, MeDirect plans to launch its Portfolio Builder, which provides innovative tools to guide and support clients in their investment journeys. Across all products, MeDirect focuses on simplifying investment journeys, while providing access to detailed information on funds and securities and clear reporting on performance.
This package of wealth services is complemented by easy-to-use mobile banking with multi-currency capabilities. MeDirect has launched its virtual and physical card product on a limited basis and plans to roll out the product to all its customers early in 2023. Within one convenient platform, MeDirect provides its clients with the choice of how they want to invest, while giving them the possibility to use the app seamlessly for everyday banking needs.
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Chairman’s and Chief Executive Officer’s review
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Annual Report and Financial Statements 2022
Growing the retail franchise
The attractiveness of MeDirect’s value proposition is evidenced by the rapid growth in its customer base, both in Belgium and Malta, as well as high levels of customer satisfaction. MeDirect grew its retail customer base to 108,000 in 2022, holding €4.2 billion of client financial assets, of which €1.4 billion were investments held in custody with MeDirect. Notwithstanding unfavourable capital markets performance in 2022, MeDirect achieved wealth product penetration of 37% of its retail depositor base. Wealth customers hold an average of over €58,000 in financial assets with MeDirect. MeDirect’s customers are very loyal – of its retail customers who joined MeDirect five years ago, over 90% remain its customers today. As a result, MeDirect’s depositor base has been stable over the years.
In Belgium, MeDirect was rated third amongst Belgian banks for investment products by Spaargids.be. MeDirect continually strives to improve its service and to develop and deploy new products and better user experience by leveraging its advanced tech platform. As an example, MeDirect’s tech team averages eight releases daily in its constant efforts to enhance the digital value proposition and user experience.
De-risking and diversifying the balance sheet
MeDirect continues to de-risk and diversify its balance sheet.
MeDirect grew its mortgage portfolio to €2 billion, of which €1.8 billion are Dutch NHG (government guaranteed) mortgages. That portfolio is hedged against interest rate risk and is financed in part through its Bastion mortgage securitisation programme, under which MeDirect has raised an aggregate of €970 million of long-term secured funding. The third Bastion transaction closed in November 2022. In partnership with Allianz Benelux S.A./N.V., MeDirect built its platform to originate Belgian mortgages. At year-end 2022, €132 million of Belgian mortgages were held on MeDirect’s balance sheet. In late 2022, MeDirect also launched a professional buy-to-let product in the Netherlands, in partnership with Build Finance, a Dutch buy-to-let specialist firm. In Malta, MeDirect has used innovative technology to set new standards in the Maltese mortgage market in relation to time-to-quote and time-to-approval, through a smooth and client-oriented process. By year-end 2022, MeDirect had originated €68 million of Maltese mortgages.
As it grew its mortgage platform, MeDirect continued to de-risk its international corporate lending portfolio, which has been reduced to €512 million on-balance sheet, representing less than 11% of total balance sheet as of end of 2022. Borrowers in the portfolio continued to improve operating performance, as the Group recognised recoveries of €14 million on the portfolio. Credit recoveries, combined with tight cost discipline enabled MeDirect to record a net profit after tax of €8.7 million. Even if still modest, this profit means MeDirect is rebuilding its capital base, which will support the delivery of its strategic roadmap.
MeDirect also continues to grow its successful Maltese corporate lending and banking services businesses. MeDirect has grown its portfolio of Maltese corporate loans to €131 million at year-end and also has €209 million of deposits from corporate customers linked to payment and foreign exchange services.
As a systemic bank in Malta, MeDirect is regulated by the European Central Bank as part of the Single Supervisory Mechanism. Being part of the Single Supervisory Mechanism ensures that MeDirect is regulated at the standard of the largest banks in Europe. MeDirect continues to operate with healthy capital ratios, even while growing its balance sheet to build sustainable net interest income and investing in its wealth platform to generate further fee income. At year-end, MeDirect’s total capital ratio stood at 18.7%, and its Liquidity Coverage Ratio stood at greater than 220%. Such ratios exceed all regulatory requirements, recommendations and management buffers. MeDirect intends to continue to explore ways to reinforce its capital base, with the aim of further supporting the growth of its core business lines: wealth and mortgages.
Chairman’s and Chief Executive Officer’s review
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Annual Report and Financial Statements 2022
Chairman’s and Chief Executive Officer’s review
Strengthening the operating model
Building tech capabilities: As one of its core competitive advantages, MeDirect owns the intellectual property of critical elements of its value proposition, including seamless service aggregation capabilities. With a cloud-agnostic and scalable architecture, developed by a tech team consisting of top talent, MeDirect has positioned itself as a software house with substantial headroom for growth. To date, over 28 million lines of
code have been deployed in a Continuous Integration/Continuous Deployment enabled stack. MeDirect plans to leverage its investment in technology by offering its platform on a software-as-a-service basis to medium-sized banks, independent investment advisors, life insurers or asset managers looking to launch or expand their digital wealth capabilities.
Improving efficiency: MeDirect has been able to maintain its fixed cost base almost flat from 2021. MeDirect’s fixed cost base has been reduced by 9% since 2019, notwithstanding significant continuing investment in its technology platform and the growth of its operations. The Group has continued to source talent from an international pool to support business growth and the development of its tech platform. It has opened a tech hub in Turkey, complementing its strong team of developers in Malta.
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Annual Report and Financial Statements 2022
As part of its business transformation plan, management continued to de-risk and diversify MeDirect’s balance sheet in 2022, reducing its on-balance sheet international corporate lending portfolio from €1.1 billion in 2019 to €0.5 billion at year end 2022, and building a specialised mortgage lending platform operating in three markets (Belgium, the Netherlands and Malta). The Group also adopted an interest rate hedging strategy aimed at ensuring its balance sheet is protected, particularly given the current volatile financial and market environment. MeDirect has also built a well- diversified and stable funding base with access to multiple sources of retail and wholesale funding. MeDirect remains committed to investing in the reliability and resilience of its IT systems and critical services by putting in place robust operational risk controls to ensure disruptions to services are minimised.
ESG and Social responsibility
MeDirect has continued to integrate environmental, social and governance (“ESG”) principles into its business and to raise ESG awareness within the organisation. In the context of workplace diversity, MeDirect employs the nationals of over 25 countries and has a workforce that is 39% female, including a number of senior executives. MeDirect prides itself on developing its employees and promoting from within. Even as the fallout from the COVID-19 pandemic abates, MeDirect continues to accommodate the needs of its employees and allows its staff to work from home or at the office. MeDirect contributes to the local communities in which it operates by supporting charitable organisations as well as talented individuals in areas such as sports and culture through sponsorships, donations and the voluntary actions of its employees.
Conclusion
The year 2022 was a pivotal year for MeDirect. In spite of a highly unstable geo-political and macroeconomic environment in 2022, MeDirect continued to execute its strategic transformation roadmap and to build its businesses. MeDirect’s disciplined execution of its strategic plan has borne fruit, as the Group returned to profitability. MeDirect’s Board and management are monitoring carefully the volatile financial and market environment, which has continued into 2023, and have focused on ensuring robust risk management and controls are in place. Notwithstanding current market conditions, in view of MeDirect’s diversified and lower risk balance sheet as well as the development of its fee-based wealth franchise and its tech capabilities, management is confident that MeDirect can continue to grow sustainably and profitably as a pan-European wealth neobank. MeDirect’s Board and management look forward cautiously but optimistically to an exciting future.
Chairman’s and Chief Executive Officer’s review
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Annual Report and Financial Statements 2022
Who
We Are
Purpose, Mission and Core Values
Our vision is exciting:
To empower people
to manage their
wealth with confidence
and autonomy.
To achieve this goal, we have built our Wealth SuperApp, a one-stop shop that offers in a single app a broad and growing portfolio of digital wealth and banking services. Our vision for our customers is embodied in our “My Money, My Choices” branding, which speaks to the freedom and flexibility provided by our platform to customers in managing their finances.
We target the underserved affluent customer segment; people who want to retain control of their finances but who often want to be guided in their investment journeys. Our solution addresses the needs of a large potential universe, ranging from first time to active investors looking for a wide choice of investment products and a highly convenient platform that enables them to achieve their financial goals.
Users of our platform may include:
• customers unsatisfied with the offline journey provided by their current bank;
• people who do not have the time nor the willingness to manage their money and want to delegate or be guided;
• tech-savvy investors who want to access a highly functional trading platform with real-time capabilities and rich information; and
• customers who do not qualify for private banking, which typically caters only to customers with significant investible wealth.
MeDirect aims to address these problems with cutting-edge technology and customer-centric solutions with the ambition of disrupting the retail digital investment space.
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Annual Report and Financial Statements 2022
To achieve this, we offer, on a single multi-channel platform with open architecture, a broad range of online investment solutions combined with superior UX and attractive pricing. Our app addresses in one place a wide range of investor needs including trading, advisory and discretionary management services, coupled with daily banking. Technology is the backbone of our success. We developed internally most of the critical components of the value chain which form part of our ecosystem, allowing us to deploy seamless service aggregation capabilities. Our Tech architecture is state-of-the-art, with scalability and modularity at its core, built by a talented team recruited from advanced technology sectors including iGaming and Telecoms.
Our strategic priorities reflect our core values:
Autonomy
We empower our customers to navigate the financial world and give them the choice of how to manage their money, their way. We encourage our employees to take ownership of their work and grow their skills.
Innovation
We do not rest on our laurels. We are results driven and constantly review how we go about delivering on our vision and improving our value proposition.
Transparency The financial world
isn’t simple, but the
MeDirect app is.
We communicate clearly
with our clients and our
colleagues and offer clear
and understandable
reporting of customer
portfolios.
Responsibility
We take seriously our
responsibilities to all our stakeholders: customers,
employees, regulators,
shareholders and our
community.
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Annual Report and Financial Statements 2022
Efficient operating model
MeDirect operates a high-quality service centre in Malta consisting of technology, digital channels, operations and other support teams. These teams drive MeDirect’s vision to be simpler, better and faster for our customers and workforce. The role of these teams include:
• the development of software and applications to improve customer experience;
• the management of the IT infrastructure and support;
• the management of customer operations and change across MeDirect; and
• the provision of professional services in various areas such as finance, risk and treasury, amongst others.
Dedicated marketing and product teams, as well as control functions, are located in each of our banks. This international set-up enables MeDirect to scale up efficiently while remaining flexible and close to local market customer and regulatory requirements.
How our vision ties into our core strategy
Our core strategy is based on four main pillars:
Scaling up our innovative WealthTech platform
MeDirect serves a broad customer base and focuses on the affluent customer segment (typically with €30,000-€300,000 in wealth) that values convenience, transparency and choice. MeDirect aims to provide a full range of investment services from brokerage to investment advice to discretionary portfolio management, combined with high-quality daily banking. We bring to market innovative solutions combining our proprietary software with seamlessly aggregated services from selected partners to create intuitive customer journeys.
Since 2018, we have invested over €26 million in our technology platform.
Growing a low risk and capital efficient mortgage lending platform
We have built from scratch mortgage offerings in the Netherlands, Belgium and Malta and have developed a lending platform that is both scalable and competitive. In Belgium and the Netherlands, MeDirect operates a B2B2C approach, by working with top notch servicing and origination partners and focusing on niche market segments, while still maintaining an appropriate risk-reward balance. Looking forward, we aim to use this business line to complement our disruptive wealth offering and to build a platform which maximises the full range of synergies between the two business lines, including in the future cross-selling mortgages to wealth customers or vice-versa.
The mortgage lending platform leverages on top notch partners and in-house Technology and Product capabilities.
Advanced tech allowing for scalability and faster time-to-market
MeDirect has the technological foundations on which we can maintain a competitive advantage over our competitors. This is thanks to our award-winning, in-house software development team. Through its cloud agnostic tech architecture, MeDirect has the ability to aggregate services by seamlessly integrating with strategically selected third party providers that support its digital offering. This modular ecosystem of partners has been built to support flexibility in the platform. An important element of our tech strategy is the ability to containerise the platform, by transitioning away from a monolith setup. This allows us to scale-up for higher volumes but maintain lower costs. Operating with a modular microservices architecture, MeDirect continues to innovate and meet business needs, with all customer touchpoints offered through multiple channels.
An important element of our tech strategy is the containerisation of our platform.
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Annual Report and Financial Statements 2022
Continued growth in retail client base despite the Russia-Ukraine
crisis and resulting turmoil in the financial markets
108k
Retail clients
7% increase from 2021
68%
Increase in retail clients since 2019
€4.2bn
Group client
financial assets
+€145m
Inflows in assets held under nominee basis
In 2022 the Group continued to execute its plan to diversify its
asset portfolios with the launch of its Belgian mortgage business
€2.0bn
Mortgage book built since 2019
+20%
In mortgage book growth value in 2022
>€130m
Belgium mortgage
origination in 2022
-69%
In International Corporate Lending since March 2019
Capital and liquidity ratios well above regulatory requirements
18.7%
Total Capital Ratio
>221%
Liquidity Coverage Ratio
>119%
Net Stable Funding Ratio
Significant recovery in financial performance with further room for growth
€9.2m
Profit before tax
+23%
In net interest income
2%
Non-performing loans ratio
compared to 7% in 2021
Positive business developments during the year
3 new business lines launched
1. Belgian retail mortgages in partnership with Allianz
2. Dutch buy-to-let professional mortgages
3. Online discretionary portfolio management in partnership with Blackrock
Top 15%
Of companies rated for sustainability by Silver Ecovadis (over 85k companies rated)
3rd
Dutch mortgages securitisation raised funding of €369m
MeDirect empowers people in growing their wealth with confidence
★ ★ ★ ★ ★
Average mobile app
rating across all markets
89%
2022 average
customer satisfaction
rating in internal
call centre surveys
MDB
Group at
a glance
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Annual Report and Financial Statements 2022
• Acquired by AnaCap Financial Partners II L.P.
• Launch of online deposits and wealth in Malta
• Established syndicated ICL portfolio
• Belgian branch obtains banking licence, becomes subsidiary of Maltese bank in 2015
• MDB Group regulated under the Single Supervisory Mechanism in 2016
• Group Client Financial Assets above €3 billion as at December 2018
• New management team joined to transform MeDirect and develop the WealthTech franchise
• Collateralised Loan Obligation transaction executed to de-risk the ICL portfolio
• Launch of Dutch NHG mortgage business line
• Milestone of 75,000 affluent retail clients reached
• NHG mortgage book exceeds €1 billion
• Launch of business transformation programme by new management team
• Launch of retail mobile app
• Ranked top 5 for mobile app, investment products and savings by spaargids.be
• Successful completion of first Residential Mortgage-Backed Security (“RMBS”) transaction
• Navigated through Covid crisis
• Milestone of 100,000 affluent retail clients with €4.5 billion financial assets reached
• NHG mortgage book exceeds €1.6 billion
• Launch of revamped online brokerage platform
• Again ranked top 5 for mobile app, investment products and savings by spaargids.be
• Awarded “Best Use of Technology in Business Transformation” by Tech.MT for MeDirect’s digital onboarding platform
• New mortgage platform launch in Malta and Belgium
• Issuance of €11 million Tier 2 capital in international markets
• Second RMBS transaction completed
• Operating as a software house: 28 million lines of quality code deployed
• New MeDirect branding and logo and UX enhancements
• Launch of Discretionary Portfolio Management offer with top asset manager
• Launch of professional buy-to-let mortgage product in NL
• Third RMBS transaction completed
• New eco-friendly home loans introduced
• Top 15% in Ecovadis Silver sustainability rating
2009-2014
2015-2018
2019
2020
2021
2022
From then till now…
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Annual Report and Financial Statements 2022
Directors’
Report
We hereby present the annual report of MeDirect Bank (Malta) plc (the “Bank”) and of the Bank and its subsidiaries (“MeDirect” or “the Group”) for the year ended 31 December 2022.1 These results reflect the consolidated position of the Bank and its principal subsidiaries.2
1 This report is prepared in terms of the Maltese Companies Act (Cap. 386) and complies with the disclosure requirements of the Sixth Schedule to the same Act.
2 Consisting of MeDirect Bank SA (“MeDirect Belgium”), Medifin Leasing Limited, MeHomeLoans B.V. and all entities where MeDirect Malta and MeDirect Belgium retained all the underlying risks and rewards consisting of Bastion 2020-1 NHG B.V. and Bastion 2021-1 NHG B.V., Bastion 2022-1 NHG B.V. and Grand Harbour I B.V., controlled special purpose entities established in the Netherlands that were set up as part of the Group’s funding strategy, and Medifin Estates, a property leasing partnership. Also forming part of the MDB Group together with MeDirect Malta’s parent company MDB Group Limited.
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Annual Report and Financial Statements 2022
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Annual Report and Financial Statements 2022
Building the MeDirect WealthTech platform
During 2022, MeDirect continued to build and strengthen its disruptive, best-in-class wealth tech platform. The year started with a major update to our WealthTech app in January. As part of MeDirect’s commitment to giving customers control of their finances, our mobile app now offers in one place both banking services and easy access to over 5,000 financial instruments. Additional enhancements to the mobile app followed later in the year. Key amongst these was the introduction of real-time pricing on orders for equities and ETFs. This ensures that customers using MeDirect for their trading can benefit from the latest information and prices, making it easier to take advantage of investment opportunities. In addition, the new user interface features improved search facilities, including guided searches, as well as different options for presentation of information on personalised dashboards and other screens.
In July, we unveiled MeDirect’s new branding, with our new “My Money, My Choices” tag line. December saw the launch of our MeManaged service, offering retail banking clients access to a new, fully digital and highly accessible discretionary investment solution. MeDirect manages client investment portfolios using products from BlackRock that deploy iShares ETFs as efficient building blocks. By combining active management with ETFs, our clients benefit from a globally diversified and cost-efficient investment solution.
MeDirect’s development teams work constantly to build new products to improve our ability to serve client needs. In 2023, we plan to launch our Portfolio Builder, which provides innovative tools to guide and support clients in their investment journeys. To improve our daily banking capabilities, we are launching a virtual and physical card product so that our customers can use our platform for their daily banking needs.
We also plan to expand into the Netherlands in 2023. The Netherlands business will focus initially on attracting retail wealth customers. To scale as quickly as possible, we will use our current operational resources, customised to address local needs.
Directors’ Report
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Annual Report and Financial Statements 2022
Technology is at the heart of MeDirect
We have built a world-class, award-winning technology team drawn from industries ranging from telecoms to iGaming. The team has achieved success both at MeDirect and in their previous positions and comprises over 115 engineers located primarily in Malta as well as in other locations including Turkey. The team has been benchmarked favourably against other neo-banks in an independent review. The quality of the team has enabled MeDirect to build and to continue to build its disruptive omni-channel Wealth SuperApp, providing wealth and daily banking capabilities in one convenient and accessible app.
The team has built a modular ecosystem of distributed micro-frontends and micro-services, with 28 million lines of quality code written to date. MeDirect developers use cutting-edge programming language and average eight new releases per day. MeDirect has also contributed to open-source platforms, such as SAP’s Luigi, a micro-frontend framework, and Netflix’s conductor, a platform that orchestrates workflows across microservices. MeDirect’s platform is built to be scalable, using Services Oriented Architecture (SOA) with headroom for growth. This architecture provides us with enormous flexibility; with our cloud-agnostic architecture, we can integrate seamlessly with a wide range of third-party suppliers. The platform supports multiple entities and multiple geographies.
Our platform has proven its reliability, with 99.9% availability on all client touchpoints in 2022. N+1 architecture across the ecosystem ensures system resilience. A strong KPI culture drives high quality service management.
Most importantly, we own the intellectual property that forms the basis of our wealth tech platform, including the front end layer and our highly sophisticated middle layer, which facilitates the ability to integrate seamlessly with third-party systems. Ownership of our own software also creates an independent source of value for MeDirect.
In order to leverage our investment in our wealth tech platform, we plan to begin to offer access to the platform to third party financial institutions such as banks, investment advisors and insurance companies on a white-labelled basis. The platform provides a turnkey solution to enable institutions to monetise their customer bases and to create new sources of fee income. This Software-as-a-Service business will complement our existing B2C wealth business.
De-risking and diversifying the balance sheet
During 2022, MeDirect continued to de-risk its balance sheet and to build its mortgage business in three jurisdictions - the Netherlands, Belgium and Malta.
Directors’ Report
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Annual Report and Financial Statements 2022
In the Netherlands, we took advantage of a rapid increase in mortgage rates in the market to grow our portfolio of Dutch government guaranteed (NHG) mortgages at higher interest rates. Lower-risk NHG mortgages comprised €1.8 billion of the Group’s €4.7 billion of total assets at year-end. To protect itself against interest rate volatility, MeDirect has hedged its asset portfolios with over €1.7 billion notional amount of interest rate hedges as at year-end 2022. In November, MeDirect closed its third NHG mortgage securitisation, Bastion 2022-1. The transaction raised €369 million of longer-term financing for MeDirect Belgium, and the innovative capital structure, with a mix of floating and fixed-rate notes, optimised funding in the new interest rate environment. The transaction demonstrated the resilience of the Bastion programme and the trust of the capital markets in MeDirect. Bastion 2022-1 was the only Dutch prime mortgage securitisation in the second half of 2022 and was placed into a difficult and uncertain market.
In October 2022, we started a new business in professional buy-to-let mortgage loans in the Netherlands. In partnership with Build Finance, a Dutch buy-to-let specialist firm, MeDirect invests in buy-to-let mortgage loan receivables. These mortgage loans are made to professional real estate investors (either private individuals or companies) and are secured by residential rental properties. By the end of 2022, we had €15.9 million of buy-to-let mortgage receivables on our balance sheet.
In Belgium, we launched a new controlled risk mortgage loan product in partnership with Allianz Benelux S.A/N.V. Under the programme, MeDirect Belgium originated €132.1 million of balance sheet exposure, validating the concept and setting the stage for continued portfolio growth in 2023. The robustness of our credit risk framework is reflected in the high quality of the portfolio. In December 2022, in line with our ESG commitments, a new eco-friendly loan was introduced, rewarding projects with a low EPC rating with a reduction in the applicable interest rate.
In Malta, we continued to originate directly Maltese retail home loans, including mortgage products and home equity loans. During 2022, we grew the portfolio to €68 million, and launched our green home loan and home equity loan products. We have worked to improve the efficiency of our processes to ensure market-leading efficiency in completion of mortgage loans. Our aim is to provide a smooth, client-focused process.
During 2023, we plan to offer insurance products to complement our home loan offering in order to provide a full-service mortgage lending platform. We are also working in partnership with the Malta Housing Authority under the New Hope Scheme, to help prospective borrowers who cannot get life insurance due to illness or disability.
During 2022, we continued to de-risk our International Corporate Lending (“ICL”) portfolio, which has been reduced to €512 million, a decrease of 14% from year-end 2021. Notwithstanding the reduction, MeDirect made select investments in the European syndicated loan market with the aim of maintaining a well-diversified ICL portfolio across multiple sectors and geographies.
MeDirect Malta continued to grow its Maltese local lending portfolio, reaching €131 million by year-end 2022.
Continuing ESG focus
We continue to embed ESG principles in our day-to-day operations, launching green mortgage loan products in Belgium and Malta and participating in the New Hope Scheme in Malta. We also aim to ensure that MeDirect is an attractive and employee-friendly workplace and work to build a diverse workforce, focused on promoting from within. The Group developed and approved its first ESG strategy 2024/2025 “On the path to sustainability” and has started working on its implementation. The strategy is based on four pillars: ‘’Governance’’, ‘’Employees’’, ‘’Environment’’ and ‘’Society’’. In each of these pillars, we set specific sustainability objectives translated into commitments that support our business goals. The Group intends to follow these commitments in the coming years. More details on the Group’s ESG initiatives can be found in the Non-Financial Information Report published by MeDirect.
Directors’ Report
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Annual Report and Financial Statements 2022
Strong turnaround in financial performance
The financial year ended 31 December 2022 was a positive one from various perspectives. The strong turnaround in pre-tax profits (rising to €9.2 million from an overall loss-making situation in 2020 and 2021) was widely anticipated as we started to retake lost ground following the losses incurred in prior financial years as a result of the COVID-19 pandemic that brought about considerable challenges. Despite this significant recovery in the financial performance management is confident that there is further room for growth. Our focus is now on executing against the priorities at pace and we are making progress on each of them.
Our results for the 2022 financial year reflect strong financial and operational performance through continued customer focus, disciplined execution and investment. A highlight of the result is our continued balance sheet strength and capital position.
The completion of our diversification plan supported by the Group’s strong balance sheet and funding position, provided the foundation on which to deliver further growth and a rebound to profitability.
Balance sheet strength is critical to MeDirect’s ability to generate value for our stakeholders, deliver sustainable profitable growth and deploy capital efficiently by offering relevant products and services to our customers.
The size of the balance sheet increased by 10% in 2022 and in line with its diversification plan the Group continued to reduce the ICL book, increase the low risk Dutch NHG mortgages portfolio and Malta home loans portfolio and started building an encouraging portfolio of Belgium mortgages. The growth of the NHG portfolio was facilitated through a third securitisation completed in November 2022.
MDB Group remains in a good capital position and consistently well in excess of regulatory minimum capital requirements. MeDirect’s capital, liquidity and funding metrics remained sound during the year, well above regulatory minimum requirements. The regulatory ratios below reflect the profit of MDB Group in the financial year ended 31 December 2022.
• MDB Group has a good capital position with a total capital ratio of 18.7% as at 31 December 2022, well above the TSCR3 benchmark of 11%.
• MDB Group’s liquidity reserves remained good at €510 million as at 31 December 2022, with Liquidity Coverage Ratio (“LCR”) stood at 221% (minimum requirement of 100%).
• MDB Group’s Net Stable Funding Ratio (“NSFR”) as at 31 December 2022 was 119% (minimum requirement of 100%).
• MDB Group’s leverage ratio stood at 4.7% as at 31 December 2022 (minimum requirement of 3%).
MeDirect’s Non-Performing Loans (“NPL”) ratio decreased from 7% as at 31 December 2021 to 2% as at 31 December 2022 as a result of strenuous recovery efforts by management. The Group continued to reduce its NPL ratio via individual borrower strategies aimed at maximising recoveries as well as through debt sales and write-off strategies following effective debt restructuring.
The Group’s financial results for the financial year ended 31 December 2022 improved significantly compared to the prior year, from a loss before tax of €14.0 million in 2021 to a profit before tax of €9.2 million in 2022, as a result of business growth and improved economic environment that led to an increase of 23% in net interest income and recoveries from Stage 3 borrowings resulting in a favourable movement of €2 million in credit impairment charges.
Directors’ Report
3 TSCR refers to the minimum Total Supervisory Review and Evaluation Process (“SREP”) Capital Requirements: 8% (of which 6% must be Tier 1 capital) plus P2R of 3%.
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Annual Report and Financial Statements 2022
Dividends and reserves
The accumulated losses of the Group amounted to €25.5 million (2021: €34.1 million) and of the Bank amounted to €25.3 million (2021: €34.0 million). After consideration of the financial results of the Group as well as an uncertain macroeconomic environment, the directors of the Bank do not recommend the payment of a final dividend, despite the good capital and liquidity ratios of the Group. The Board has determined that the Group should conserve its capital to maximise its ability to support its customers, to continue to invest in its Wealth platform and to continue to strengthen its balance sheet.
Focus on financial key performance indicators
The evaluation of management’s implementation of MeDirect’s corporate and financial strategy is based on the use of key performance indicators (“KPIs”). KPIs are the tools by which MeDirect’s businesses and operations are managed, monitored and directed and indicate when the Group needs to undertake corrective measures. KPIs (and associated risk appetite and risk tolerance metrics) ensure that key risk metrics are constantly monitored. KPIs also play an essential role in MeDirect’s performance management process.
MeDirect focuses particularly on quantitative KPIs that are actively monitored on a regular basis through dashboards monthly management reports. In addition, The Group’s management and Board evaluate non-financial metrics such as customer satisfaction, employee engagement and sustainability.
The principal financial KPIs of the MDB Group are presented in the following table:
Key performance indicators 2022 2021
Business performance management
Annualised return on equity 3.7% (6.0%)
Overall net interest margin 1.4% 1.1%
Capital management
Common equity tier 1 (“CET 1”) ratio 15.2% 15.7%
Leverage ratio 4.7% 4.9%
Solvency management
Liquidity coverage ratio (“LCR”) 221% 363%
Net stable funding ratio (“NSFR”) 119% 134%
Credit management
Non-performing loans ratio 2% 7%
Confirmation of MeDirect’s going concern assessment
MeDirect remains well positioned to achieve strong business growth whilst remaining well capitalised, with the total capital ratio being 170% of the total SREP4 capital requirement and soundly funded with access to the required levels of liquidity with the liquidity coverage ratio being more than two times the minimum requirement.
Directors’ Report
4 Supervisory Review and Evaluation Process
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Annual Report and Financial Statements 2022
After due consideration of MeDirect’s business, profitability projections, funding and capital plans, robust risk and internal control processes and taking into account the broader macro-economic outlook, the directors declare that MeDirect is in a position to continue operating as a going concern for the foreseeable future. 5 The Board believes that MeDirect will have sufficient capital to meet not only its regulatory capital and liquidity requirements but also any internal risk buffers and any buffers recommended by its regulators.
Related parties
During the year ended 31 December 2022, other than the transactions described under note 36 to the financial statements, there were no material changes in related party transactions as compared with those detailed in the financial statements for the year ended 31 December 2021. In addition, no related party transactions materially affected the financial position or liquidity of MeDirect.
MeDirect confirms that there were no material contracts to which it or any of its subsidiaries was a party or in which any of its directors was directly or indirectly interested.6
Events after the reporting date
There were no events after the reporting date that would have a material effect on the financial statements of the Bank or the Group.
Pillar 3 disclosures
MeDirect is required to publish Pillar 3 quantitative and qualitative disclosure requirements.7 The Group publishes its full Pillar 3 disclosures on an annual basis as a separate document that is available on MeDirect’s website.
Board of Directors
The Bank’s Articles of Association require that directors shall be appointed for a maximum term of six years by a majority vote of the shareholders carried out in a general meeting. Following the expiry of such term, the directors may be re-elected for additional new terms.
The directors of the Bank who held office during the year were:
Mr. Michael Bussey – Chairman – appointed on 20 February 2017
Mr. Arnaud Denis – Chief Executive Officer – appointed on 15 October 2019
Mr. Jamal Ismayilov – appointed on 14 December 2021
Mr. Radoslaw Ksiezopolski – appointed on 4 October 2019
Mr. Dominic Wallace – appointed on 6 October 2015 and resigned on 27 April 2022
Mr. John Zarb – appointed on 17 July 2017
Directors’ Report
5 Statement pursuant to MFSA Capital Markets Rule 5.62.
6 Statement pursuant to Capital Markets Rule 5.70.1.
7 As governed by BR 07: Publication of Annual Report and Audited Financial Statements of Credit Institutions authorised under the Maltese Banking Act (Cap. 371), issued by the MFSA, which follows the disclosure requirements of EU Regulation No 575/2013 (CRR) of the European Parliament and of the Council of 26 June 2013 and the Commission Implementing Regulation (EU) 2021/637 of 15 March 2021.
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Annual Report and Financial Statements 2022
Enhancing risk governance
MeDirect understands the importance of adopting sound risk management principles. MeDirect’s core objective in the management of risk is to protect its customers and counterparties and to ensure its ability to grow sustainably.
Managing risk effectively, efficiently and sustainably is an integral part of the Group’s business strategy.8 MeDirect’s risk management approach focuses on ensuring continued financial soundness and safeguarding the interests of its stakeholders while retaining the ability to seize value-creating business opportunities in a fast-changing environment. This is achieved through high standards of corporate governance and sound risk management principles.
MeDirect has a well-established risk governance structure, with an active and engaged Board of Directors supported by an experienced senior management team and a centralised risk management function that is independent of the business lines. Decision making is primarily conducted through the Board of Directors with oversight from a Board level Risk Management Committee and delegated authority within Executive level Committees. The responsibilities of the Group’s Risk Management Team are to protect and enable the Group to deliver sustainable income through facilitating and monitoring the implementation of effective risk management practices and assisting risk owners in defining and controlling risk exposures.
The Group has established a comprehensive and robust risk management framework which sets forth the steps necessary to assess, manage and monitor and report current and emerging risks, whilst continually seeking to improve and evolve its risk management practices to ensure that it can address a constantly evolving risk environment pro-actively.
MeDirect has designed its risk management framework to support and enable its transformation strategy. This risk management framework ensures that new and proposed business lines, areas of growth, changes in technology and management decisions are well governed and sustainable.
Risks are monitored through regular and timely risk reporting, enabling the proactive identification and management of risks with the aim of reducing or avoiding undue exposure to various specific risk types. Risk appetite limits established by the Board set forth the amount and types of risk that MeDirect is prepared to accept or tolerate when delivering its strategy. These risk appetite limits are embedded in policies, management authorities and limits across the Groups. Frequent and close monitoring of all risk appetite limits, combined with comprehensive reporting to management and the Board of Directors ensures that risk is maintained within acceptable levels in accordance with the Group’s risk appetite.
In addition, all critical risk appetite limits are subjected to stress testing analysis at a risk type and portfolio level to ensure MeDirect remains financially healthy during and after severe risk events. Stress testing is an important part of the Group’s risk management framework and addresses a range of idiosyncratic and market-wide scenarios. The results from stress testing allow senior management to assess any potential vulnerability to exceptional but plausible adverse events. Stress testing enables MeDirect to assess its capital adequacy and liquidity risks and to identify potentially risky segments in its business model as well as inherent systematic risks. This enables the Group to develop appropriate risk controls, contingency plans and mitigating actions to address relevant risks before adverse events occur.
In view of volatile financial and market conditions, MeDirect’s Board has mandated a heightened focus on any threats or emerging risks which could potentially have an adverse effect on the operations or financial condition of the Group. The Board continues to oversee risk management measures being implemented by management, including maintaining a strong and diversified funding base; interest rate hedging aimed at protecting its balance sheet; continuing reduction
Directors’ Report
8 A detailed review of MeDirect’s use of financial instruments, and its exposure to liquidity risk, credit and market risk, non-financial risk and the related risk management framework and policies are included in Note 2 to the financial statements.
MeDirect’s
core objective in the management of risk is to protect its customers and counterparties and to ensure its ability to grow sustainably.
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Annual Report and Financial Statements 2022
of credit risk and diversification of the balance sheet into lower-risk mortgage assets; and robust operational risk controls, particularly in view of the Group’s increasing reliance on technology to improve the efficiency of its operations.
Standard licence conditions applicable under the Investment Services Act (Cap. 370)
Licence holders are required to include in the Directors’ Report breaches of standard licence conditions under the Investment Services Act (Cap. 370). Accordingly, the directors confirm that no breaches of standard licence conditions requirements under the Investment Services Act (Cap. 370) that were subject to administrative penalty or regulatory sanction were reported during the financial year.9
Statement of directors’ responsibilities for the financial statements
MeDirect is required by the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386) to prepare financial statements that give a true and fair view of the state of affairs of the Bank and the Group as at the end of each reporting year and of the profit or loss for that year.
In preparing the financial statements, MeDirect is 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 Bank and the Group will continue in business as a going concern.
MeDirect is also responsible for designing, implementing and maintaining internal controls designed to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386). MeDirect is also responsible for safeguarding the assets of the Bank and the Group and 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 2022 are included in the Annual Report 2022, which is published in hard-copy printed form and will be made available on the Group’s website. MeDirect is responsible for the maintenance and integrity of the Annual Report on the website in view of its responsibility for the controls over and the security of its website. Access to information published on the Group’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 by the directors pursuant to Capital Markets Rule 5.68
The undersigned declare that to the best of their knowledge, the financial statements were prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bank and its subsidiaries included in the consolidated financial statements and that this report includes a fair review of the performance of the business and the position of the Bank and its subsidiaries included in the consolidated financial statements, together with a description of the principal risks and uncertainties that it faces.
Signed by Michael Bussey (Chairman) and Arnaud Denis (Chief Executive Officer) on 28 March 2023.
Directors’ Report
9 Statement in accordance with SLC 7.60 of the Investment Services Rules for Investment Services providers regulated by the MFSA
23
Annual Report and Financial Statements 2022
Michael A. Bussey
Independent Chair and Non-Executive Director
• Joined MeDirect’s Board on 20 February 2017
• 45 years of experience in banking, specialising in Private banking and Wealth management
Former key positions held:
• Joined HSBC in 1980 and held various senior positions in his more than 20 years with the company, most recently as CEO of HSBC Private Banking EMEA
• CEO at Schroder & Co Ltd
• CEO of Private Banking and Trust at NM Rothschild & Sons Ltd
• CEO of Arbuthnot Latham & Co.
• Non-Executive Chairman, Credit Suisse (U.K.) Limited (2012-2020)
External appointments:
Non-Executive Chairman at DB UK Bank Limited
John Zarb
Independent Non-Executive Director
• Joined MeDirect’s Board on 17 July 2017 and is the Chair of the Audit Committee and interim Chair of the Risk Committee
• 40 years of experience with PwC in Malta, retiring from his role as Partner in 2014
Former key positions held:
Formerly President of Malta Institute of Accountants and served as Malta’s representative on the EU Accounting Regulatory Committee and on the Accountancy Board for several years.
External appointments:
• Chairman of PG plc
• Director of Foster Clark Products Ltd
• Board member and Chairman of the Audit committee of Tumas Investments plc and board member and chairman of the Remuneration Committee of its parent company, Tumas Group Company Limited.
Dina Quraishi
Nominated as Independent Non-Executive Director
(to become effective upon regulatory approval)
• Nominated in September 2022
• 20+ years of experience in risk management covering various sectors including payments, FinTech, engineering and financial services.
Former key positions held:
• Chief Risk Officer – SWIFT (Belgium)
• Global Head of Enterprise Risk Management – Sandvik (Sweden)
• Head of Operational Risk – Zurich Insurance
Our Group Board
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Annual Report and Financial Statements 2022
Jamal Ismayilov
Non-Executive Director
• Joined MeDirect’s Board on 14 December 2021
• 18+ years of experience in financial services, specialising in strategic and operational transformation
• Currently Managing Director within Private Equity at AnaCap Financial Partners
Former key positions held:
• Partner in the Financial Services practice at Oliver Wyman
• Head of Financial Strategy at Nomura International
External appointments:
Vice-Chairman of the Supervisory Board at Nest Bank S.A.
Philip C. English
Nominated Non-Executive Director
(to become effective upon regulatory approval)
• Nominated to the MeDirect’s Board in March 2023
• 30+ years of experience focusing on portfolio management, security valuation, financial markets and institutions and commercial banking.
Former Key positions held:
• Served on the Board of Directors of the CFA Society Washington, DC
• Served on the Investment Management Committee for Raffa Wealth Management
External appointments:
• Research Associate Professor of Finance at the Fox School of Business, Temple University
• Executive Director of the Fischer-Shain Centre for Financial Services and executive member of its Board
Arnaud Denis
Director and Group Chief Executive Officer
• Joined MeDirect as Group CEO in September 2019 and formally on MeDirect’s Board on 15 October 2019
• 25+ years of experience in banking, with track record of retail business transformation in the field of digital
Former key positions held:
• First Deputy CEO of ROSBANK Group, Société Générale’s Russian retail platform
• CEO of Eurobank SA, Polish subsidiary of Société Générale
• MD in Société Générale’s Fixed Income division based in NY
• Held various non-executive directorships in banking
Radoslaw Ksiezopolski
Director and Group Chief Financial Officer
• Joined MeDirect as Group CFO in August 2019 and formally on MeDirect’s Board on 4 October 2019
• 20+ years of experience in banking, specialising in business transformation
Former key positions held:
• CFO of Eurobank Polish subsidiary of Société Générale
• CFO of Credit Agricole Bank Poland
• Consultant at McKinsey & Co.
• Worked on the transformation of Polish subsidiary of UniCredit
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Annual Report and Financial Statements 2022
Group Leadership Team
Standing, from left.
Tim Rooney - Chief Executive Officer, MeDirect SA
Jamal Ismayilov - Non-Executive Director, MeDirect Group
Philip Campbell English - Nominated as Non-Executive Director, MeDirect Group
(to become effective upon regulatory approval)
Dina Quraishi - Nominated as Independent Non-Executive Director, MeDirect Group
(to become effective upon regulatory approval)
Michael A. Bussey - Chair and Non-Executive Director, MeDirect Group
Marcia de Wachter - Chair and Non-Executive Director, MeDirect SA
Alain Moreau - Nominated as Chief Executive Officer designate, MeDirect SA
(to become effective upon regulatory approval)
John Zarb - Independent Non-Executive Drector, MeDirect Group
Sitting, from left.
Radoslaw Ksiezopolski - Group Chief Financial Officer, MeDirect Group
Marija Fenech - Chief Risk Officer, MeDirect Group
Arnaud Denis - Group Chief Executive Officer, MeDirect Group
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Annual Report and Financial Statements 2022
Malta Management Team
Standing, from left:
Chris Portelli - Chief Technology Officer
Francesca Farrugia - Chief People Officer
Roderick Camilleri - Deputy Chief Financial Officer
Henry Schmeltzer - Head of Commercial Strategy and Legal
Lorraine Bonello Ghio - Chief Administration Officer
Owen Camilleri - Chief Accounting Officer
Marija Fenech - Chief Risk Officer
Vincent Borg - Chief Financial Crime Compliance
Sitting, from left:
Keith Cauchi - Chief Information Security Officer
Caroline Grech - Head – Regulatory Compliance
Pawel Malukiewicz - Group Head – Channels & Customer Experience.
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Annual Report and Financial Statements 2022
Statement of compliance with the Principles of good corporate governance
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Annual Report and Financial Statements 2022
Introduction
MeDirect Bank (Malta) plc (the “Bank” or “MeDirect Malta”) hereby reports on the extent to which the Code of Principles of Good Corporate Governance (the “Code”) has been adopted as required by the Capital Markets Rules of the Malta Listing Authority.
The Group acknowledges that the Code does not dictate or prescribe mandatory rules but recommends principles of good practice. However, the directors strongly believe that such practices are in the best interests of MeDirect Malta, its shareholders and other stakeholders, primarily because compliance with principles of good corporate governance is expected by investors on the Malta Stock Exchange and evidences the directors’ and the Group’s commitment to a high standard of corporate governance.
The directors report that since MeDirect Malta is a company that only issues debt securities and has not issued equity securities which are traded in a multilateral trading facility, it is exempt from disclosing the information prescribed in Capital Markets Rules 5.97.1, 5.97.2, 5.97.3, 5.97.6 and 5.97.8 in this corporate governance statement. It is in the light of these factors that the directors are herein reporting on the corporate governance of MeDirect Malta.
The directors are aware that the Code highlights principles which although of general application to listed companies are adaptable by each company depending on its particular circumstances. Those circumstances are more often than not determined by two factors, namely: (i) the specific nature of the business of the company itself; and (ii) the fact that whilst certain principles in the Code are applicable to companies the equity securities of which are listed on the Stock Exchange, they are not altogether applicable, or not applicable in the same manner, to companies that fall within the definition of a listed company by virtue of having issued debt instruments which are listed on the Malta Stock Exchange. In this context, the directors believe that the Group’s current organisational set up guarantees the proper and efficient functioning of MeDirect Malta and provides adequate corporate governance safeguards.
Compliance with the Code
Principles 1 and 3: Board of Directors and composition of the Board
MeDirect Malta’s Board of Directors (the “Board”) is composed of persons with a diverse range of skills and experience acquired in senior roles with international banks and financial organisations, professional firms and governmental entities. At 31 December 2022, the MeDirect Malta Board consisted of three non-executive members and two executive members, satisfying the rule that one third of the Directors should be Non-Executive Directors. Taking into account certain factors such as the size of MeDirect Malta, the size of the Board and the balance of skills and experience represented by its members, the MeDirect Malta directors are considered to be appropriate for the requirements of MeDirect Malta’s business.
In line with MeDirect Malta’s Articles of Association, all directors remain in office. All directors are deemed to be fit and proper to direct the business of MeDirect Malta.
Principle 2: Chairman and Chief Executive Officer
The positions of MeDirect Malta’s Chairman and Chief Executive Officer are held by different individuals, avoiding concentration of authority and power in one individual and differentiating the leadership of the Board from that of the running of MeDirect Malta’s business.
MeDirect Malta’s Chairman is responsible to lead MeDirect Malta’s Board and to ensure that MeDirect Malta’s Board discussions on any issue put before it go into adequate depth, that the opinions of all the directors are taken into account, and that all MeDirect Malta Board decisions are supported by adequate and timely information. On the other hand, MeDirect Malta’s Chief Executive Officer leads the MeDirect Malta Executive Committee that is responsible to execute the strategy as approved by the Board.
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Annual Report and Financial Statements 2022
Principles 4, 5 and 8: Responsibilities of the Board and Board Meetings and Committees
The MeDirect Malta Board has the first level responsibility for executing the four basic roles of corporate governance namely: accountability, monitoring, strategy formulation and policy development.
Functioning of the Board
The MeDirect Malta Board delegates the management and day-to-day running of the Group to the Group Chief Executive Officer (“CEO”) in accordance with such policies and directions as the Board may from time to time determine with the exception of the following matters which require the approval of the Board:
• Overall business strategy;
• Key policies that may leave a material impact on the Group;
• Overall risk strategy, including the risk appetite and risk management framework;
• Corporate governance structure ensuring the proper functioning of the Board committees;
• An internal controls framework covering the whole Group, including the responsibilities and tasks of the Board, and the activities of all business lines and internal units, including internal control functions, outsourced activities and distribution channels;
• Amounts, types and distribution of both internal capital and regulatory capital to adequately cover the risks of the Group;
• Targets for liquidity management of the Group;
• Dividend policy including recommendation for the dividend pay-out;
• Individual large exposures that are 20% or more of own funds;
• Remuneration practices that should be documented in a Remuneration policy, including remuneration of the members of the Board and senior management;
• Arrangements aimed at ensuring that the individual and collective suitability assessments of the Board are carried out effectively, that the composition and succession planning of the Board are appropriate, and that the Board performs its functions effectively, including the effectiveness of the Board Committees. The Suitability assessment policy should also cover the evaluation process for key function holders;
• Arrangements at ensuring the integrity of the accounting and financial reporting systems, including financial and operational controls and compliance with the law and relevant standards; and
• A conflicts of interest policy covering conflicts on an institutional level and for staff.
The Board is also responsible for setting a framework of values and code of conduct within which the desired corporate and risk culture can evolve and thrive. Each member of the Board should reinforce these values through their own behaviour and decisions. The Board has oversight of the following:
• The process of public disclosures and communications with external stakeholders and competent authorities; and
• The overall activity, financial and risk situation of the Group, taking into account the economic environment, and the implementation of strategic decisions that have a major impact on the business.
The Board monitors, periodically reviews and addresses any weaknesses identified regarding the implementation of processes, strategies, and policies related to any of their approval and oversight responsibilities.
The Board may decide to delegate some of its responsibilities, in particular its review and monitoring responsibilities, to Board Committees, however, it still retains oversight over these activities and remains responsible for the ultimate decision-making.
Notices of the dates of scheduled meetings of MeDirect Malta’s Board together with supporting materials are circulated to the directors in advance of such meetings. Advance notice is also given of ad hoc meetings of MeDirect Malta’s Board to allow directors sufficient time to rearrange their commitments in order to be able to participate. After each MeDirect Malta Board meeting and before the next meeting, minutes that faithfully record attendance, deliberations and decisions of MeDirect Malta’s Board are prepared and circulated to all directors.
This section provides details of the members of MeDirect Malta’s Board of Directors and the members of each of the committees of MeDirect Malta’s Board.
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Annual Report and Financial Statements 2022
Board of Directors
Total board meetings that were held during the financial year was twenty. The percentage of meetings attended by the following during their directorship being:
Meetings attended (%)
Michael Bussey Independent Chairman and Non-Executive Director 100
John Zarb Independent Non-Executive Director 100
Dominic Wallace * Independent Non-Executive Director 87
Jamal Ismayilov Non-Executive Director 95
Arnaud Denis Executive Director - Chief Executive Officer 100
Radoslaw Ksiezopolski Executive Director - Chief Finance Officer 100
* As from 27 April 2022, Mr Dominic Wallace no longer served in a non-executive capacity with MeDirect Malta.
Dina Quraishi and Philip Campbell English have been nominated as Non-Executive Directors, and their appointment will become effective upon regulatory approval.
Committees of the Board
Certain responsibilities of the Board are delegated to Board committees. The Board committees play an essential role in supporting the Board in fulfilling its responsibilities and ensuring that the highest standards of corporate governance are maintained. Updates from the Chair of the Board Committees are included as a standing agenda item in all routine Board meetings.
Board Committees
A. Audit Committee
The main purpose of the Audit Committee is to oversee the Group’s financial reports and disclosures and the selection of external statutory auditor and to review and monitor the external audit’s performance. The Audit Committee also oversees and monitors the progress on the execution of the internal audit plan and tackles any matters relating to the Group’s internal control environment. The Group Audit Committee is also responsible for the following:
• review accounting policies;
• monitor the Group’s financial and other disclosures, ensuring compliance with legal and regulatory requirements;
• review the qualifications, performance, and independence of the external auditor;
• review and approve Internal Audit’s plan; and
• assess the effectiveness of Internal Audit, including the adequacy and competence of its staff.
The members of the Audit Committee are:
John Zarb Committee Chairman and Independent Non-Executive Director
Michael Bussey Member and Independent Non-Executive Chairman
Dina Quraishi, that has been nominated as Independent Non-Executive Director, and her appointment will become effective upon regulatory approval, will become a member of the Audit Committee.
In terms of Capital Markets Rules 5.117 and 5.118, John Zarb is the non-executive director whom the Group Board considers as competent in accounting and/or auditing. John Zarb retired from his role as partner at PwC at the end of 2014 after a career spanning over 40 years spent within the audit and advisory practices of the firm. He is a past president of the Malta Institute of Accountants and served for a number of years on the Accountancy Board and as Malta’s representative on the EU Accounting Regulatory Committee. John Zarb is currently the chairman of PG plc, a director and chairman of the audit committee of Tumas Investments plc and a director of Foster Clark Products Limited.
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Annual Report and Financial Statements 2022
During the year ended 31 December 2022, nine meetings of the Group Audit Committee were held. The Group Chief Internal Auditor attends the meetings as a standing invitee, unless there are exceptional circumstances. Other Chiefs or employees may be asked to join the meeting as required.
B. Nomination and Remuneration Committee
The Group’s Nomination and Remuneration Committee is considered under the Remuneration Report. The disclosures in the Remuneration Report reflect the requirements of the EU Capital Requirements Regulation (575/2013) to the extent applicable to the financial year under review.
MeDirect Malta’s Nomination and Remuneration Committee is composed of non-executive directors with no personal financial interest, being Michael Bussey (Chairman), John Zarb and Jamal Ismayilov.
C. Board Risk Committee
The primary purpose of the Board Risk Committee is to advise and support the Group Board Directors by performing in depth and detailed oversight of the Group’s risk management and compliance policies and practices, and monitoring of its actual performance against the risk appetite as approved by the Board. The Risk Fucntion and the Compliance Function both report to the Board Risk Committee.
The current members of the Risk Committee are:
John Zarb Interim Committee Chairperson and Independent Non-Executive Director
Jamal Ismayilov Member and Non-Executive Director
Dina Quraishi, that has been nominated as Independent Non-Executive Director, and her appointment will become effective upon regulatory approval, will become the Committee Chairperson of the Risk Committee.
The Group Chief Executive Officer, the MeDirect Malta Chief Risk Officer and the Group’s Heads of Regulatory Compliance and Financial Crime Compliance and the Money Laundering Reporting Officer may attend the Board Risk Committee meetings by invitation. The Group’s Chairman of the Board attends the Board Risk Committee meetings as an observer.
Amongst the primary responsibilities of the Board Risk Committee are:
• to ensure that the Group’s risk strategy and Risk Appetite Framework (including its Risk Appetite Statement and associated thresholds for escalation and related controls) are comprehensive and consistent with the Group’s business strategy, objectives, corporate culture and values;
• to assess, and at least annually report on, the effectiveness of the Group’s Risk Management Function, the Compliance Function and the Money Laundering Reporting Officer, including the adequacy of staffing levels and expertise as well as the completeness of the function’s coverage; and
• to vet and approve related party transactions in accordance with Capital Markets Rule 5.138.
The Board Risk Committee has oversight of all the Group’s risk and compliance matters, even if they arise in its main subsidiary, MeDirect Bank SA, which has its own Board Risk and Compliance Committee.
The Chairman of the Committee reports on all matters to the Group’s Board after each meeting and notifies the Board of any decisions made. The Committee makes whatever recommendations to the Group Board that it deems necessary. The Committee meets as frequently as is required to fulfil its responsibilities but shall at a minimum hold four meetings each year. In fact, throughout this financial year the Board Risk Committee met eight times.
C
Management Credit Committee (“MCC”)
A
Group
Steering Committee (“Group Steerco”)
B
Malta
Executive Committee (“Malta
ExCo”)
D
Management Risk
Committee (“MRC”)
E
Asset and Liability Committee (“ALCO”)
F
Operations Committee
G
Compliance and client acceptance committee (“CCAC”)
Principal Management Committees
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Annual Report and Financial Statements 2022
Principal Management Committees
Group Steering Committee (“Group Steerco”)
The Group Steerco provides a forum for the two executive directors of the Group and the three executive directors of MeDirect Belgium to discuss key strategic issues and initiatives affecting the Group as a whole. It draws on a wide range of experience to ensure that the strategic objectives of the Group are delivered in accordance with the Group’s Strategic Business Plans, as approved by the Boards of Directors of the Group and MeDirect Belgium. The main purpose of Group Steerco is to foster unified culture and promote a holistic approach towards discussions on strategy across the various jurisdictions in which the Group operates.
Malta Executive Committee (“Malta ExCo”)
The MeDirect Malta Board delegates the execution of the strategy to the Malta ExCo. This committee serves as a management forum in order to enhance the execution of MeDirect Malta’s business priorities and reinforce the governance of MeDirect Malta’s activities. It focuses on MeDirect Malta’s growth strategies and new initiatives and monitors the ability to respond to new regulatory developments. It meets on a monthly basis and is responsible for the formulation and implementation of Board-approved strategies and plans and for ensuring that the business is operated in accordance with such strategies and plans.
The ExCo is chaired by the Group Chief Executive Officer and includes the Group Chief Financial Officer and the MeDirect Malta Chief Risk Officer. The Group Chief Technology Officer, Group Head of Channels and Customer Experience, Head of Legal and Commercial Strategy and the Chief Internal Audit Officer (as an observer) are standing invitees of the Malta ExCo.
Management Credit Committee (“MCC”)
The Management Credit Committ of the Group is responsible for making credit decisions under its delegated authority including:
• whether to extend credit to a borrower, and under what conditions;
• the classification of individual credits for risk and performance monitoring purposes;
• whether to recommend Board-approval for credit decisions beyond its delegated authority;
• consideration of hedging strategies and whether to recommend them for Board-approval;
• review and recommending impairments and provisioning; and
• oversight over the risk performance of the portfolio.
The Group MCC covers all asset classes of the Group, including all loans and receivables portfolios, all securitised transactions, and Securities investments.
The MCC is chaired by the MeDirect Malta Chief Risk Officer who carries the casting vote and a right of veto in all Management Credit Committees. Members of the MCC include at least two other members, with representation from the respective credit teams or treasury team, and a member from the risk team.
The MCC is scheduled twice weekly and meets as required for the proper fulfilment of its duties. It also meets at least quarterly to review the Group’s respective Lending portfolios and to make decisions on internal credit ratings and recommendations on any impairments to be taken.
Management Risk Committee (“MRC”)
The MRC is a sub-committee of the Group EXCO. Its purpose is to provide executive risk management oversight and steering within the Group and its subsidiaries. The MRC oversees, monitors, assesses and drives risk management activities across the Group under the oversight of Board of Directors, with a functional reporting line to the Board Risk Committee, which monitors risk appetite, approves the risk management strategy, internal controls framework and associated policies. The MRC ensures the Group and its subsidiaries remain adequately capitalised and funded while ensuring a strong risk culture is embedded across the organisation.
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The main responsibilities of the MRC are to:
• Oversee risk assessments and internal controls across all legal entities within the Group and across the risk taxonomy of the Group, as defined in the Risk Management Framework;
• Monitor and oversee compliance with risk appetite limits and risk strategy;
• Maintain clear escalation channels for risk issues and act as the executive point of escalation for portfolio and process risk related decisions;
• Manage scenario development and stress testing as a strategic tool to inform business and risk decisions and meet regulatory requirements;
• Maintain, drive development and embed the Group’s recovery plan;
• Assess the impact of regulatory developments on the risk management framework and risk policies, recommending changes to the Board Risk Committee as necessary;
• Steer the development and implementation of risk frameworks, projects and strategic initiatives;
• Drive and oversee major deliverables such as ICAAP/ ILAAP and the Recovery Plan;
• Oversee risk related action plans, regulatory and audit findings; and
• Promote risk awareness and a strong risk culture within the organisation.
The membership of this committee consists of the MeDirect Malta Chief Risk Officer (Chair), MeDirect Belgium Chief Risk Officer (Deputy Chair), Head – Operational Risk, Manager – Risk Analytics, Senior Manager – Corporate Credit Risk and Head – Regulatory Affairs.
A standing invitation is extended for attendance as required to the Group Chief Financial Officer, Head – Financial Crime Compliance, Head – Regulatory Compliance, Head – Corporate Credit, Group Head – Channels & Customer Relationship Management, Group Chief Technology Officer, Head – Operations and Retail Network and Manager – ALM. Other staff members may be invited to attend the Committee as appropriate.
Asset and Liability Committee (“ALCO”)
The Group’s ALCO ensures that the Group has in place, and operates effectively, appropriate and robust strategies and policies to manage and optimise the Group’s asset-liability mix and oversee the Group’s capital, liquidity, funding, interest rate risk and foreign exchange (“FX”) risk position. Group ALCO cascades Group strategies down across each business line and legal entities and across risk types and products. Group ALCO oversees and, where necessary, approves Group policies and objectives for assets and liability management, capital and funding management and allocation, market risk position and hedging activity, liquidity monitoring, capital usage and efficiency, product-pricing, fund transfer pricing, dealing and trading activities according to the risk appetite statement set by the Group Board. The Group ALCO’s authority covers MDB Group Limited and MeDirect Bank (Malta) plc. Belgium ALCO’s authority covers MeDirect Bank SA (Belgium). Group ALCO provides oversight and ensures that decisions taken at Belgium ALCO are aligned to the interests of the Group. Group ALCO is a sub-committee of the Group EXCO.
The members of ALCO include MeDirect Malta’s Head – Treasury Operations (Committee Chairman), Group Chief Executive Officer, Group Chief Financial Officer, MeDirect Malta Chief Risk Officer, the MeDirect Bank SA – Chief Financial Officer and MeDirect Bank SA – Chief Risk Officer. ALCO convenes meetings monthly but also holds additional ad hoc meetings.
Operations Committee
The purpose of the Group Operations Committee is to ensure that the Group has in place, and operates effectively and appropriately robust change management, project management, outsourcing and vendor management processes and procedures as well as having oversight of the ICT strategy implementation, monitoring if the complex ICT architecture changes, budget spending related to change management, status of operational and cyber security risks, data governance initiatives and that arrangements related to Business Continuity and Disaster Recovery are in place. The Group’s Operations Committee is a sub-committee of the Executive Committee and is the decision-making body for matters relating to change management, project management, outsourcing and vendor management, under the delegated authority from the Executive Committee.
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The Committee’s terms of reference are to oversee and take any necessary decisions in the following areas:
Feasibility of the business and regulatory change requests;
• Operational feasibility of the new products and services;
• Governance of the key third party vendors on-boarding and monitoring;
• Governance of the arrangements related to budget spending on change initiatives, business continuity and disaster recovery and data retention and archiving; and
• Awareness and oversight of the arrangements related to ICT strategy and its implementation, operational risk and cyber security and organisational design of the Group from the point of view of efficiency and change sustainability.
The members of this committee include the Group Chief Technology Officer (Chairman), Group Head of Channels and Customer Experience, MeDirect Malta Chief Risk Officer, MeDirect Belgium Chief Risk Officer, Group Chief Financial Officer, MeDirect Belgium Chief Financial Officer, Head of Commercial Strategy and Legal, MeDirect Belgium Head of Dutch Retail Market and the Supply and Procurement Senior Manager.
Compliance and client acceptance committee (“CCAC”)
The purpose of the Compliance and Client Acceptance Committee is to (i) evaluate from a reputational and financial crime compliance perspective and either accept or reject new clients proposed by business lines, (ii) review periodically existing clients, from a reputational and financial crime compliance perspective (iii) accept or reject the termination of an existing relationship with Corporate Banking and Retail Clients from a reputational and financial crime compliance perspective and (iv) oversee and, if appropriate, recommend approval of financial crime compliance-related policies, action plans, risk assessments and methodologies. The CCAC operates within the authority delegated from the Board and is comprised of representatives of key departments within the Group.
The permanent voting members of this committee are Head – Legal (Chair), Head – Financial Crime Compliance (Deputy Chair), Senior Manager – Retail and Wealth Operations and Senior Manager– Operational.
Code Provision 4.2.7 - Succession planning
MeDirect Malta has established a list of Key Personnel Substitutes to cover instances in which executive directors, key personnel and managers are temporarily incapacitated or otherwise unable to complete their duties for a significant period of time.
If such individuals are permanently unable to re-assume their duties, MeDirect Malta’s management, in consultation with the Board, will designate permanent successors, either from MeDirect Malta’s existing management team or, if appropriate, by selecting an outside candidate.
As part of succession planning and talent management, MeDirect Malta’s Board and the Chief Executive Officer ensure that MeDirect Malta implements appropriate schemes to recruit, retain and motivate high quality executive officers. They also encourage members of management to move to higher ranks, seek to maintain high morale amongst MeDirect Malta’s personnel and identify high performing employees with the potential to take on more responsibilities.
The succession plan ensures that MeDirect Malta is constantly empowering and developing existing employees, guaranteeing that there is a pool of talent ready and waiting for advancement and promotion into ever more challenging roles when they arise. This requires developing employees at every level of MeDirect Malta, and not just at the top.
Principle 6: Information and professional development
In addition to the responsibilities of MeDirect Malta’s Board previously listed, MeDirect Malta’s Board actively participates in the appointment of senior management. Board members receive regular updates on MeDirect Malta’s strategic, operational, corporate governance, compliance, risk management and financial plans and objectives.
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MeDirect Malta’s Board appoints the Chief Executive Officer of MeDirect Malta taking into account the view of the ultimate controlling party. The Board’s training programmes have the aim of improving the Board’s awareness of risk, regulation, and compliance developments in the financial services sector, with topics to be covered ranging from Environmental, Social and Governance (“ESG”) and sustainable finance to information technology and cyber security.
MeDirect Malta Directors are given opportunities to update and develop their skills and knowledge, through briefings by senior executives and externally-run seminars throughout their directorship. Moreover, Directors have access to independent professional advice, at MeDirect Malta’s expense.
MeDirect Malta Directors also have access to the advice and services of the Company Secretary who is responsible for adherence to MeDirect Malta’s Board procedures as well as effective information flows within the Board, its Committees and with senior management.
Principle 7: Evaluation of the Board’s performance
Periodically, MeDirect Malta’s Board carries out an evaluation procedure whereby Board members are requested to complete a questionnaire on the Board’s performance and that of its committees. The evaluation is co-ordinated by the Board’s Chairman, an independent non-executive director, and all directors participate in the process. Feedback from the evaluation is presented to the Board for analysis. An internal evaluation took place for the financial year ended 31 December 2022.
Principles 9 and 10: Relations with shareholders and with the market and institutional shareholders
MeDirect Malta maintains on-going communication with its shareholders and the market on its strategy and performance in order to enhance trust and confidence in MeDirect Malta. During the year under review MeDirect Malta issued various company announcements and media releases to explain ongoing corporate developments and material events and transactions which have taken place and their impact on its financial position. Through public announcements, MeDirect Malta’s website, financial reports and interaction with the general media in Malta, MeDirect Malta provides the market with regular, timely, accurate, comprehensive and comparable information in sufficient detail to enable investors to make informed investment decisions in respect of MeDirect Malta’s listed securities.
MeDirect Malta’s ultimate controlling party is represented on its Board of Directors and actively monitors its investment in MeDirect Malta.
The Chairmen of MeDirect Malta’s Audit, Nomination and Remuneration and Risk Committees are available to answer questions at the Annual General Meeting. The conduct of the meeting is conducive to valid discussion and appropriate decision making. In terms of MeDirect Malta’s Articles of Association, the Directors shall, on the request of members of the company holding not less than one-tenth of the paid-up share capital, proceed duly to convene an Extraordinary General Meeting of MeDirect Malta.
Principle 11: Conflicts of interest
MeDirect Malta’s Articles of Association provide that any director who is in any way, whether directly or indirectly, interested in a transaction or proposed transaction with MeDirect Malta must (i) declare to the other directors the nature of such interest, (ii) not participate in or be present for any discussion relative to any such transaction or proposed transaction, and (iii) not vote in respect of any such transaction or proposed transaction.
On joining the MeDirect Malta Board and regularly thereafter, directors are informed and reminded of their obligations in respect of dealing in MeDirect Malta’s securities within the parameters of law and the Capital Markets Rules.
Principle 12: Corporate social responsibility
During the financial year ended 31 December 2022, MeDirect Malta continued to support local talent in sports and culture, as well as charitable institutions, causes and events. The Bank’s commitment to these initiatives is established through the various sponsorships and donation agreements that support a wide variety of community organisations.
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MeDirect Malta has always supported local talent, including music and performing arts and will proudly continue to promote and support this scene. In line with this commitment, the Group has once again showed its’ support towards the Malta Philharmonic Orchestra, where, with its donation, it helps support the orchestra, its events and most importantly its musicians. During this year, MeDirect has also supported ŻfinMalta National Dance Company who provide a space for artists to develop and take risks, contributing to an open and expansive dance ecology in Malta and internationally, providing opportunities for aspiring, emerging and established dance professionals to realise their potential. Furthermore, MeDirect Malta is also supporting Socjeta Filarmonika La Stella A. D. 1863, with a donation to assist the NGO to continue producing high quality theatre events.
This commitment is also extended when marketing agreements are being considered and in fact, MeDirect Malta was one of the sponsors of the first edition of The Voice Kids, as an endorsement to the increasing popularity of local talent and to the importance which music plays in people’s lives. Moreover, MeDirect Malta was also one of the sponsors of the second edition of Malta’s Got Talent, which is a platform that showcases several artistic disciplines in addition to singing.
MeDirect Malta’s patronage of the sporting community was strengthened this year. MeDirect is an active supporter of the Otters Water Polo Club/Aquatic Club which celebrated its 50-year anniversary this year. The club was founded back in 1971 and is to date the only surviving water polo club in Gozo. This year, MeDirect Malta also started supporting Island Car Club, Malta’s oldest car racing club having been founded 63 years ago. Island Car Club is the organiser of the National hill climb and sprint championship in Malta.
MeDirect Malta also kept its yearly appointment and presented a donation to the President’s Community Chest Fund Campaign - L-Istrina on Boxing Day, during a nation-wide charity campaign.
MeDirect Malta was also a proud supporter of Project Maleth II, the second mission under space bioscience experiment Project Maleth which was launched in 2021 to investigate the effects of spaceflight and microgravity on diabetic foot ulcer skin tissue samples together with the microbiome. The Maleth Program is the first Maltese space bioscience project led by Professor Joseph Borg from the Faculty of Health Sciences at the University of Malta. Maleth II was launched on 15 July 2022
Amongst other organisations that MeDirect Malta helped during its financial year, one should mention The National Blood Transfusion Unit to whom MeDirect donated freebies to be handed out to blood donors whilst providing a new board for the main reception of the National Blood Transfusion Unit. This year MeDirect once again supported Children’s Dreams, a project with the sole mission of making Christmas wishes come true for children coming from families facing social and financial difficulty, with the Bank fulfilling five of these wishes.
MeDirect Malta actively supports charity initiatives, focussing on organisations serving the Maltese community. Employees are also actively engaged in such charitable activities via donations deducted from their payroll, fund-raising efforts and voluntary work, such as beach clean-ups and manning calls during l-Istrina. Some of the organisations that benefitted from these activities during 2022 were Hospice Malta, Puttinu Cares, Smiling with Jerome, Island Sanctuary, CLAWS Malta, The Marigold Foundation and Foodbank Lifeline Foundation.
MeDirect was also one of the first banks to participate in the New Hope guarantee scheme in collaboration with the Maltese Housing Authority. This scheme, is giving new hope to those who are unable to obtain a life insurance policy due to past or current illness or disability and therefore have not been able to purchase a home.
During the financial year ended 31 December 2022, MeDirect Malta continued to support local talent in sports and culture, as well as charitable institutions, causes and events.
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Other disclosures
There were no material contracts to which MeDirect Malta, or its subsidiary were a party, and in which any one of MeDirect Malta’s Directors was directly or indirectly interested.
Management’s internal controls over financial reporting
MeDirect Malta’s Board is responsible for ensuring that MeDirect Malta’s senior management develops and implements a sound system of internal controls 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 only provide reasonable and not absolute assurance against material misstatement or loss. MeDirect Malta operates a system of internal control that provides reasonable assurance of effective and efficient operations covering all controls, including financial and operational controls and compliance with laws and regulations. Processes are in place for identifying, evaluating and managing the significant risks facing MeDirect Malta.
The management of MeDirect Malta is responsible for instituting and preserving sufficient internal control over financial reporting. Internal control over financial reporting is a process designed under the supervision of the Group Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
Internal control over financial reporting includes policies and procedures that pertain:
• to maintaining records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;
• to providing reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS as adopted by the EU;
• to ensuring that receipts and expenditures are made only in accordance with authorisations of management and the respective directors; and
• to providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements.
Signed by Michael Bussey (Chairman) and Arnaud Denis (Chief Executive Officer) on 28 March 2023.
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Remuneration
report
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Annual Report and Financial Statements 2022
Remuneration governance
The primary purpose of the Nomination and Remuneration Committee of the Group (that also covers MeDirect Malta) and the Nomination and Remuneration Committee of MeDirect Belgium (“NRCs”) is to review remuneration levels in the Group and to consider whether to approve performance-related and other variable bonus awards that may be delivered in cash or share linked instruments.
The NRCs are charged with aligning the Group’s remuneration policy, approved by the Group board of directors, and in particular performance-related elements of remuneration, with the Group’s business strategy and risk tolerance, objectives, values and long-term interests. The key objectives of the NRCs in this regard are the following:
• annual review of the proposals put forward by management relating to the principles of the remuneration policy and verification with management that they are effectively implemented. In particular, monitoring of the budgets allocated to the fixed salary increases for the forthcoming year and the variable remuneration pools for the previous financial year; and
• annual review of the individual remuneration of senior management and staff members who are employed in control functions, as well as that of staff with total remuneration above a threshold fixed by the NRCs.
One of the NRCs primary functions is to ensure that the Group is able to attract and retain suitable employees at all levels at an acceptable cost. It may request market-related information from time to time, to verify the recommendations made by management. On an annual basis, the NRCs review the budgets allocated to the fixed salary increases for the forthcoming year and the variable remuneration pools for the previous financial year and review the individual remuneration of senior management and staff members who are employed in control functions such as Risk and Compliance, as well as that of staff with total remuneration above a threshold fixed by the relative NRC.
Membership and meetings
The members of the Group’s NRC are:
Michael Bussey Committee Chairman/Independent Non-Executive Board Chairman
John Zarb Independent Non-Executive Director
Jamal Ismayilov Non-Executive Director and Shareholder representative
The Group’s Chief Administration Officer acts as a secretary to the Committee, whilst the Chief People Officer was invited as an attendee and to minute the meetings throughout the year as was the Chief Executive Officer.
During the year ended 31 December 2022, the Group’s NRC met on eight occasions. These meetings were attended by all members of the Group’s NRC.
Remuneration policy statement
The Remuneration Policy is owned by the Chairman of the Group’s NRC and is approved by the Group’s Board of Directors. The policy was developed in conjunction with the Group’s principal shareholder and the NRCs. The policy is reviewed on an annual basis by the NRCs or when significant changes occur in related directives, guidance, best practice and technical standards. The policy is also reviewed on an annual basis by the Internal Audit function to ensure that it is in compliance with all applicable legal and regulatory requirements. The NRCs may also require review of this policy by external advisors to the extent it is deemed necessary or appropriate.
The remuneration of staff in control functions should allow the Group to employ qualified and experience personnel in those functions and should be predominantly fixed so as to reflect the nature of their responsibilities.
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The purpose of the Remuneration Policy is to set out the overall principles that MeDirect Malta and MeDirect Belgium, whether direct or indirect, must follow when determining the remuneration and compensation of its management and staff members. This policy establishes an effective framework for determining role descriptions, performance measurement, risk adjustment of compensation and the linkages to reward. The Group’s Board and the MeDirect Belgium Board are responsible to ensure that the remuneration practices are based on sound governance processes that take the Group’s risk strategy and profile into account.
The Boards, directly and through the NRCs, carry out effective monitoring and evaluation of adherence to the remuneration policy and of the Group’s remuneration system on an on-going basis. The NRCs and the Boards monitor the on-going performance by executive directors and senior management and determine the design and implementation of an effective remuneration system. They also ensure that the remuneration policies and practices are consistent with a prudent, forward-looking approach, aimed at maintaining a sound capital base, and that all awards of variable remuneration to Material Risk Takers are subject to malus and clawback arrangements and are otherwise consistent with the Remuneration Policy.
Material Risk Takers, that consist of members of staff whose actions have a material impact on the risk profile of the Group, are identified on the basis of the qualitative and quantitative criteria set out in the Commission Delegated Regulation (EU) 2021/923. Material Risk Takers are also identified on the basis of additional criteria developed internally. This category would include a member of the Board of Directors, a member of senior management and the Heads and key personnel active in the independent control functions such as the internal audit, compliance and risk management functions of the Group and subsidiaries.
Material Risk Takers would also include:
• Staff members authorised to approve or veto the introduction of new products;
• Staff members authorised to take, approve or veto discussions on material credit risk exposures or who are a member of a committee which has authority to take decisions on material credit risk exposures; and
• Staff members that have been awarded total remuneration in the previous financial year equal to or in excess of other material risk takers (excluding non-executive, support function and control function roles).
The list of Material Risk Takers is reviewed and reconsidered by the Group’s NRC on at least an annual basis.
Remuneration consists of base salary and, where applicable, performance based or other variable bonus awards. Performance-related compensation is determined both on (i) a Group wide basis, and (ii) an individual employee basis.
Compliance with the Group’s rules and requirements and involvement on a continuous basis in risk management, are taken into account when determining performance-based remuneration for all employees. Other non-financial factors are considered such as skills acquired, personal development, commitment to the Group’s business strategies and policies and contribution to the performance of the team. Performance is measured in relation to non-financial and financial goals and, where appropriate, failure to perform in non-financial areas of responsibility outweighs success in profit generation in determining compensation. The remuneration of staff in control functions should allow the Group to employ qualified and experience personnel in those functions and should be predominantly fixed so as to reflect the nature of their responsibilities.
The Group Risk team provides advice in respect of the definition of suitable risk-adjusted performance measures, as well as in assessing how the variable remuneration structure affects the risk profile and culture of the Group. The Risk team provides input into the process for determining bonus pools and the allocations of variable remuneration awards to ensure that all relevant factors are considered by the relevant decision-making body. The Risk team also validates and assesses risk adjustment data, and a member of the Risk Committee provides input to the NRCs on this matter.
The Group Compliance function analyses how the remuneration policy affects the Group’s compliance with legislation in all jurisdictions in which the Group operates, regulations and internal policies, and conducts an annual review of the implementation of the Remuneration Policy. The Compliance function would report all identified compliance risks and issues of non-compliance, and these findings are taken into account during the approval and review procedures and oversight of the Remuneration Policy.
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The Internal Audit team carries out an annual independent review of the design, implementation and effects of the Remuneration Policy on the Group’s risk profiles, and the way these effects are managed.
The Group’s Remuneration Policy includes malus and clawback provisions applicable to all material risk takers and key personnel in control functions, even if variable compensation is remunerated in cash. Clawback, that implies that employees would be required to pay back all or some of an amount they have already received, will apply during the period of five years from the date of award or until the end of the applicable retention period, as applicable. The malus provisions refer to the downward adjustment of incentive awards before they become payable or before they vest and may be applied in respect of deferred elements of variable remuneration at any time during the applicable deferral period.
It is possible for the Group to apply malus and clawback provisions to variable remuneration such as performance related bonuses or other variable bonuses if the respective employees were responsible for circumstances that resulted in significant losses to the Group or in situations where the most appropriate standards of fitness and propriety were not met during the period for which the performance or retention bonus was awarded.
Variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial and regulatory capital situation of the Group as a whole. Without prejudice to the general principles of national contract and labour law, the total variable remuneration may be contracted where subdued or negative financial performance of the Group occurs, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus or clawback arrangements.
Conflicts of interests with regard to the implementation of this Remuneration Policy and the award of remuneration in accordance with the provisions of this policy are identified and appropriately mitigated.
In 2021 the Group revised the remuneration policy in line with updates emanating from CRD V and engaged an independent firm to carry out a review in order to assess and report on the adequacy and effective implementation of the Group Remuneration Policy across the group entities. This review focused on the following key areas: policy documentation, mapping of the Group Remuneration Policy to relevant directives, regulations and guidelines, assessing the governance setup around remuneration processes, performing a walkthrough of the year end process, review of documentation pertaining to the process in determining the Material Risk Takers and sample testing of payroll records. Whilst in 2022 it was updated to reflect ESMA guidance on MIFID II.
The Group’s reward strategy
The quality and long term-commitment of all employees is fundamental to the Group’s success. The Group therefore aims to attract, retain and motivate the very best people who are committed to maintaining a long-term career with the Group and who will perform their role in the long-term interest of the shareholders. The Group’s reward package may comprise fixed remuneration and variable remuneration.
Fixed remuneration
The fixed remuneration reflects the individual’s role, experience and responsibility. It comprises the base salary and in some cases a pay allowance of a fixed nature such as extra hours or public holiday allowances as detailed in their employment conditions. Base salaries are expected to comprise the majority of the Group’s overall compensation cost, are benchmarked on an annual basis, and are paid by direct credit to an employee’s personal account on a monthly basis. Allowances are also paid by direct credit on a monthly basis.
The allocations of individual variable remuneration awards are correlated to the staff member’s formalised annual individual appraisal, that takes into consideration quantitative and qualitative objectives known to the employee, as well as risk management considerations.
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Fixed remuneration also includes benefits (of a fixed nature as these are pre-determined). Benefits take account of market practice and include the provision of medical insurance and life assurance to all employees across the Group. In Belgium and UK the Group provides defined contribution pension schemes whereby the Group’s fixed contribution is set for each employee on the basis of the relevant salary and the payment of such contributions would stop on termination of employment by the employee.
The employees of MeDirect Malta are also entitled to the following benefits:
Staff savings account
All of the Group’s Malta-based employees are entitled to make equal monthly deposits of a specified amount direct from after tax payroll into an employee savings account. At the end of the financial year, MeDirect Malta will pay a beneficial interest rate on the accumulated savings remaining in the account in December. On such date, amounts remaining in such savings accounts may be withdrawn and the terms of such accounts may be reset.
Home loan subsidy
MeDirect Malta continues to grant its employees based in Malta an annual subsidy in respect of home loans up to a specific amount, that such employees have acquired from MeDirect Malta or from third party banks. This latter third party subsidy ceased as from 2023, since going forward all staff home loans will be offered in-house at a competitive rate to staff.
Variable remuneration
Variable remuneration may consist of performance bonuses and other variable bonuses awarded in cash or share linked instruments and guaranteed sign on payments and severance payments awarded in cash. In accordance with Article 92(1) (q) of directive 2013/36/EU (“CRD”), variable remuneration is not paid through vehicles or methods that facilitate the non-compliance with this Directive or Regulation (EU) No 575/2013. In Belgium a number of employees opted to be paid the performance bonus in warrants or options rather than in cash.
Performance bonuses represent additional remuneration payable to employees as a reward for achieving specific goals or hitting predetermined targets, but such variable remuneration is discretionary as the Group does not set an expectation to its employees that a bonus will be paid if certain goals are met and the amount of the bonus is not determined in advance. Besides the annual performance bonus the Group may also award ad hoc bonuses that are linked to pre set KPIs in relation to specific projects.
Retention bonus is variable remuneration awarded on the condition that staff stays at the Group or subsidiary company of the Group for a predefined period of time. Retention bonuses have been awarded by the Group in the financial year ended 31 December 2022. This is targeted to ensure best performance, by securing the retention of critical employees who are key to success of the realisation of the strategic plan of the Group.
Any consideration given to granting retention bonuses, guaranteed remuneration and/or severance payments is made in light of the applicable regulatory requirements in order to ensure that such remuneration is only awarded where to do so is compliant with the applicable regulatory requirements and any such remuneration is awarded in such form as is determined by the NRCs, taking account of applicable regulatory requirements (including in respect of deferral, payment in the form of a share-linked instruments and the application of malus and clawback).
(a) Determination of the performance bonus variable remuneration pools
A performance bonus pool is established for the Group as a whole and is calculated at Group level based on the success of the Group in meeting its business objectives. The variable remuneration pool shall not be directly or solely linked to the amount of profits or revenues generated. Assessment of performance shall be made in the context of a multi-year analysis, taking into account the business cycle and the Group’s business risks. In determining the variable remuneration pool, the Group applies a prudent, forward-looking approach,
A bonus pool is allocated per department based on the bonus pool of the group. A percentage of fixed salary is allocated to each performance rating scale in each jurisdiction.
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consistent with maintaining a sound capital base. The Group expects that in aggregate variable remuneration shall not have a significant impact on its capital base and is immaterial in relation to its overall capital and operating income.
The performance bonus variable remuneration pool is set and is calculated on the basis of the following qualitative and quantitative factors:
• Financial results of the Group, the relevant subsidiary and/or the relevant business line after taking into account the cost of risk, capital and liquidity, with the aim of ensuring that the total amount of variable remuneration does not undermine the Group’s or the subsidiary’s capacity to meet its objectives in terms of capital requirements; and
• Qualitative factors such as market practices, conditions under which activities are carried out and risk management.
The pool will be further adjusted to the extent required to ensure that all relevant identified current and future risks are reflected or in light of the Group’s capital position. Such an adjustment may include the NRCs reducing pools of variable remuneration in the event of a breach (or unacceptable risk of a breach) of any key regulatory ratios and/or reducing or not paying variable remuneration to any employee (whether or not a Material Risk Taker) who the NRC determines has caused or contributed to any such breach (or risk of a breach).
The variable remuneration pool is split between entities by taking into consideration the pools allocated in the previous financial period, but also taking into consideration other factors such as change in composition of staff and senior management and market benchmarks.
The variable remuneration pool is approved by the NRC of MeDirect Malta and MeDirect Belgium.
(b) Measures of performance as basis for awarding of bonuses
All personnel are compensated out of the variable remuneration bonus pool based on their contribution to the achievement of the Group’s business objectives as well as personal objectives. The allocations of individual variable remuneration awards are correlated to the staff member’s formalised annual individual appraisal, that takes into consideration quantitative and qualitative objectives known to the employee, as well as risk management and compliance considerations. Individuals are compensated out of that bonus pool based on their contribution to the achievement of the Group’s and/or the subsidiary’s business objectives. Such individual criteria will also depend on the role of the individual in the Group. For example, portfolio managers are judged on factors such as risk management, overall continuing performance of the portfolio, contribution to development of the Group’s systems, while members of the Treasury team are assessed on effectiveness in managing liquidity. The amount of variable remuneration will vary depending on the performance of the staff member, as well as of the staff member’s business unit and the institution as a whole.
The appraisal process for all employees is a continuous process which involves the following stages:
• Objective setting at the beginning of the year
Goals are set that revolve around the development of the employee allowing for progression. Objectives may be technical (related to area of expertise and day-to-day role) or behavioural (related to a desired change in personal development).
• End of year appraisal
As above employees would do a self-review followed with a manager review together with a one-to-one meeting to discuss overall performance and rating. The employee rating is based on a 5-point rating scale.
When appraising the performance in 2022, 360 appraisals will be introduced for all senior management.
The methods used for determining the variable remuneration of control functions are designed to encourage staff not to compromise their objectivity and independence.
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(c) Individual allocation of the variable remuneration
All staff (including material risk takers)
The Chief People Officer initiates the process of gathering recommendations for salary revisions, bonuses and promotions from Heads of departments. A bonus pool is allocated per department based on the bonus pool of the group. A percentage of fixed salary is allocated to each performance rating scale in each jurisdiction.
All staff are eligible for performance related variable remuneration delivered in cash, though this is discretionary and depends on both individual and collective performance. It takes into account quantitative and qualitative criteria and is not directly or solely linked to the amount of profits or revenues generated. Assessment of performance is made taking into account the business cycle and the Group’s business risks. The criteria used to set variable remuneration pools, as well as their allocation, takes into account all risks, both qualitative and quantitative.
The amount payable to any individual under the annual variable remuneration plan is based on the following:
• The Group’s financial performance in particular the profit before tax, the cost to income ratio and maintenance of all regulatory ratios across the Group within established risk appetite levels;
• Customer satisfaction (if applicable) based on the subjective assessment of the NRC;
• Conduct risk based on the Risk Committee’s recommendation to the NRC; and
• Personal performance against personal objectives.
In exceptional circumstances, the allocation of variable remuneration may differ from the pre-determined criteria set forth in the End of Year procedure, on a case-by-case basis. Furthermore, depending on the performance of the employee and the financial performance of the Group, variable remuneration can also be reduced to zero. Variable remuneration may be significantly reduced or nullified in the case of any kind of unethical or non-compliant behaviour.
The Chief Administration Officer together with the Chief People Officer ensure that recommendations for salary revisions and bonuses do not exceed the allocated pool. The Chief Risk Officer of MeDirect Malta and the Chief Risk Officer of MeDirect Belgium confirm that the bonus allocation is consistent with sound and effective risk management practices and does not impact the capital adequacy of both entities. Recommendations are then discussed with the Group Chief Executive Officer and the Chief Executive Officer of MeDirect Belgium for approval before presenting to the Nominations and Remuneration Committee of the relevant entity.
Internal control functions
Whilst the general bonus pool of the Group is based on the Group’s financial results, compensation of control functions is not directly tied to the results of any business unit but should provide incentives for such staff to deliver the best performance in their role. Thus, control functions are judged on success in developing and implementing appropriate policies, developing effective risk management controls and procedures, monitoring risk and building control systems. The Group’s remuneration practices shall ensure that no material conflicts of interest arise in respect or remuneration for staff in the Group’s control functions.
The methods used for determining the variable remuneration of control functions are designed to encourage staff not to compromise their objectivity and independence. Where control function staff receive variable remuneration, it is appraised and the variable part of remuneration determined separately from the business units they control, including the performance which results from business decisions where the control function is involved. The criteria used for assessing performance and risk is based exclusively on internal control objectives.
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Annual Report and Financial Statements 2022
Other matters on variable remuneration
The ratio between the variable components of remuneration and the fixed components is limited to 100% (200% with shareholders’ approval subject to certain conditions being met) for variable remuneration paid to MeDirect Malta staff and 50% for variable remuneration paid to MeDirect Belgium staff.
Where variable remuneration is more than €50,000 both for MeDirect Malta employees and MeDirect Belgium employees, or for lower values which are more than 100% of the fixed remuneration, a minimum of 50% of the variable remuneration cannot be delivered in the form of cash. These are the only deviations for staff in Belgium compared to staff in other jurisdictions. There were no instances throughout the financial year when the 100% ratio for MeDirect Malta staff and 50% for the MeDirect Belgium Staff was exceeded.
Variable remuneration may be paid in the form of the following: 1) upfront cash; 2) an upfront share-linked instrument award and/or 3) a deferred award representing an award granted in respect of cash or share-linked instruments subject to deferral. Such award of share-linked instruments for the purpose of Article 94 (1) (i) of CRD entitles the material risk taker to a cash payment based on the market value of a share of the Group but does not entitle the employee to shares or any interest in or right over such shares. In the case of upfront share-linked awards and deferred share-linked award linked to a retention bonus, these awards would be subject to a retention period as determined by the NRCs, of not less than 12 months but not greater than 5 years. Any tranche of a deferred award, in relation to a retention bonus, which has not yet been paid will lapse if the material risk taker leaves employment before the end of the deferral period, unless the material risk taker leaves due to certain specific reasons as listed in the bonus plan rules approved by the Group’s NRC. The share linked instruments awarded by the Group so far were to current and previous executive directors.
Variable remuneration awarded in cash is normally paid out in the first quarter of the subsequent financial year as determined by the NRCs. Variable remuneration paid to Material Risk Takers is subject to malus and clawback provisions.
The clawback provisions state that the bonus may have to be repaid to the Group in certain circumstances that would have led to significant losses to the Group or in case of failure to meet appropriate standards of fitness and propriety, including cases of fraud, dishonesty or gross negligence. Clawback provisions may be applied ex post to variable remuneration paid in cash and share linked instruments.
Malus may be applied at the discretion of the relevant NRC, and examples of the circumstances in which such discretion to impose malus may be exercised are included in the Group’s Remuneration Policy. Malus provisions may be applied ex ante to share linked instruments.
Subject to regulatory de minimis limits, for Material Risk Takers deferral will apply to at least 40% of annual variable remuneration (depending on the quantum of each individual’s total remuneration, and being at least 60% where annual variable remuneration outcomes are significant according to the NRC, as determined in accordance with applicable regulations), including both cash and instrument payments. The deferral period would be of five years and no discount rate is applied by the Group to variable remuneration.
Signed by Michael Bussey (Chairman) and Arnaud Denis (Chief Executive Officer) on 28 March 2023.
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Annual Report and Financial Statements 2022
46
Annual Report and Financial Statements 2022
Financial Statements
47
Annual Report and Financial Statements 2022
Statements of financial position
Group Bank
31 December 31 December 31 December 31 December 1 January
2022 2021 2022 2021 2021
Notes €000 €000 €000 €000 €000
Restated Restated
ASSETS
Balances with central banks and cash 4
Derivative financial instruments 5
Loans and advances to financial institutions 6
Loans and advances to customers 7
Investments
- Securities portfolio 8
- Securitisation portfolio 8
- Subsidiaries 9 - - 184,599 189,519 211,975
Property and equipment 10
Intangible assets 11
Non-current assets classified held for sale 12
Current tax assets
Deferred tax assets 13
Prepayments and accrued income 14
Other assets 15
Total assets
EQUITY
Called up issued share capital 16
Share premium 16
Shareholders’ contributions 16
Reserve for general banking risks 16
Other reserves 16
Accumulated losses 16 (
Total equity
LIABILITIES
Derivative financial instruments 5
Amounts owed to financial institutions 17
Amounts owed to customers 18
Debt securities in issue 19
Subordinated liabilities 20
Current tax liabilities
Deferred tax liabilities 13
Provisions for liabilities and other charges 21
Accruals and deferred income 22
Other liabilities 23
Total liabilities
Total equity and liabilities
Memorandum items
Commitments to purchase financial assets 7 - 11,000 - 1,000 22,000
Commitments to extend credit, guarantees
and other commitments 32 -33 342,233 377,572 165,200 285,508 394,803
The notes on pages 53 to 238 are an integral part of these financial statements. The financial statements on pages 46 to 238 were approved and authorised for issue by the Board of Directors on 28 March 2023. The financial statements were signed on behalf of the Board of Directors by Michael Bussey (Chairman) and Arnaud Denis (Chief Executive Officer) as per the Directors’ Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.
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Annual Report and Financial Statements 2022
Statements of comprehensive income
Group Bank
2022 2021 2022 2021
Notes €000 €000 €000 €000
Restated
Interest income
Interest expense (
Net interest income 24
Fee and commission income
Fee and commission expense (
Net fee and commission income 25
Net trading income 26
Net gain from financial instruments at fair value through profit or loss
Share of results of subsidiary undertakings 9 - - (5,592) (21,072)
Other operating income
– Realised gains/(losses) on disposal of loans and advances
– Other income
Total operating income
Personnel expenses 27 (
Depreciation and amortisation 10-11 (
Other administrative expenses 28 (
Total operating expenses (
Net operating profit/(loss) before changes in expected credit losses
Change in expected credit losses and other credit impairment charges 29
Profit/(loss) before tax
Tax expense 30 (
Profit/(loss) for the year
- Attributable to equity holders of the parent
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value, before tax (
- Reversal due to reclassification to amortised cost 16
Income tax relating to these items (
Items that will not be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value
Share of other comprehensive income of subsidiary undertaking
Other comprehensive income, net of tax
Total comprehensive income, net of tax
Earnings per Share (in cents)
The notes on pages 53 to 238 are an integral part of these financial statements
49
Annual Report and Financial Statements 2022
Statements of changes in equity
€000 €000 €000 €000 €000 €000 €000
Group
Balance at 1 January 2021
Total comprehensive income
Loss for the year - - - - - (
Other comprehensive income, net of tax:
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value through
other comprehensive income:
- Net change in fair value arising during the year, net of tax
Items that will not be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value through
other comprehensive income:
- Net change in fair value arising during the year
- Reclassification of gain on disposal of investments to retained earnings
Total comprehensive income, net of tax
Transfer to Reserve for General Banking Risks
Transaction with owners
Acquisition of subisidiary (note 9)
Balance at 31 December 2021
Balance at 1 January 2022
Total comprehensive income
Profit for the year - - - - -
Other comprehensive income, net of tax:
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value arising during the year, net of tax
- Reclassification adjustments - net amounts reclassified to profit
or loss, net of tax
Total comprehensive income, net of tax
Balance at 31 December 2022
The notes on pages 53 to 238 are an integral part of these financial statements
Share capital
Share premium
Shareholders’
contributions
Reserve for general
banking risks
Other reserves
Accumulated losses
Total
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Annual Report and Financial Statements 2022
€000 €000 €000 €000 €000 €000 €000
Bank
Balance at 1 January 2021 - as previously stated 117,450 13,464 133,196 3,160 3,241 (5,245) 265,266
Impact of changes in accounting policy
Accounting for investment in subsidiary using the equity method - - - - 1,425 (14,451) (13,026)
Balance at 1 January 2021 – restated 117,450 13,464 133,196 3,160 4,666 (19,696) 252,240
Total comprehensive income
Loss for the year - - - - - (15,865) (15,865)
Other comprehensive income, net of tax:
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value arising during the year, net of tax - - - - (1,013) - (1,013)
Items that will not be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value arising during the year - - - - 1,991 - 1,991
- Reclassification of gain on disposal of investments to
retained earnings - - - - (1,323) 1,323 -
- - - - 668 1,323 1,991
Share of other comprehensive income of subsidiary undertaking - - - - (1,873) - (1,873)
Total comprehensive income, net of tax - - - - (2,218) (14,542) (16,760)
Realisation of previously recognised fair value reserve
upon merger of subsidiary with Bank (see note 16) - - - (276) 276 -
Transfer to Reserve for General Banking Risks - - - 66 - (66) -
Balance at 31 December 2021 117,450 13,464 133,196 3,226 2,172 (34,028) 235,480
Statements of changes in equity (continued)
Share capital
Share premium
Shareholders’
contributions
Reserve for general
banking risks
Other reserves
Accumulated losses
Total
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Annual Report and Financial Statements 2022
€000 €000 €000 €000 €000 €000 €000
Bank
Balance at 1 January 2022 - as previously stated 117,450 13,464 133,196 3,226 2,620 1,495 271,451
Impact of changes in accounting policy
Accounting for investment in subsidiary using the equity method - - - - (448) (35,523) (35,971)
Balance at 1 January 2022 117,450 13,464 133,196 3,226 2,172 (34,028) 235,480
Total comprehensive income
Profit for the year - - - - - 8,471 8,471
Other comprehensive income, net of tax:
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income:
- Net change in fair value arising during the year, net of tax - - - - (5,474) - (5,474)
- Reclassification adjustments - net amounts reclassified
to profit or loss, net of tax - - - - 5,769 - 5,769
- - - - 295 - 295
Share of other comprehensive income of subsidiary undertaking - - - - 672 - 672
Total comprehensive income, net of tax - - - - 967 8,471 9,438
Realisation of previously recognised fair value reserve upon
merger of subsidiary with Bank (see note 16) - - - - (180) 180 -
Balance at 31 December 2022 117,450 13,464 133,196 3,226 2,959 (25,377) 244,918
The notes on pages 53 to 238 are an integral part of these financial statements
Statements of changes in equity (continued)
Share capital
Share premium
Shareholders’
contributions
Reserve for general
banking risks
Other reserves
Accumulated losses
Total
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Annual Report and Financial Statements 2022
Statements of cashflows
Group Bank
2022 2021 2022 2021
Notes €000 €000 €000 €000
Cash flows from operating activities
Interest and commission receipts
Interest and commission payments (
Payments to employees and suppliers (
Operating cash flows before changes in operating assets/liabilities
(Increase)/decrease in operating assets:
- Reserve deposit with central banks (
- Loans and advances to financial institutions and customers (
(Decrease)/increase in operating liabilities:
- Amounts owed to financial institutions and customers (
- Other payables
Tax refunded/(paid)
Net cash (used in)/from operating activities (
Cash flows from investing activities
Acquisition of investment in subsidiary - - - (489)
Acquisition of property and equipment 10 (
Acquisition and development of intangible assets 11 (
Acquisition of investments measured at amortised cost 8 (
Acquisition of investments measured at fair value
through other comprehensive income 8
Redemption of investments measured at amortised cost 8
Redemption of investments measured at fair value
through other comprehensive income 8
Net cash (used in)/from investing activities (
Cash flows from financing activities
Issuance of debt securities 19-20
Redemption of debt securities 19 (
Principal element of lease payments 23 (
Net advances from immediate parent company
Net advances (to)/from ultimate parent company (
Net advances (to)/from other group companies (
Net cash from/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents (
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year 32 (
The notes on pages 53 to 238 are an integral part of these financial statements
53
Annual Report and Financial Statements 2022
Notes to the Financial Statements
53
Annual Report and Financial Statements 2022
54
Annual Report and Financial Statements 2022
Notes to the financial statements
1. Summary of significant accounting policies
1.1 Reporting entity
The consolidated financial statements of MeDirect Malta as at and for the financial year ended 31 December 2022 comprise the financial statements of MeDirect Malta and its subsidiaries, together referred to as “the Group”. Therefore, these financial statements report the consolidated financial results of MeDirect Malta for the financial year ended 31 December 2022, including the financial results of MeDirect Bank SA (“MeDirect Belgium”); Bastion 2020-1 NHG B.V. (“Bastion 2020-1”), Bastion 2021-1 NHG B.V. (“Bastion 2021-1”) and Bastion 2022-1 NHG B.V. (“Bastion 2022-1”), three controlled special purpose entities utilised as part of the Group’s funding strategy in respect of the Dutch Mortgage business; Grand Harbour I B.V. (“GH I”), a controlled special purpose entity that used to be utilised as part of the Group’s funding strategy in respect of the International Corporate Lending portfolio; MeHomeLoans B.V. that is in the process of liquidation; Medifin Leasing Limited (“Medifin Leasing”) that leases computer hardware and software to MeDirect Malta and MeDirect Belgium; and Medifin Estates, a property leasing partnership.
MeDirect Belgium is a credit institution licensed in Belgium and is carrying out all of the Group’s activities in Belgium.
MeDirect Belgium invests in Dutch residential mortgages via an established third-party mortgage originator in the Netherlands. In December 2021, MeDirect Belgium launched a Belgian residential mortgage loan product in partnership with Allianz Benelux S.A/N.V.. This offering is underpinned by a robust credit risk framework and will continue to diversify the asset base of MeDirect Belgium into the residential mortgage sector. Also as from November 2022, MeDirect Belgium launched its Dutch buy-to-let mortgage business whereas in March 2021, MeDirect Malta started offering innovative and attractive home loan products in a client-oriented process. MeDirect Malta continues to support the Maltese real economy through convenient banking services such as payment services and foreign exchange and through lending to Maltese corporates on projects and to small and medium-sized enterprises through fully collateralised lending facilities.
Following the Group’s diversification strategy, both MeDirect Malta and MeDirect Belgium still hold a small portfolio of senior secured loans and revolving credit facilities to finance the business of European corporates. The Group has retained substantially all risks and rewards pertaining to the activities of GH I, Bastion 2020-1, Bastion 2021-1 and Bastion 2022-1 and hence to assets, liabilities and related income and expenditure attributable to these entities, and as such, all assets, liabilities and related income and expenditure have been reflected within the Group’s consolidated financial statements.
GH I, is a Dutch special purpose vehicle which is bankruptcy remote and was utilised as part of the Group’s funding strategy. Grand Harbour I used to hold euro and sterling-denominated corporate loans, and was financed through a tranche bought by MeDirect Belgium (the “Senior Loan”) having a senior ranking vis-à-vis the tranche acquired by MeDirect Malta (the “Junior Loan”).
On 23 December 2021, MeDirect Malta and MeDirect Belgium agreed to instruct GH I and the Collateral Manager to dispose of all the collateral in the form of international corporate loans. MeDirect Malta acquired collateral loans from GH I at a consideration of €156.1 million and £77.5 million and MeDirect Belgium acquired collateral loans at a consideration of €142.5 million and £11.8 million. As a result of the proceeds from such sale of loans, with transfer prices being at arm’s length, GH I repaid the Senior Loan of MeDirect Belgium that at that date was equivalent to €103.3 million and £44.1 million, with the remaining funds available, after settlement of expenses, released to MeDirect Malta in respect of its Junior Loan.
In May 2020, the Group successfully securitised part of its Dutch Mortgage portfolio raising €350 million through a Residential Mortgage-Backed Security (“RMBS”). As part of the transaction, a sub-portfolio of the Dutch Mortgage portfolio amounting to €375.5 million was sold to Bastion 2020-1, a special purpose securitisation vehicle established in the Netherlands, which is controlled by MeDirect Belgium.
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Annual Report and Financial Statements 2022
Notes to the financial statements
warehouse facility provided bridge financing enabling MeDirect Belgium to build up a Dutch Mortgage portfolio large enough to be securitised through a RMBS transaction. This facility was used to build up a Dutch Mortgage portfolio equivalent to €154 million, which was subsequently securitised.
More specifically, in January 2021 MeDirect Belgium securitised a further part of its Dutch retail mortgages portfolio through a RMBS transaction whereby a principal amount of €414 million of the Dutch Mortgage portfolio was sold to a securitisation special purpose entity, Bastion 2021-1 NHG B.V., established in the Netherlands, which is controlled by MeDirect Belgium. On closing, the Dutch retail mortgages portfolio acquired by Bastion 2021-1 NHG B.V. included the €154 million portfolio of Dutch Mortgages that was financed through the warehouse funding facility obtained via Cavalier 2020 B.V. This portfolio, that was originated by MeDirect Belgium and subsequently transferred to Cavalier 2020 B.V., was repurchased by MeDirect Belgium and together with a further €260 million portfolio of Dutch Mortgages was transferred to Bastion 2021-1 NHG prior to closing.
The warehouse facility provided through Cavalier 2020 was suspended in May 2021 and Cavalier 2020 was dissolved on 23 December 2021.
In November 2022, the Group successfully securitised part of its Dutch Mortgage portfolio raising €369 million through a RMBS. As part of the transaction, a sub-portfolio of the Dutch Mortgage portfolio amounting to €528.3 million was sold to Bastion 2022-1, a special purpose securitisation vehicle established in the Netherlands, which is controlled by MeDirect Belgium.
MeDirect Belgium, in line with article 6 of the Securitisation Regulation (EU) No 2017/2402 of the European Parliament and of the Council of 12 December 2017, undertook to retain, on an ongoing basis, a material net economic interest in the Bastion securitisation transactions. This implies that the Group retains substantially all risks and rewards pertaining to the activities of these securitisation structures and hence to the assets, liabilities and related income and expenditure attributable to the structures and as such, all assets, liabilities and related income and expenditure of the securitisation special purpose entities are reflected in the Group’s financial statements.
Medifin Estates, a property leasing partnership, was set up to lease property which is then leased back to the Group
On 4 January 2021, MeDirect Malta acquired substantially all the share capital of Medifin Leasing Ltd. from the ultimate parent company Medifin Investments Ltd., after receiving full regulatory approval, with the intention of consolidating the entity within the Group. Medifin Leasing Ltd. owns the key rights and licences, including software solutions that are utilised by both MeDirect Malta and MeDirect Belgium. It leases out amongst other equipment, software and motor vehicles and provides related support services to the other Group entities.
MeDirect Malta paid a cash consideration of €0.5 million for this acquisition, which approximates both the fair value and carrying amounts of the assets acquired and liabilities assumed as at the date of acquisition. The difference between the consideration given and the aggregate carrying value of the assets and liabilities of Medifin Leasing at the date of the transaction as well as the difference between the carrying value of the assets and liabilities of Medifin Leasing and of the Right-of-use (ROU) assets and corresponding lease liabilities previously recognised by the Group in respect of the lease arrangements between Group entities and Medifin Leasing, amounting to €3.3 million in total, have been included in equity in retained earnings at the date of the transaction.
1.2 Basis of preparation
These financial statements have also been drawn up in accordance with the provisions of the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386).
These financial statements have been prepared on the basis of the historical cost convention, except for:
• financial investments measured at fair value through other comprehensive income and at fair value through profit or loss;
• derivative financial instruments which are measured at fair value;
• recognised financial assets designated as hedged items in qualifying fair value hedge relationships which are measured at amortised cost adjusted for changes in fair value attributable to the risk being hedged; and
1. Summary of significant accounting policies
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Annual Report and Financial Statements 2022
Notes to the financial statements
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.
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).
Change in the accounting of investment in subsidiaries
Previously, investment in subsidiaries were accounted for in the separate financial statements of the Bank at cost less impairment. Directors concluded that there exist no indicators for impairing the investment in subsidiaries after assessing all available information, in particular future business growth and profit projections including most recent financial forecasts approved by management covering a five-year period.
During the current reporting period, the Bank effected a change in accounting policy whereby, in the separate financial statements of the Bank, the investment in subsidiaries started being accounted for using the equity method as permitted by IAS 27. It is the opinion of the directors that this change in accounting policy will better reflect the financial performance of its subsidiary in the separate financial statements of the Bank as it will be more consistent with the consolidated financial statements of the Group. The following table provides an overview of the impact on prior years of this change in accounting policy.
The change in accounting policy was applied retrospectively from the beginning of the earliest period presented i.e. 1 January 2021. The following table provides an overview of the effect on previous years of this change in accounting policy at MeDirect Malta level.
31 December 2021 1 January 2021
As previously As previously
stated Restated stated Restated
€000 €000 €000 €000
Statement of financial position
Investment in subsidiaries 225,490 189,519 225,001 211,975
Total assets 1,482,861 1,446,890 1,978,050 1,965,024
Other reserves 2,620 2,172 3,241 4,666
Accumulated losses 1,495 (34,028) (5,245) (19,696)
Total equity 271,451 235,480 265,266 252,240
Financial year ending
31 December 2021
As previously
stated Restated
€000 €000
Statement of Comprehensive income Share of results of subsidiary undertakings - (21,072)
Profit/(loss) before tax 6,349 (14,723)
Profit/(loss) for the year 5,207 (15,865)
Standards, interpretations and amendments to published standards effective in 2022
During the financial year ended 31 December 2022, the Group adopted the following amendments to existing standards but the adoption of these revisions to the requirements of IFRSs as adopted by the EU did not result in significant changes to the Group’s accounting policies impacting the Group’s financial performance and position.
• Amendments to IAS 16 Property, plant and equipment – Proceeds before intended use, effective 1 January 2022;
• Amendments to IAS 37 Provisions, contingent liabilities and contingent assets – onerous contracts—cost of fulfilling a contract, effective 1 January 2022;
• Amendments to IFRS 3 Business combinations – References to the conceptual framework, effective 1 January 2022; and
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Annual Report and Financial Statements 2022
Notes to the financial statements
The amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.
Interest Rate Benchmark Reform
The ‘Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’ issued in August 2020 represents the second phase of the IASB’s project on the effects of interest rate benchmark reform, addressing issues affecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of the reform.
Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by 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. In addition, hedge accounting is not discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria.
Interbank offered rates (‘Ibors’) are used to set interest rates on hundreds of trillions of different types of financial transactions and are used extensively for valuation purposes, risk measurement and performance benchmarking.
The 2016 EU Benchmark Regulation, which aims to ensure the accuracy, robustness and integrity of interest rate benchmarks, has led various national working groups to actively discuss the mechanisms for an orderly transition of five Libor currencies (US dollar, Euro, Pound sterling, Japanese yen and the Swiss franc) and the Euro Overnight Index Average (‘Eonia’) to their chosen replacement near risk-free rate (‘RFR’).
Since 31 December 2021 representative Libor rates are no longer available in the case of all sterling, euro, Swiss franc and Japanese yen rates, and the 1-week and 2-month US dollar rates. Meanwhile, the benchmark in the case of the remaining US dollar settings (one, three, six and 12 month), will cease on 30 June 2023. In addition, the Eonia benchmark ceased on 3 January 2022.
As a result, the Group embarked on an IBOR transition programme, under the governance of the Chief Financial Officer, to facilitate an orderly transition from Iibors to RFRs. During the financial year ended 31 December 2021, the Group successfully transitioned its GBP Libor and Eonia exposures to SONIA and ESTR, respectively, and is on track to complete its transition of all remaining exposures with USD Libor dependency by June 2023.
In this respect, as at 31 December 2021, leveraged loans to customers with a gross carrying amount of €161.9 million were transitioned from underlying GBP Libor reference rates to SONIA rates. The amendments to all such contracts were deemed to be necessary as a direct consequence of the IBOR reform. In addition, the new basis for each contract was also deemed to be economically equivalent to the previous basis, which was achieved through the inclusion of credit spread adjustments to each contract.
Meanwhile, during 2021, model changes were also effected to the valuation of interest rate derivative instruments with a notional value of €1.7 billion by replacing the Eonia with the ESTR discount curve. This change resulted in an adjustment to the carrying amount of derivatives amounting to €0.3 million which has been recognised in profit or loss during that year.
As a result, as at 31 December 2021, all financial instruments with a contractual maturity date after 31 December 2021 and for which the benchmark had ceased, were transitioned to RFRs accordingly
The Euribor administrator has used its prerogatives to reinforce Euribor governance and the calculation methodology to comply with the requirements of the benchmark reform (“BMR”). This benchmark can therefore continue to be used with no time limit unless it ceases to be published and is replaced by an alternative or is no longer representative. To this effect, the Group’s working group will continue to review and monitor the regulatory landscape, as like any benchmark, in time, Euribor could transition to an alternative rate.
Standards, interpretations and amendments to published standards that are not yet effective
58
Annual Report and Financial Statements 2022
Notes to the financial statements
•
• Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies, effective 1 January 2023;
• Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates, effective 1 January 2023;
• Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction, effective 1 January 2023;
• Amendments to IFRS 16 Leases: Lease Liability in a Sale and Leaseback, effective 1 January 2024;
• Amendments to IFRS 17 Insurance contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information, effective 1 January 2023; and
Appropriateness of going concern assumption in the preparation of the financial statements
The Group remains well positioned to achieve business growth through diversification, and is well capitalised, soundly funded and has access to the required levels of liquidity.
The Group’s business, profitability projections, funding and capital plans, together with a range of other factors such as the economic outlook along with ongoing developments in EU economies indicate that the Group will have sufficient capital to meet not only the regulatory capital requirements but also any internal risk buffers and any buffers recommended by the regulators throughout the forthcoming financial period. The projections confirmed that the Group will have a healthy level of funding and liquidity that will allow the relevant minimum regulatory requirements to be comfortably satisfied.
Russia and Ukraine conflict
In 2022, 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 Group will ensure compliance with any applicable sanctions and will continue to follow closely the developing situation and any potential effects on its business, customers and operations.
The war and related sanctions are contributing to deteriorating macroeconomic outlook and global economic dislocation, including disruption of energy supplies, higher inflation and additional credit and market risk. The Group performed an assessment of the effects the current situation may have on its business. The continued conflict in Ukraine and higher inflation led to rising interest rates, lower expectations for economic growth, lower consumer confidence and weaker financial markets. We can expect continued volatility and uncertainty in the coming quarters. Higher interest rates will dampen economic activity, but should result in more income from our lending portfolios. Furthermore MeDirect is adequately hedged to the interest rate risk due to the fixed income nature of its International Mortgage portfolio through a series of interest rate swaps.
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Annual Report and Financial Statements 2022
Notes to the financial statements
1.3 Consolidation
Subsidiaries are all entities over which the Group has control. The Group controls an entity where the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. 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 uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value 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. Consistent accounting policies are applied throughout the Group for the purposes of consolidation.
Accounting for business combinations between entities under common control
Business combinations between entities under common control, which do not fall within the scope of IFRS 3, are accounted for using the predecessor method of accounting. Under the predecessor method of accounting, assets and liabilities are incorporated at the predecessor carrying values, which are the carrying amounts of assets and liabilities of the acquired entity from the financial statement amounts of the acquired entity.
Accounting for investments in subsidiaries in the parent company’s stand-alone financial statements
Prior 1 January 2022
Previously, in the Bank’s separate financial statements, investments in subsidiaries were accounted for by the cost method of accounting i.e. at historical cost less impairment. An impairment test would be performed on investments in subsidiaries for determining the recoverable amount when in the opinion of the Directors there is an indication for impairment and a provision recorded if the carrying amount exceeds the recoverable amount.
Where there was an impairment in the value of an investment in a subsidiary, it would have been recognised as an expense in the period in which the diminution is identified. The results of subsidiaries were 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 would have been charged or credited to profit or loss.
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Annual Report and Financial Statements 2022
Notes to the financial statements
1.4 Foreign currency transactions and balances
a) 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 functional currency of all Group entities is the euro. The financial statements are presented in euro, which is also the Group’s presentation currency.
b) Transactions and balances
1.5 Financial assets
Initial recognition and derecognition
The Group recognises a financial asset in its statement of financial position when it becomes a party to the contractual provisions of the instrument.
The Group initially recognises loans and advances to customers at the date of transfer of beneficial ownership or when cash is advanced to borrowers. Investments and transactions in all other financial instruments consisting of regular way purchases and sales are recognised on settlement date.
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership or the Group has not retained control of the asset.
When assets are sold to a third party with a concurrent total return swap on the transferred assets, the transaction is accounted for as a secured financing transaction, retaining the asset on the statement of financial position because the Group retains all or substantially all the risks and rewards of ownership of such assets.
Similarly, when assets are sold to a structure through which the Group is deemed to have retained all, or substantially all, risks and rewards, the transferred assets are not derecognised.
In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
Modification of terms
If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised. If the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised, and the new financial asset is recognised at fair value.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The accounting treatment in respect of the modification of terms of financial assets, including considerations made to determine whether the terms of the renegotiated asset are substantially different, is described in more detail in the ‘Modified financial assets’ sub-section.
Classification and measurement
The classification and measurement criteria under IFRS 9 are driven by the entity’s business model for managing the financial instruments and the contractual cash flow characteristics of the financial instruments.
In line with the provisions of IFRS 9, the Group classifies and measures all financial assets under any one of the following three categories:
• Amortised cost;
• Fair value through other comprehensive income (FVOCI); or
• Fair value through profit or loss (FVTPL).
The Group determines the classification and measurement basis for financial assets based on an assessment of both the business model within which the financial assets are held and a review of the contractual terms of each financial asset to determine if cash flows are solely payments of principal and interest (SPPI).
For financial 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 contractual cash flow characteristics of these assets meet the SPPI requirements of IFRS 9. In this respect, the contractual cash flow characteristics are deemed to be SPPI if the terms are consistent with a basic lending arrangement.
The contractual cash flows are assessed based on conditions at the date of initial recognition of the instrument. However, if a loan modification occurs resulting in the existing loan being derecognised and a new loan recognised, the modified asset is considered as a new loan under IFRS 9 and as such is considered for the SPPI assessment. In such a case, the date of the modification is treated as the date of initial recognition of the new financial asset. If, however, the existing loan was renegotiated or modified but was not derecognised, then the contractual cash flows of the modified loan are not considered for the SPPI assessment.
The ‘principal’ of a financial asset refers to the fair value of the financial instrument at initial recognition rather than the amount that is due under the contractual terms of the instrument. On the other hand, ‘interest’ is the compensation for time value of money and credit risk, may include consideration for other basic lending risks (e.g. liquidity risk), costs associated with holding the financial assets for a particular period of time (e.g. administrative costs) and/or a profit margin.
In performing the SPPI assessment, the Group considers the following contractual terms to determine whether these introduce variability in contractual cash flows that is inconsistent with a basic lending arrangement, amongst others:
(i) variable interest rates, which typically consider the time value of money, credit risk and other basic lending risks and costs;
(ii) leverage, which is a contractual cash flow characteristic that results in increased variability in contractual cash flows;
(iii) modifications of the time value of money; and
(iv) contractual features that could alter the timing or amount of contractual cash flows of a financial asset, such as contingent events, prepayment and extension options.
A business model refers to the manner in which financial assets are managed in order to achieve a particular business objective, whether by collecting contractual cash flows only, selling financial instruments, or both. The business model is determined at portfolio level by ‘key management personnel’ (as defined in Note 34 of this set of financial statements) and the assessment is based on matters of fact, reflecting the strategic purpose and intention for the portfolio and how the performance of the portfolio is assessed.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The Group’s business model for managing financial assets is observable through the activities that are undertaken by management to achieve the objective of the business model. The following aspects are considered in determining the IFRS 9 accounting classification:
(i) the stated policies and objectives for the portfolio and the operation of those policies in practice;
(ii) how the performance of the business model and the financial assets held within it are evaluated and reported to key management personnel;
(iii) consideration of risks affecting performance and how they are managed; and
(iv) how managers are compensated for business performance (e.g. whether the compensation is based on the fair value of the assets managed or the contractual cash flows collected).
This means that the Group is not required to hold all financial instruments in a ‘Hold to Collect’ portfolio until maturity. On the contrary, the business model can be to hold financial assets to collect contractual cash flows even where sales of financial assets occur or are expected to occur in the future.
In this regard, the Group performs an assessment to determine whether the sale of financial instruments from a portfolio implies that the classification of the exposures to the ‘Hold to Collect’ business model is inappropriate. This assessment is based on information about past sales and expectations about future sales, and in the determination of the business model, the Group takes into consideration the following:
(i) The historical frequency, timing and value of sales;
(ii) The reason for the sales (such as credit deterioration); and
(iii) Expectations about future sales activity.
A key distinction between business models relates to whether the ‘sale’ of financial instruments is integral to the achievement of the desired business objectives. In order for a sale of financial instruments to steer the classification of the entire portfolio away from a ‘Hold to Collect’ business model towards a ‘Hold to Collect and Sell’ business model, sales need to be integral to the objective of the business model, rather than incidental to it.
In this regard, subsequent to initial recognition, financial instruments are measured at:
(i) amortised cost if the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows (‘Hold to Collect’) and the contractual terms of the financial asset give rise to cash flows that are SPPI;
(ii) FVOCI if the financial asset is held within a business model whose objective is achieved by both holding financial assets in order to collect contractual cash flows and selling financial assets (‘Hold to Collect and Sell’) and the contractual terms of the financial asset give rise to cash flows that are SPPI; or
(iii) FVTPL if the financial asset does not pass the business model assessment referred to above and SPPI criteria.
The Group has identified seven separate portfolios which require separate business model assessments due to the fact that these are managed separately and by different business units / management teams, namely (i) the International Corporate Lending portfolio; (ii) the Dutch Mortgage portfolio (including the buy-to-let mortgages portfolio); (iii) the Belgian Mortgage portfolio; (iv) the Maltese Business Lending portfolio; (v) the Maltese Mortgage portfolio; (vi) the Securities Investment portfolio; and (vii) the Securitisation Investment portfolio.
Financial assets measured at amortised cost
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Annual Report and Financial Statements 2022
Notes to the financial statements
In addition, financial assets measured at amortised cost comprise the Group’s investments in the Grand Harbour CLO 2019-1 Designated Activity Company (“GH1-2019”) structured note tranches, with the exception of the equity tranche which is measured at fair value through profit or loss (“FVTPL”). Both investments are classified under the Securitisation Investment portfolio.
The amortised cost is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount and the maturity amount (refer to Note 1.16) and adjusted for any credit loss allowance.
Financial assets measured at fair value through other comprehensive income
Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income (“FVOCI”). Equity instruments which are not held for trading are also measured at FVOCI if, on initial recognition, management makes an irrevocable election, on an instrument-by-instrument basis, to present changes in fair value in Other Comprehensive Income (“OCI”) rather than profit or loss. These financial assets are initially measured at fair value, which is generally the cash consideration to originate or purchase the asset including any direct and incremental transaction costs, upon recognition.
The Group’s financial assets measured at FVOCI comprise primarily a portfolio of debt securities, held for liquidity purposes and classified under the Securities and Securitisation Investment portfolios. As at 31 December 2020, the Group also held equity instruments acquired as part of debt restructuring arrangements entered into with borrowers experiencing financial difficulties classified within the International Corporate Lending portfolio.
Debt investments measured at FVOCI are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income on these investments are recognised in profit or loss. Such investments measured at FVOCI are included in the expected credit loss calculations set out below and expected credit losses are recognised in profit or loss.
Equity instruments measured at FVOCI are subsequently measured at fair value. Amounts presented in OCI are not subsequently transferred to profit or loss upon derecognition of the instrument. Dividends from such instruments are recognised in profit or loss as “Other income” on the date when the Group’s right to receive payments is established. No impairment losses (and reversal of impairment losses) are recognised in profit or loss in respect of equity instruments measured at FVOCI – any changes in fair value are recognised in OCI.
Financial instruments designated at fair value through profit or loss
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception:
• the use of the designation removes or significantly reduces an accounting mismatch;
• a group of financial assets and liabilities or a group of financial liabilities is managed, and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and
• the financial liability contains one or more non-closely related embedded derivatives.
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Annual Report and Financial Statements 2022
Notes to the financial statements
Impairment of amortised cost and FVOCI financial assets
IFRS 9 requires the measurement of credit loss allowances on financial instruments using the expected credit loss (“ECL”) impairment model using a forward-looking approach that emphasises shifts in the credit risk attached to a financial instrument, and consequently the probability of future credit losses, even if no loss events have yet occurred.
Since movements in the fair value of financial instruments measured at FVTPL are recognised directly in profit or loss, no credit loss allowances are deemed necessary for these financial instruments.
In contrast, financial assets measured at amortised cost or FVOCI, with the exception of equity instruments measured at FVOCI, are subject to impairment requirements using the general impairment model stipulated by IFRS 9. This is due to the fact that, since an integral aspect of both business models is to collect contractual cash flows, the effects of changes in credit risk are more relevant to a user’s understanding than the effects of other changes, such as changes in market interest rates.
IFRS 9 impairment requirements are also applicable to loan commitments that are not measured at FVTPL (if the terms and conditions of the arrangement give rise to an enforceable contract to extend credit), financial guarantee contracts and recognised lease receivables to which IFRS 16 Leases applies. None of these are within the scope of IFRS 9 but are still subject to impairment requirements in accordance with IFRS 9.
Expected credit losses may be recognised for loans and advances to banks and customers, other financial assets measured at amortised cost, debt instruments measured at amortised cost and at FVOCI, and certain loan commitments and financial guarantee contracts. The Group may commit to underwrite loans on fixed contractual terms for specified periods of time. When the Group intends to hold the loan, the loan commitment is included in the impairment calculations set out below.
Three stage expected credit loss approach
IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition. The key driver of the measurement of ECLs therefore relates to the level of credit risk for each exposure and, as a result, an assessment of the change in credit risk over the expected life of an asset is a core element in determining the staging criteria under IFRS 9. The three stages under IFRS 9 are as follows:
• Stage 1 - Financial instruments that have not had a significant increase in credit risk (SICR) since initial recognition, or that have “low credit risk” at the reporting date are classified in Stage 1. 12-month ECLs are recorded to measure the expected losses that result from default events that are possible within 12 months after the reporting date;
• Stage 2 - Financial instruments that have experienced a SICR since initial recognition are classified in Stage 2. Lifetime ECLs are recorded to measure the expected losses that result from all possible default events over the expected life of the financial instrument; and
• Stage 3 - Financial instruments that demonstrate objective evidence of impairment, and which are considered to be in default or credit-impaired, are classified in Stage 3, also requiring the measurement of lifetime ECLs.
Non credit-impaired and without significant increase in credit risk (Stage 1)
ECL resulting from default events that are possible within the next 12 months (12-month ECL) are recognised for financial instruments that remain in Stage 1.
Financial instruments are all classified within Stage 1 upon initial recognition, unless a financial instrument is purchased or originated credit-impaired (POCI) in which case the exposure is classified as POCI upon initial recognition and will remain classified as such until derecognition. Therefore, the Group calculates a credit loss allowance based on 12-month ECL. Subsequent changes in credit risk will be reflected in the staging of the exposure, with a transfer of the exposure to Stage 2 or 3 conditional upon the identification of a SICR or impairment respectively.
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Annual Report and Financial Statements 2022
Notes to the financial statements
For all Stage 1 and 2 financial assets, interest income is recognised by applying the effective interest rate to the gross carrying amount, prior to deduction of credit loss allowances.
Significant increase in credit risk (SICR) or Stage 2
The concept of default risk is central to IFRS 9. Therefore, a key risk parameter used by the Group in its credit risk management activities is the probability that the obligor defaults, either within the next 12-month period (in case of Stage 1 exposures) or over the lifetime of the exposure (in case of Stage 2 exposures).
An assessment of whether credit risk has increased significantly since initial recognition is performed at least at each reporting date by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions.
To assess a SICR event, the Group considers both actual and forward-looking information relating to external market indicators, internal factors and borrower-specific information. The assessment is unbiased and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is based on multiple factors, and their relevance is driven by product type, characteristics of the financial instrument and the obligor. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk, and these criteria will differ for different types of lending. The internal credit risk management framework comprises the use of both qualitative and quantitative SICR triggers.
The Group’s credit risk rating processes are designed to highlight exposures which require closer management attention because of their greater probability of default and potential loss.
In this respect, the Group adopts a five-point credit quality classification system in order to rate the credit quality of its key financial assets. Further detail on internal credit risk management is outlined in Section 2 (Financial Risk Management, Credit Risk). Typically, an internal risk grade is assigned to each obligor by the business which is then reviewed by both the Credit Risk Team, and the Management Credit Committee responsible for the oversight of the Group’s respective portfolios. The following are the internal risk grades:
• Regular - No material credit concerns.
• Focus - No immediate prospect that a credit loss will ultimately be suffered, but worthy of closer credit oversight.
• Under Surveillance - Significant increase in credit risk with identified concerns and some prospect that a credit loss may ultimately be suffered.
• Doubtful - Likely that the contractual terms of the debt will not be met and that a credit loss will be suffered (Impaired).
• Write-off - Full or partial write-down of exposures with little prospect of recovery.
An overview of the Group’s qualitative SICR assessment is provided below. However, the quantitative assessment performed by the Group to identify a SICR varies across each of the Group’s portfolios of financial instruments and is disclosed in the relevant sub-sections below.
It is possible for multiple instruments to the same customer to be classified under different stages. This may occur when the Group holds exposures originated at differing points in time thereby potentially giving rise to differing default risk at initial recognition, causing a variation in the relative increase in credit risk since origination between the different instruments.
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Annual Report and Financial Statements 2022
Notes to the financial statements
•
Financial instruments within the Group’s International Corporate Lending portfolio are managed on an individual basis for credit purposes, whereby the Group’s credit analysts have access to the obligors and their financial information, the latter comprising both historical and forecasted financial information. The SICR assessment for the International Corporate Lending portfolio comprises the following:
• Use of qualitative SICR triggers, including the following qualitative triggers which are taken into consideration by the Group in the quarterly SICR trigger assessments:
Qualitative SICR themes
Evidence of past due information
Significant change in the operating performance of the borrower
Significant change in the viability of the borrowers business model
Quality and timeliness of reporting
Project delays or overruns
Significant adverse macroeconomic or market conditions
Significant increase in refinancing risk
Pricing of debt and equity (relative to market)
Forbearance
Bankruptcy, acceleration, legal enforcement and insolvency
Sponsor support
Troubled debt restructuring
Covenant waivers or forecast breach of covenant
Adherence to internal shadow financial covenants
SICR observed on related financial instruments
• Use of quantitative SICR assessment based on a ratings-based approach using lifetime ‘Point in Time’ (PiT) Probabilities of Default (PDs) (i.e. PD in current economic conditions)
• Hard trigger (Internal credit classification) - financial asset that has a credit quality classification of “Under surveillance” is Stage 2, classification of “Impaired” is Stage 3
For the purposes of the quantitative SICR assessment, the Group has adopted a ratings-based approach (i.e. based on notch deterioration) for its SICR assessment.
Due to the lack of internal history of defaults, the Group uses a credit risk modelling solution developed by an external vendor to estimate unconditional PiT PDs by: (i) benchmarking the obligor’s financial statements with those of the underlying model dataset; and (ii) applying a qualitative scorecard to adjust the quantitative unconditional PiT PDs to better reflect obligor-specific peculiarities.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The quantitative SICR staging decision uses both a relative and an absolute threshold approach. The relative threshold approach involves calculating the magnitude of the difference between the reporting date rating and the origination date rating based on the deterioration in the number of notches between the two ratings. The appropriate stage is determined based on the magnitude of this difference. The absolute threshold determines the stage based on the reporting date rating of the instrument. The following table presents the relative and absolute thresholds applied by the Group in the quantitative assessment of SICR.
Implied Rating Relative threshold (SICR Deterioration Trigger) Absolute threshold (SICR Trigger Floor)
Aaa -10 notches -
Aa1 -8 notches -
Aa2 -7 notches -
Aa3 -6 notches -
A1 -5 notches -
A2 -5 notches -
A3 -5 notches -
Baa1 -5 notches -
Baa2 -5 notches -
Baa3 -4 notches -
Ba1 -4 notches -
Ba2 -4 notches -
Ba3 -4 notches -
B1 -3 notches -
B2 -3 notches -
B3 -2 notches -
Caa1 -1 notches -
Caa2 -0 notches Stage 2 SICR Trigger Floor
Caa3 -0 notches Stage 2 SICR Trigger Floor
Ca -0 notches Stage 2 SICR Trigger Floor
C -0 notches Stage 3 SICR Trigger Floor
Although the Group has adopted a ratings-based approach (i.e. based on notch deterioration) for its SICR assessment, each implied rating is represented by an underlying PD.
Lifetime PDs are determined by estimating the marginal PD for each year over the life of the financial instrument. For example, for a five-year loan, PDs are calculated for each of the five years. The year-1 PD is calculated as the probability of the loan defaulting within the first year of it being issued, whereas the year-2 PD is calculated as the probability of the loan surviving the first year but defaulting in the second year. The same principle of survival applies to the PDs for the remaining years. The summation of marginal PDs results in the derivation of the cumulative lifetime PD term structure. Cumulative lifetime PDs increase at a diminishing rate as the residual life of the loan shortens.
“Unconditional” PDs refer to the PD term structure based on historical information and prior to the application of forward-looking macroeconomic scenarios. Multiple forward-looking macroeconomic scenarios are applied to the unconditional PiT PD term structure in order to estimate a forward-looking probability-weighted “conditional” PiT PD at an obligor level.
PDs are determined upon origination date and at each subsequent reporting date at an obligor level rather than at a facility level. Therefore, at any given date, multiple facilities attributable to the same obligor are assigned the same PD, reflecting the borrower’s financial condition as at the date of the assessment. In this regard, different facilities with the same obligor originated at the same time are expected to have an identical PD both at origination date as well as subsequent reporting dates. However, facilities with the same obligor originated at different time intervals can have different PDs upon origination, reflecting the borrower’s financial condition and credit risk at each respective origination date, whereas identical PDs are determined at each subsequent reporting date in respect of all such facilities.
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Annual Report and Financial Statements 2022
Notes to the financial statements
as at the origination date and the annualised PD over the remaining life of the financial asset as at the reporting date. The annualised PD measure is the cumulative PD for a given period, stated on a per-year basis. These are then mapped to implied ratings which are used to determine potential SICR events and consequently the credit stage of a financial instrument through a combination of relative and absolute thresholds using the implied credit ratings.
Hard Trigger based on Internal Risk Classifications
The quantitative assessment through the Group’s implied credit rating staging criteria is considered alongside qualitative SICR triggers and forms part of the overall SICR trigger assessment. In this regard, where qualitative SICR triggers are observed by credit analysts, the Group applies a hard trigger based on the internal credit classification (Stage 2 for all borrowers classified as “Under surveillance”, and Stage 3 for all borrowers classified as “Doubtful”).
• Dutch Mortgage portfolio
In respect of the Dutch national-guaranteed residential mortgage assets (for which losses are capped at 10% of expected losses through the ‘Nationale Hypotheek Garantie’ or NHG) classified within the Group’s Dutch Mortgage portfolio, the primary determinant of SICR is a quantitative rule based on the change in PD between origination and reporting date, and based on absolute PD thresholds. SICR is determined at “loan part” level – i.e. each facility (even where the source of repayment is the same) is assessed for SICR.
The quantitative SICR trigger compares residual lifetime PD at reporting date versus residual lifetime PD at origination. To identify whether an account experienced a SICR since initial recognition, a lifetime PD threshold is used.
In this respect, the following SICR triggers and backstops are applied and would result in a shift of these exposures to Stage 2:
Change in Probability of Default: lifetime PD of the exposure on the reporting date exceeds its lifetime PD at initial recognition by more than 200%; or
Absolute level: 12-month PD of the exposure on the reporting date exceeds 20%.
The following are also deemed to give rise to SICR:
1. Forbearance events where exposures are not 30 DPD;
2. Where payments in respect of the exposure are 30 DPD or more.
Quantitative SICR triggers are not applied to mortgages / loan parts with a PD of 0.03% or below at reporting date. Such exposures are deemed to qualify for the low credit risk exemption (Stage 1 without further staging assessment) in IFRS 9. The appropriateness of the application of this exemption is periodically tested for portfolios on which it is applied.
• Belgian Mortgage portfolio
Staging for the Belgian Retail Residential Mortgages portfolio is similar as for Dutch Mortgages where primary determinants of SICR are delinquency, forbearance, and other quantitative rules relating to the relative and absolute change in PD.
• Maltese Business Lending portfolio
For Maltese Business Lending assets, the Group is unable to use external credit ratings as all exposures are unrated, nor rely on risk-modelling for quantifying credit risk for each asset, as no robust database exists for the asset class. The Group therefore uses the evidence of past-due information as the primary driver of SICR triggers alongside other qualitative SICR metrics.
Payments in respect of exposures within this portfolio that are more than 30-days past due are considered as evidencing a SICR trigger.
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Annual Report and Financial Statements 2022
Notes to the financial statements
Exposures within the Maltese Business Lending portfolio are therefore managed at an individual exposure level for credit purposes, through relationship managers who have access to the customers and their financial information on a regular basis. Such qualitative SICR trigger assessments are undertaken at least quarterly and any identified SICR trigger events are presented to the appropriate Management Credit Committee. These SICR assessments could lead to changes in the internal risk grade assigned to each borrower.
Although assigned at an obligor level rather than at facility level, internal risk grades can still be used to assess and identify SICR since initial recognition. In this regard, the Group’s internal risk grades are aligned to the three stages contemplated by IFRS 9.
Financial instruments that:
(i) have not deteriorated significantly in credit quality since initial recognition must be recognised as either “1-Regular” or “2-Focus” within the Group’s internal risk grading system;
(ii) incurred a SICR are classified as “3-Under Surveillance”, in which case the Group recognises lifetime ECLs; and
(iii) demonstrate objective evidence of default are classified as “4-Doubtful” and assessed individually for provisioning purposes.
• Maltese Mortgage portfolio
Staging for the Maltese Retail Residential Mortgages portfolio is similar as for Dutch Mortgages where primary determinants of SICR are Delinquency, Forbearance, and other quantitative rules relating to the relative and absolute change in PD.
• Securities Investment portfolio
In order to monitor SICR in relation to its Securities Investment portfolio, the Group refers to external credit ratings from at least one of the following rating agencies: Moody’s, Fitch or Standard & Poor’s. In this regard, an exposure is deemed to have low credit risk if it is assigned an investment-grade status by one of these three external credit rating agencies.
Should the credit rating of a financial instrument fall below the investment-grade threshold, i.e. BBB (or equivalent) the financial instrument is deemed to have suffered a SICR. As a result, the financial instrument will be re-classified as a Stage 2 exposure, which will impact the measurement of the ECL charges, moving from a 12-month ECL calculation to a lifetime ECL calculation.
• Securitisation Investment portfolio
Investment in tranches within a Collateralised Loan Obligation Structured Entity (“CLO SE”) originated and managed by the Group: The Group assesses the staging of the tranche rather than the facilities within the underlying portfolio of financial assets. The Group determines an Implied Rating (as a proxy measure of credit risk) for each tranche at different points in time. Expected losses and average life are used to assign an Implied Rating to each tranche based on an external vendor’s methodology and observed defaults in the industry sectors of the underlying assets. The Implied Rating at reporting date is benchmarked to the Implied Rating at origination date of the tranche in order to determine whether a SICR has occurred since initial recognition.
In line with the Group’s approach for the identification of SICR events and the determination of staging for the International Corporate Lending and Securities Investment portfolios, a quantitative ratings-based approach is utilised in order to assess the movement in credit risk since initial recognition of the Group’s investment in the tranches of the CLO.
In respect of tranches of CLOs to which an investment-grade Implied Rating is assigned, the Group makes use of the low credit risk exemption. As a result, the Group assumes that no SICR has occurred since initial recognition as long as the tranche retains an investment-grade Implied Rating. Hence, the Group assumes that the credit risk attributable to tranches to which the low credit risk exemption is applied has not increased significantly since initial recognition, and therefore does not perform a SICR assessment for such tranches unless their Implied Rating falls to sub-investment-grade.
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Notes to the financial statements
Credit impaired (Stage 3)
The Group defines a financial asset as credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
In order to assess whether there has been an increase in credit risk of a financial instrument since initial recognition, changes in default risk are considered over the remaining life of the financial instrument. The definition of default is therefore critical to the application of IFRS 9 requirements. However, IFRS 9 does not specifically define default, but requires the Group to apply a definition that is consistent with the definition used for internal credit risk management purposes, requiring consideration of qualitative indicators, where appropriate.
IFRS 9 introduces a rebuttable presumption that default does not occur later than when a contractual repayment relating to a financial asset is 91 days past due, unless reasonable and supportable information is available to demonstrate that a more lagging criterion is more appropriate. This presumption has not been rebutted by the Group for its lending portfolios, meaning that default is deemed not to have occurred later than when a financial asset is 90 days past due. Although this presumption is applicable to all lending portfolios managed by the Group, it is much more relevant for identifying defaulted exposures within the Maltese Business Lending portfolio and the Dutch, Belgian and Maltese Mortgage portfolios.
The definition of default is addressed in more detail by guidelines issued by the European Banking Authority (EBA) and the Basel Committee on Banking Supervision (BCBS). These guidelines provide detailed definitions of what should be considered in the determination of defaulted exposures for regulatory purposes. As a result, the Group aligned the IFRS 9 definition of default, used for accounting purposes, to the definitions provided in the EBA and BCBS guidelines, thereby ensuring that a single consistent view of credit risk is applied for internal risk management, regulatory capital and the measurement of ECLs.
In this regard, defaulted exposures are those that satisfy either or both of the following criteria:
(i) material exposures which are past due by more than 90 days;
(ii) the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due.
Therefore, since the criteria for credit-impaired under IFRS 9 can be interpreted consistently with the definition of default for regulatory purposes, all defaults in terms of regulation are deemed to be credit-impaired, and vice versa. Defaulted exposures are therefore classified under Stage 3 for IFRS 9 purposes.
In order to define which events trigger “unlikeliness to pay”, the Group takes into account the situations and events listed in the Capital Requirements Regulation (“CRR”) definition of default and in the IFRS definition of impairment requirements.
IFRS 9 provides a list of events that may indicate that a financial asset is credit-impaired. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:
• Significant financial difficulty of the issuer or borrower;
• A breach of contract, such as default or past due event;
• The lender(s) of the borrower having granted a concession(s) to the borrower for economic or contractual reasons relating to the borrower’s financial difficulty (this would not have otherwise been considered);
• It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
• The disappearance of an active market for that financial asset because of financial difficulties; or
• The purchase or recognition of a financial asset at a deep discount that reflects the incurred credit losses.
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Notes to the financial statements
Unlikely to pay events
1) The Group considers that the obligor is unlikely to pay its debt obligations to the Group without recourse by the Group to actions such as realising security.
2) Group puts the credit obligation on non-accrued status
3) Group recognises a specific credit adjustment resulting from a significant perceived decline in credit quality subsequent to the institution taking on the exposure.
4) Group sells the credit obligation at a material credit-related economic loss.
5) Group consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness or postponement of principal, interest, or fees.
6) The Group filed for the obligor’s bankruptcy or a similar order in respect of an obligor’s credit obligation to the institution.
7) Obligor has sought or has been placed in bankruptcy or similar protection, where this would avoid or delay repayment of a credit obligation to the Group.
Indicative triggers
• Loan is accelerated or called
• Group has called any collateral including a guarantee
• Lawsuit, execution or enforced execution in order to collect debt
• The borrower is a co-debtor when the main debtor is in default
• It is expected that a bullet loan cannot be refinanced at standard market conditions with less than a 6-month contractual maturity
• Group stops charging of interest (also partially or conditionally)
• Any direct write-off
• Any specific loan loss provisions booked
• Any write-off against provisions
• An asset is sold or partially sold with material loss (>15% loss on book value) due to credit-related concerns (i.e. not as a result of market risk)
• Restructuring with a material part which is forgiven giving rise to net present value (NPV) loss
• Restructuring where the institution also considers the obligor is unlikely to pay its debt obligations without recourse to actions such as realising security
• It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation
• Credit institution or leader of consortium starts bankruptcy/insolvency proceedings
• International Swaps and Derivatives Association (“ISDA”) credit event declared
• Out-of-court negotiations for settlement or repayment (e.g. stand-still agreements)
• Obligor has filed for bankruptcy or insolvency
• Third party has started bankruptcy or insolvency proceedings
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Notes to the financial statements
In certain instances, it might not be possible to identify a single discrete event which leads to the classification of an exposure as credit-impaired. However, the Group takes a holistic view of the performance of the exposure, where the combined effect of several events may be deemed to have caused financial assets to become credit-impaired. Generally, the Group expects that a SICR be identified before a financial asset becomes credit-impaired or an actual default occurs. Therefore, exposures that are treated as credit-impaired in most cases are transferred from Stage 2 to Stage 3.
In respect of the Dutch, Belgian and Maltese Mortgage portfolios, the key indicator of credit-impairment arises when exposures are past due by more than 90 days taking into account the materiality threshold for Retail exposures as per the EBA regulatory definition of default, with other unlikeliness to pay indicators, such as the extension of forbearance measures, also being taken into consideration.
For the Securitisation Investment portfolio, the 90 DPD presumption has been rebutted by the Group for the purposes of the investment in tranches in CLOs measured at amortised cost. All tranches in the Group’s securitisation investments are deemed to have defaulted in the event that the CLO is unable to partially or fully repay the Senior Notes, and / or the interest thereon, i.e. if payment is 1 DPD. This might be driven by a significant level of defaults occurring in the underlying portfolio, which might lead to an insufficient level of cash flows to honour the payment commitments linked with each tranche within the funding structure. Similarly, the 90 DPD presumption has also been rebutted by the Group with respect to exposures within the Securities Investment portfolio. In this regard, an exposure is deemed to be defaulted in the event that the obligor is unable to partially or fully repay any amount due.
For all Stage 3 financial assets, interest income is recognised by applying the effective interest rate to the amortised cost or carrying amount of the financial instrument, i.e. gross carrying amount less credit loss allowances.
Write-offs
Financial assets and the associated credit loss allowances are normally written off, either partially or in full, when there is no realistic prospect of recovery. In the case of international corporate loans, the determination is made after considering facts and circumstances relating the borrower’s financial position, typically following a distressed restructure. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier (see Note 2.2.5). In this respect, the Group writes off financial assets when the relevant Management Credit Committee of MeDirect Malta and MeDirect Belgium determines that the balance is uncollectible.
Modified financial assets
In accordance with IFRS 9, the modification of contractual cash flows of a financial instrument could result in one of two possible outcomes:
(i) If the modification is not considered to be significant, the modified cash flows are considered to pertain to the original financial asset; or
(ii) If the modification is considered to be significant, the original asset is considered to be extinguished and accordingly the original asset is derecognised and replaced by a new financial asset.
The assessment of whether a modification is considered to be significant is therefore critical in determining the accounting implications of modifications to an asset’s contractual cash flows. The Group applies judgement in assessing whether a change in contractual terms (such as a change in interest rates, currency or the remaining term of the loan) is substantial enough to represent an expiry of the original instrument.
In this regard, when considering a change in the contractual terms, the Group evaluates how the cash flows under the revised terms compare with the cash flows under the original terms of the loan and also takes into consideration qualitative factors. Qualitative considerations include extension of terms, insertion of credit enhancements, changes in interest rates, etc. If the modification is deemed substantial, derecognition of the financial instrument is warranted.
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Notes to the financial statements
When there is a substantial modification to the terms of a financial asset resulting in the derecognition of the existing financial asset and the subsequent recognition of the modified financial asset, the modified asset is considered a ‘new’ financial asset. Any new financial assets that arise following derecognition events as a result of substantial modification to the terms of the instrument are classified as Stage 1 assets, unless the new financial asset is credit-impaired on initial recognition, in which case it will be classified as a POCI financial asset. A loss is booked in profit or loss (normally as a write-off) since the new instrument is recognised at fair value.
When the modification is not substantial enough to result in the derecognition of the financial asset, renegotiated loans within the International Corporate and Maltese Business Lending portfolios are considered credit-impaired and accordingly classified as Stage 3 assets unless no unlikeliness-to-pay events are deemed to have occurred. Assets that are credit-impaired at the time of renegotiation remain in Stage 3 post renegotiation. When evidence suggests that the renegotiated loan is no longer credit-impaired, the asset is transferred out of Stage 3. This is assessed on the basis of historical and forward-looking information and an assessment of the credit risk over the expected life of the asset, including information about the circumstances that led to the renegotiation. A full assessment from the appropriate Management Credit Committee is required for approval that the exposure is no longer considered as credit-impaired.
With respect to loans within the Dutch and Maltese Mortgage portfolios, when the modification is not substantial enough to result in derecognition, renegotiated loans are classified as credit impaired, and accordingly as Stage 3 assets, when the exposure is 90 DPD. In all other instances, renegotiated loans within these portfolios are initially classified as Stage 2 assets.
Other than originated credit-impaired loans, all other modified loans could be transferred out of Stage 3 if they no longer exhibit any evidence of being credit-impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to Stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified, contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.
Purchased or originated credit-impaired
Originated credit-impaired financial assets are those assets that are credit-impaired on initial recognition. The Group does not expect to purchase any financial assets that are credit-impaired. However, there might be rare instances where the Group originates new assets following a renegotiation or restructure for reasons relating to a borrower’s distressed financial circumstances that otherwise would not have been considered, and which may result in the new assets to be deemed POCI. The amount of change in lifetime ECL is recognised in profit or loss as an impairment gain or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.
Movement between stages
Financial instruments are transferred out of Stage 2 if their credit risk is no longer considered to be “significantly increased” since initial recognition. Stage classification under IFRS 9 is distinct from regulatory requirements for performing status classification. That is, it should not be assumed that a regulatory “probation” period and EBA pre-requisites must be used as the criteria needed to move from Stage 2 to Stage 1 for IFRS 9 purposes.
For IFRS 9 purposes, the Group has determined the below guideline approach to determine whether movement from Stage 2 to Stage 1 is appropriate:
• Where qualitative triggers were used to determine SICR: Stage transfer from Stage 2 to Stage 1 is subjective. Where implied rating SICR triggers were not a determinant for reclassification in the first instance, it is expected that any qualitative SICR triggers that were observed that derived the SICR event must be fully resolved and evidenced for a 90-day period prior to any reclassification.
• Where quantitative triggers were used to determine SICR, the financial asset must evidence an improvement and return to the external or implied default risk rating at the point of inception (instrument should evidence an implied default rating in line or better than the original inception rating in order to trigger a reclassification from Stage 2 to Stage 1).
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Notes to the financial statements
I
Similarly, for movement of Stage 3 corporate loans to either Stage 2 or Stage 1, a full assessment from the appropriate Management Credit Committee is required for approval that unlikeliness to pay criteria are no longer present, the exposure is no longer considered as impaired and there is no past due amount on the exposure (through settling of amounts in a regular manner).
Stage transfer in respect of corporate exposures is also subject to a 12-month probation period where defaulted (Stage 3) exposures are classified as NPEs before they can be upgraded to Stage 2. Meanwhile, stage transfer of defaulted retail exposures is subject to a 3-month probation period, unless the default/NPE classification is the result of forbearance measures for which a 12-month probation period applies.
For loans that are assessed for impairment on a portfolio basis, the evidence to support the stage transfer assessment typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all evidence is determined on a case-by-case basis.
Movement between stages is aligned with the Group Credit Risk policy, and any exceptions are governed by the Management Credit Committee.
Measurement of expected credit losses
The Group first determines whether objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, and then measures credit loss allowances using different models for non credit-impaired and credit-impaired financial assets, as follows:
• If no evidence of impairment exists (Stage 1 and Stage 2 assets), the Group uses statistical models developed by an external vendor to measure ECLs for exposures within the International Corporate Lending portfolio and Maltese Business Lending portfolio at facility level.
• For credit-impaired exposures (Stage 3 assets), the Group generally models ECLs based on an internally developed methodology to estimate the expected cash flows by reference to borrowers’ enterprise values and forecasted operating cash flows for exposures within the International Corporate Lending portfolio and the individual valuation of the underlying asset / collateral for exposures within the Maltese Business Lending portfolio.
With respect to the Dutch Mortgages, Securitisation Investment and Securities Investment portfolios, the ECLs on all assets (irrespective of staging) are modelled using statistical models developed by an external vendor. For the Belgian and Maltese Mortgage Lending portfolios, the ECL for the mortgage portfolios is determined using internally developed statistical models.
ECLs are defined as the probability-weighted estimate of credit losses over the expected life of a financial instrument. Credit losses are in turn defined as the present value of all expected cash shortfalls between contractual and expected cash flows, discounted using the original effective interest rate (EIR).
Lifetime ECLs refer to the ECLs that result from all possible default events over the expected life of a financial instrument, whilst 12-month ECLs are a portion of lifetime ECLs and represent the lifetime cash shortfalls that result if a default occurs in the 12 months after the reporting date, weighted by the probability of the default occurring.
For each portfolio, the Group calculates ECLs on its financial instruments based on three key inputs, namely: probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). 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 entire residual life of the exposure.
Non credit-impaired financial assets (Stage 1 & 2)
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Notes to the financial statements
Probability of Default
As outlined previously, the concept of default risk is central to IFRS 9 – therefore, one of the key risk parameters used by the Group in its ECL calculation is the probability that the obligor defaults either within the next 12-month period (in case of Stage 1 exposures) or over the lifetime of the exposure (in case of Stage 2 / 3 exposures).
The 12-month and lifetime PDs therefore represent the probability of default occurring over the next 12 months and the residual life of the instrument, respectively. Since the PD is a probability measure used to capture the likelihood that a customer will default over a defined period of time, this is estimated at a customer level.
PDs for the Group’s portfolios are estimated based on statistical models developed by external vendors. In particular, the models used for the International Corporate Lending, Maltese Business Lending, Securitisation Investment and Securities Investment portfolios use rating scale to PD matrices calibrated based on historical default data observed in the market and compiled by the external vendor. In respect of the International Corporate Lending portfolio, PDs and implied ratings are modelled by benchmarking borrower-specific characteristics, including financial performance and qualitative characteristics captured through a scorecard, with the underlying dataset. In respect of the Maltese Business Lending portfolio, PDs are estimated through rating scale to PD matrices by mapping internal risk grades to public ratings. In respect of exposures within the Securities Investment and Securitisation Investment portfolios, PDs are generally estimated using public ratings through rating scale to PD matrices. With regard to the Dutch Mortgage portfolio, PDs are generated using models based on historical default rates observed in the Netherlands for similar assets. With regards to the Belgium and Malta Residential Mortgages portfolio, PDs are also generated using models based on proxies for historical default rates using external, publicly available sources for similar assets.
Loss Given Default
The second key risk parameter used by the Group relates to the estimation of the recovery rate expected to be observed in the event that a ‘default’ occurs. In this regard, the Group uses the LGD to capture this element within the ECL calculation.
The LGD of an exposure measures the size of the estimated loss (as a proportion of the total EAD) that is expected to materialise in the event of default. It is based on the difference between the contractual cash flows due and the cash flows that the Group expects to receive, whether from cash flows or from any collateral. It takes into account the mitigating effect of collateral value at the time it is expected to be realised and the time value of money. LGD for ECL measurement includes the expected impact of future economic conditions and discounting back from estimated time of default to reporting date using the original EIR.
In contrast with PDs, LGDs are estimated at a facility level. Whilst linked to the general credit risk of the obligor, recovery rates are also impacted by the relative ranking of a particular facility within the obligor’s debt structure.
For assets within the Group’s International Corporate Lending portfolio, estimated recovery rates are measured using statistical models developed by external vendors by benchmarking exposure-specific characteristics with the underlying dataset.
The Group’s Securities Investment portfolio consists of covered bonds, bonds issued by supranational organisations, sovereign bonds and corporate bonds. For its supranational exposures and sovereign exposures, the Group uses the LGD values obtained from the statistical model developed by an external vendor while for covered bonds the LGD is aligned with regulatory standards. The LGD for corporate bonds is modelled using the same methodology as for the International Corporate Lending portfolio.
The LGD used for the Maltese Business Lending portfolio is driven by the loan-to-value ratio of the individual facilities, whilst also taking into consideration other factors such as costs to sell, valuation haircuts and the time value of money.
The LGD for the Dutch Mortgage portfolio is modelled using the loan-to-value ratio of individual loan parts. Expected recoveries are used to determine the expected loss and are modelled by reference to assumptions in relation to valuations of different property types, haircut to sale proceeds and the time value of money. The LGD is then estimated at 10% of expected losses, since the NHG absorbs 90% of losses, adjusted for assumptions on expected NHG pay-outs and claim rejection rates.
With regards to the Belgium and Malta Residential Mortgages portfolios, as the Group has no internal loss data, LGD parameters are based on external, publicly available sources of loss data for similar assets.
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Notes to the financial statements
Exposure at Default
The EAD is used to estimate the Group’s expected exposure at the time of default of an obligor, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and any expected drawdowns on committed facilities.
The maximum period over which ECLs are measured is the maximum contractual period over which the Group is exposed to credit risk.
• International Corporate Lending portfolio
For the Group’s International Corporate Lending portfolio, the Group makes use of behavioural rather than contractual maturity, thereby reflecting expectations on the exercise of prepayment or extension options. In this regard, for Revolving Credit Facilities and Term Loans containing a prepayment option which is expected to be exercised by the obligor, the Group adjusts the contractual maturity date to reflect the expected maturity date, thereby reflecting the expected payment profile. Expected maturities are assessed quarterly, on a case-by-case basis, in order to determine any change to the expected maturity.
To measure the EAD of off-balance sheet exposures, including loan commitments, the Group aligns the expected drawdown on committed facilities with the credit conversion factors (CCFs) as set out in the Standardised Approach to Credit Risk under the CRR.
• Dutch Mortgage portfolio
The EAD for the Dutch Mortgage portfolio is based on amortisation per the contractual payment profiles, taking into account modelled prepayments. The maturity date is deemed to be equal to the contractual maturity of the mortgage. To measure the EAD of off-balance sheet assets, the Group applies a 75% CCF.
• Belgian Mortgage portfolio
The EAD for the Belgian Residential Mortgage portfolio is based on the outstanding exposure amount as at reporting date. To measure the EAD of off-balance sheet assets (commitments to lend), the Group applies an 80% CCF.
• Maltese Business Lending portfolio
For the Maltese Business Lending portfolio, the maturity date is deemed to be equal to the contractual maturity of the exposure.
To measure the EAD of Revolving Credit Facilities the Group applies a 100% CCF, whereas the EAD for Term Loans is assumed to be equivalent to the drawn amounts as at reporting date.
• Maltese Mortgage portfolio
The EAD for the Maltese Residential Mortgage portfolio is based on the outstanding exposure amount as at reporting date. To measure the EAD of off-balance sheet assets (commitments to lend), the Group applies a 90% CCF.
• Securities Investment portfolio
For the Group’s Securities Investment portfolio, the maturity date is deemed to be equal to the contractual maturity of the exposure, and the EAD assumed to be the full committed exposure.
• Securitisation Investment portfolio
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Notes to the financial statements
Credit-Impaired financial assets (Stage 3)
For Stage 3 assets in the International Corporate Lending and Maltese Business Lending portfolios, the Group estimates ECL on an individual basis. When assessing impairment for these assets, the recoverable amount corresponds to the present value of estimated future cash flows. In the case of collateralised exposures, typically within the Maltese Business Lending portfolio, the estimation of the recoverable amount reflects the cash flows that may result from the liquidation of the collateral discounted at the original effective interest rate.
For exposures in the International Corporate Lending portfolio, the Group deems these assets as very rarely secured by assets whose value is easily observable. Therefore, recoverable amounts are usually calculated by projecting expected cash flows using a discounted cash flow (“DCF”) approach to determine the Enterprise Value (“EV”) under multiple scenarios. The recoverable amount under each scenario is estimated as the EV, plus available cash, less exit fees, discounted using the estimated weighted average cost of capital (“WACC”) at a borrower level. The latter is determined using multiple assumptions in respect of the cost of debt and cost of equity. The recoverable amount is then compared to the EAD in order to determine any expected shortfalls / credit losses.
Hence for Stage 3 exposures the individual impairment allowance is measured as the difference between the asset’s outstanding exposure, which is measured as the sum of the carrying amount and the expected future drawdown on off-balance sheet commitments estimated by reference to CCFs, and the recoverable amount. The recoverable amount is the weighted average of the base case and the downside case, with recoveries under each case capped separately at 100%. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in profit or loss.
For exposures in the Maltese Business Lending portfolio, these are typically secured by real estate assets, cash collateral or tradeable equities whose value is more easily observable. In this respect, the recoverable amount is usually calculated on the basis of the present value of the estimated future cash flows of a collateralised financial asset, reflecting the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the Securities Investment portfolio, recoverable amounts are assessed on a mark-to-market basis, using observable market prices for the instruments held.
For the Dutch, Belgian and Maltese Mortgages and the Securitisation Investment portfolios, the ECL on Stage 3 exposures is equivalent to the LGD parameter multiplied by the exposure amount, with PD equivalent to 100%.
Forward looking information
The recognition and measurement of ECL requires the incorporation of forward-looking information into the ECL estimates to meet the measurement objective of IFRS 9. A particularly complex aspect is the need to consider a range of possible forward-looking economic scenarios when calculating ECL, given the potential effect of non-linearities on ECL. Based on the principle of non-linearity, the modelled increase in credit losses if conditions are expected to deteriorate exceeds the decrease in credit losses if conditions improve. The Group takes into consideration reasonable and supportable information relating to forecasts of future macroeconomic conditions in order to determine the expected level of and movement in credit risk for specific obligors.
The Group first identifies macroeconomic variables (MEVs) which have the highest correlation to systemic credit risk factors for its obligors using statistical methods developed by external vendors. These macroeconomic variables include country-level variables that are deemed to have the highest correlation to the Group’s portfolios. The MEVs applied for ECL calculations for each portfolio may differ. The MEVs that exhibit the highest level of correlation for exposures classified within the International Corporate Lending, Maltese Business Lending and Securities Investment portfolios principally comprise country-specific Gross Domestic Product (“GDP”), unemployment levels and the performance of stock market indices. In addition, the House Price Index and national unemployment rates are key for exposures within the Dutch, Belgian and Maltese Mortgage portfolios, whereas interest rates are used for calculating ECLs for exposures within the Securitisation Investment portfolio.
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Notes to the financial statements
multiple forecasts of macroeconomic conditions (reflecting future paths of the selected key macroeconomic variables). The Group then estimates an unbiased, forward-looking, probability-weighted ECL by assigning probability weights to expected losses under each of the macroeconomic scenarios.
IFRS 9 does not require forecasts of future conditions to extend over the entire expected life of the financial instrument in question. The Group uses macroeconomic forecasts from the external vendor for up to 20 quarters to estimate a forward-looking ECL. For maturities that go beyond this 5-year period, the Group extrapolates projections from available data.
Multiple forward-looking scenarios for Stage 3 Credit-impaired exposures
With regards to Stage 3 exposures within the Group’s International Corporate Lending portfolio, ECLs are based on a DCF analysis aimed at assessing the level of credit risk in detail and estimating the recoverable amount for the instrument. In line with IFRS 9 requirements, such exposures still require a consideration of multiple forward-looking scenarios. The scenarios are designed specifically for each obligor in question by considering the different cash flows that may accrue to the Group under the contractual agreement including those resulting from potential restructuring, which may include derivative features including pay-outs if certain targets or objectives are met at a future date. Such scenarios are designed by reference to estimated unlevered operating cash flows, typically over a three-year forecasted period, together with a terminal value estimated using assumed stable cash flows under each scenario.
With regards to Stage 3 exposures within the Group’s Maltese Business Lending portfolio, different work-out options available to the Group in respect of each impaired exposure, such as the initiation of court proceedings to enforce foreclosure of collateral or reaching an amicable out-of-court agreement with the obligor to sell the collateral in the market and repay the exposure from the sales proceeds, are taken into consideration.
In line with the requirements of IFRS 9, the Group assigns a probability weight, based on management judgement, to each of the scenarios considered in the estimation of ECLs. Due to the high level of subjectivity involved, decisions relating to the selection of scenarios, probabilities and assumed forecasted cash flows are subject to scrutiny through the Group’s governance structure around credit risk.
In respect of exposures within the Dutch, Belgian and Maltese Mortgages and Investment portfolios, the ECL on Stage 3 exposures is modelled based on an identical methodology as that used for Stage 1 and Stage 2 exposures.
Presentation of ECL in the Statement of financial position
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: as a provision;
• Where a financial instrument includes both a drawn and undrawn component, and the Group cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Group presents a combined credit loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the credit loss allowance over the gross amount of the drawn component is presented as a provision; and
1.6 Offsetting financial instruments
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Notes to the financial statements
1.7 Intangible assets
1.7.1 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.
1.7.2 Computer software
Intangible assets with finite useful lives, such as purchased and internally developed computer software, are amortised, on a straight-line basis, over their estimated useful lives. Estimated useful life is generally the lower of legal duration, where applicable, and expected useful life. The estimated useful life of purchased software and developed computer software ranges between 3 to 5 years. Costs incurred in the ongoing maintenance of software are expensed immediately as incurred.
Development costs that are directly attributable to the design and testing of identifiable and unique software elements controlled by the Group are recognised as intangible assets when the following criteria are met:
• it is technically feasible to complete the software so that it will be available for use;
• management intends to complete the software and use it;
• there is an ability to use the software;
• it can be demonstrated how the software will generate probable future economic benefits;
• adequate technical, financial and other resources to complete the development and to use the software are available; and
• the expenditure attributable to the software during its development can be reliably measured.
Directly attributable costs that are capitalised as part of the software include the software development employee costs and an appropriate portion of relevant overheads.
Capitalised development costs are amortised from the point at which the asset is ready for use. Other development expenditure that does not meet these criteria is recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
1.8 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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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 any part accounted for separately is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.
Depreciation on assets, recognised in profit or loss, is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
- improvements to premises 4 - 10 years
- computer equipment 3 - 5 years
- other equipment 4 years
- fixtures and fittings 10 years
- motor vehicles 5 years
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.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in profit or loss.
1.9 Impairment of non-financial assets
1.10 Non-current assets classified as held for sale
1.11 Current and deferred income tax
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Notes to the financial statements
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.
1.12 Share capital
1.13 Financial liabilities
The Group recognises a financial liability on its statement of financial position when it becomes a party to the contractual provisions of the instrument. The Group’s financial liabilities, other than derivative financial liabilities (refer to Note 1.14), are classified as financial liabilities measured at amortised cost.
Financial liabilities measured at amortised cost, i.e. 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. These liabilities are subsequently measured at amortised cost using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.
1.14 Derivative financial instruments
Derivative financial instruments, including currency forwards and swaps, interest rate swaps and other derivative contracts, are classified as held for trading derivatives unless designated as hedging instruments, and 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 and swaps 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.
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Notes to the financial statements
The Group designates certain derivatives as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument/s and hedged item/s, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instrument/s is/are expected to be ‘highly effective’ in offsetting the changes in the fair value of the respective hedged item/s during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 percent.
1.14.1 Fair value hedges
When a derivative is designated as a hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk.
If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively.
Any adjustment up to that point of discontinuation to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.
The Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU carve-out version of IAS 39. The EU carve-out macro hedging rules enable a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument in the Group’s macro fair value hedging model, and remove some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the EU carve-out, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. The Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU carve-out in respect of its retail operations after considering the duration gap between the International mortgages and core deposits. The hedging activities are designated as a portfolio fair value hedge in respect of the mortgage book, being the hedged items. Changes in the fair value of the derivatives are recognised in the statement of profit or loss, together with the basis adjustment in relation to the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
The Group establishes the hedging ratio by matching the notional of the derivatives with the principal of the portfolio being hedged. Possible sources of ineffectiveness are as follows:
• Differences between the expected and actual volume of prepayments, as the Group hedges to the expected repayment date taking into account expected prepayments based on past experience;
• Difference in the discounting between the hedged item and the hedging instruments, as cash collateralised interest rate swaps are discounted using Overnight Indexed Swaps (OIS) discount curves, which are not applied to the fixed rate mortgages;
• Hedging derivatives with a non-zero fair value at the date of initial designation as a hedging instrument; and
• Counterparty credit risk which impacts the fair value of uncollateralised interest rate swaps but not the hedged items.
The Group applies micro fair value hedging to hedge separate hedged positions on an individual asset basis, generally fixed interest securities, by utilising interest rate swaps as hedging instruments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps hedging fixed interest loans and securities is recognised in profit or loss within interest income, together with changes in the fair value of the hedged fixed interest loans and securities attributable to interest rate risk.
The gain or loss relating to the ineffective portion is also recognised in profit or loss within interest income and disclosed separately. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective interest rate.
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Notes to the financial statements
1.15 Provisions
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.
1.16 Interest income and expense
Interest income and expense for all interest-bearing financial instruments are recognised within ‘interest income’ and ‘interest expense’ in 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 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 instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Interest income and expense presented in the profit or loss include:
• interest on financial assets and financial liabilities measured at amortised cost calculated using the effective interest method;
• interest on investments measured at fair value through other comprehensive income calculated using the effective interest method; and
• the effective portion of fair value changes attributable to qualifying hedging derivatives designated in fair value hedges of interest rate risk, together with changes in fair value of the hedged items attributable to interest rate risk.
Fair value changes attributable to other derivatives in hedging relationships which are discontinued are presented in ‘net trading income’ with effect from the last date on which the hedge was demonstrated to be effective.
1.17 Fees and commissions
Fee and commission income and expenses 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 interest income or interest expense.
Other fee and commission income, comprising account servicing fees, underwriting fees, investment management fees, foreign exchange fees, guarantee fees, placement fees and syndication fees, are recognised in profit or loss 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 in profit or loss on a straight-line basis over the commitment period.
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Notes to the financial statements
Consideration payable to customers, comprising incremental costs in the form of cash amounts that the Group pays to wealth management customers, are incurred in acquiring new customer contracts. These costs are deferred within “Other assets” and subsequently recognised as an offset within fee and commission income, as follows:
- For customer contracts with a contractual fixed period, these costs are amortised over the contractual life.
1.18 Net trading income
1.19 Net income from other financial instruments carried at fair value through profit or loss
1.20 Leases
Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the future lease payments. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
1.21 Share-based compensation
The Group operates a deferred bonus plan in the form of a share-based compensation plan whereby selected officers or employees are awarded performance bonuses upon meeting specific performance conditions, or retention bonuses.
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Notes to the financial statements
1.22 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.
In the ordinary course of business, the Group gives financial guarantees, consisting of guarantees and acceptances.
Financial guarantee contracts are initially measured at fair value and subsequently measured at higher of:
- The amount of the credit loss allowance (calculated as described in Note 1.5); and
- The premium received on initial recognition less income recognised in accordance with the principles of IFRS 15.
Loan commitments are the Group’s commitments to provide credit under pre-specified terms and conditions and are measured at the amount of the credit loss allowance (calculated as described in Note 1.5).
1.23 Cash and cash equivalents
Cash and cash equivalents are carried in the statement of financial position at face value less expected credit losses. Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash in hand, unrestricted balances held with central banks, deposits held at call with financial institutions and other short-term highly liquid investments with original maturities of three months or less.
1.24 Customer assets
Customer assets are held with the Group in a fiduciary capacity and are segregated from the assets of the Group in accordance with the applicable rules and regulations on protection of customer assets, except when such customer assets are held by the Group to cover a required margin or when they are used to secure an obligation towards the Group.
Customer assets are not presented within the Group’s statement of financial position.
1.25 Dividend distribution
Dividend distribution to the Group’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Group’s shareholders.
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Notes to the financial statements
2. Financial Risk Management
2.1 Introduction and overview
The Group’s core business activities include:
• deposit taking;
• the provision of wealth management and investment services;
• the granting of loans to international and Maltese corporates; and
• the granting of residential mortgage loans in the Dutch, Belgian and Maltese markets, the granting of buy-to-let mortgages in the Dutch market and the relative securitisation of sub-portfolios of such Dutch residential mortgage loans through RMBS transactions.
The Group also provides basic retail services such as money transfer and spot currency exchange. Currency swaps, foreign exchange forwards and interest rate swaps are also entered into for risk management purposes.
In respect of funding, the Group continues to do securitisations of Dutch mortgages portfolios and to access the international wholesale funding markets through bilateral repo lines and the Eurex repo platform.
The major components within the Group’s asset base are: the International Corporate Lending portfolio, comprising loans to international corporates; the Dutch Mortgage portfolio, comprising residential mortgage lending to Dutch customers; and the new buy-to-let mortgage portfolio that was launched in November 2022; the Belgian Mortgage portfolio, comprising residential mortgage lending to Belgian customers, the Maltese Mortgage and Business Lending portfolios, comprising residential mortgage loans to retail customers to support the purchase of residential properties as their own dwellings and loans to Maltese corporates; the Securities Investment portfolio principally comprising investment-grade debt securities; and the Securitisation Investment portfolio, comprising investments in Collateralised Loan Obligation (“CLO”) transactions originated by the Group (representing a 5% vertical slice in each structured note tranche of the Grand Harbour CLO 2019-1 Designated Activity Company (“GH1-2019”)), as well as acquired positions in CLO transactions managed by third party entities.
The Group continued the diversification and de-risking of its asset portfolio through continued focus on the Dutch national-guaranteed mortgage market (relying on strong partners for origination and servicing) and continued to de-emphasise investment in international corporate lending markets. In 2022 the Group also started financing Belgian Residential mortgages and also Dutch buy-to-let mortgages, The Dutch national-guaranteed mortgage lending activity represents prime Dutch mortgages that benefit from a guarantee from a private non-profit fund and indirectly from a government guarantee (the “Nationale Hypotheek Garantie” or “NHG”). The Dutch Mortgage business continued to grow during the financial year ended 31 December 2022, growing from a total gross exposure amounting to €1,643.2 million as at 31 December 2021 to €1,818.2 million as at 31 December 2022.
Another key development during the financial year ended 31 December 2022 included the third securitisation of a sub-portfolio of the Dutch Mortgage portfolio, which was sold to Bastion 2022-1, an additional special purpose securitisation vehicle established in the Netherlands, raising a further €369 million in funding through a RMBS in November 2022.
In March 2021, MeDirect Malta also launched a residential mortgage ‘home-loan’ product for retail customers in Malta to facilitate the purchase of dwellings for their own occupancy as part of its broader asset diversification strategy. The product was launched to strong effect, with a total gross exposure amounting to €19.0 million as at 31 December 2021, that grew to a total gross exposure amounting to €68.0 million as at 31 December 2022, alongside €33.2 million of approved home-loan applications pending completion as at 31 December 2022.
MeDirect Malta continued to participate in the MeAssist lending product, which is an assistance package issued in collaboration with the Malta Development Bank (“MDB”), aimed at supporting and enhancing access to bank financing to corporate customers in the Group’s Maltese Business Lending portfolio in Malta. Such financing, offered in the form of working capital facilities granted to assist customers with their operational requirements in view of the market disruptions brought about by the outbreak of the COVID-19 pandemic, is up to 90% secured by guarantees provided under the MDB COVID-19 Guarantee Scheme (“CGS”). The Group’s total gross exposures emanating from this product as at 31 December 2022 amounted to €1.4 million (2021: €1.4 million).
The main risks assumed by the Group are: (a) counterparty credit risk arising primarily from loans and advances to customers, but also from other financial instruments; (b) liquidity risk arising from maturity mismatches and committed but undrawn revolving credit facilities; (c) market risk, including interest rate risk; and (d) operational risk, including cyber security related threats.
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Notes to the financial statements
2.1.1 Risk management framework
The Group recognises the need to have an effective and efficient Risk Management Function and has therefore adopted a comprehensive risk management process that provides a balance between growth and maximising profitability while managing the associated risks. The Risk Management Function is actively involved in all material risk management decisions and is adequately structured to deliver a holistic view of the whole range of risks faced by the Group in its strategic decision-making.
The Risk Management Framework (“RMF”) aims to outline and define the Group’s risk management processes to enable informed risk-based decision-making. This framework outlines the process of how the Group identifies, manages and monitors material risks. It refers to the risk management processes that include policies, procedures, risk limits and risk controls ensuring adequate, timely and continuous identification, measurement or assessment, monitoring, management, mitigation and reporting of the risks at the business line, institution and consolidated or sub-consolidated levels.
The Group’s objective is to deploy an integrated risk management approach that ensures an awareness of, and accountability for, the risks taken throughout the Group and also to develop the tools needed to address those risks.
Strong risk management and internal controls are core elements of the Group’s strategy. The Group has adopted a risk management and internal control structure, referred to as the Three Lines of Defence (Figure 1), to ensure it achieves its strategic objectives while meeting regulatory and legal requirements and fulfilling its responsibilities to shareholders, customers and staff.
Figure 1: Three Lines of Defence Model
In the three lines of defence model, business line management is the first line of defence (including those functions that are responsible for day-to-day operations and the Treasury function), the various risk control and compliance oversight functions established by management represent the second line of defence, and internal audit is the third.
Board of Directors
Board & Executive Committees
Senior Management
Regulator
External Audit
Ist line of Defence
Business Line
management
and staff
2nd line of Defence
Risk Management;
Financial Control; Compliance & Legal*
*On occasions, the Legal team also performs duties within the first line of defence
3rd line of Defence
Internal
Audit
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Annual Report and Financial Statements 2022
Notes to the financial statements
2.2 Credit risk
Credit risk is the risk of loss to the Group’s business or of adverse change in its financial position, resulting from fluctuations in the credit standing of issuers of securities, customers, counterparties and any debtors in the form of default or other significant credit loss event (e.g. downgrade or spread widening).
2.2.1 Management of credit risk
The purpose of the Group’s Credit Policy is to establish the principles, credit standards, monitoring and reporting requirements and escalation and approval processes that govern the ongoing management of the Group’s credit risk. The policy applies to all subsidiaries of the Group and governs the associated credit frameworks for each asset class.
“The Group’s Board of Directors has defined risk appetite limits based on the Capital Requirements Regulation (“CRR”) governing large exposures as well as prudential requirements. Exposure limits are monitored on a regular basis by the Risk, Corporate Credit and Treasury teams. Amongst other things, the Credit Policy outlines the following specific exposure and trading limits:
• Concentration limits;
• Country limits;
• Portfolio limits; and
• Minimum credit quality within each asset class.”
Limits on counterparty exposures are established by the Group’s Management Risk Committee (“MRC”) in line with the Credit Framework. Such limits relate to net exposure, after application of cash (and cash equivalent) collateral, as provided in industry-standard documentation, and are established to manage credit risk to banks and other financial institutions in connection with the Group’s over-the-counter (“OTC”) derivative and repurchase agreement transactions. Settlement and delivery risk are mitigated through the use of industry-standard documentation such as the Loan Management Association (“LMA”) and International Swaps and Derivative Association (“ISDA”) agreements, alongside associated Credit Support Annex (“CSA”) legal documents. Any bilateral secured financing transaction is executed under a signed Global Master Repurchase Agreement (“GMRA”) or an ISDA agreement.
The Group’s objective is to maximise its returns while maintaining a sound and prudent credit risk profile. To facilitate achieving this target, the Group invests in a diversified portfolio of financial assets, including both high quality securities with strong ratings stability and a diversified portfolio of loans to corporates, whose higher returns are viewed as justifying a greater level of risk. In accordance with its business strategy, the Group is de-risking its asset portfolio by reducing its exposure to the International Corporate Lending portfolio, with the portfolio size having been reduced by 14.3% since the beginning of the previous financial period. In addition, the Group is further diversifying its business through growth in a Dutch National Mortgage portfolio, which portfolio benefits from favourable credit risk weighting treatment as a result of the NHG provided under the Dutch national-guaranteed mortgage programme (the so called NHG mortgages); the launch of the Belgian retail mortgages and Dutch buy-to-let mortgages and the growth in the Maltese Mortgage business and Maltese Business Lending; and investments in AAA-rated CLO notes managed by third parties. In respect of the latter, the Group’s only exposure to CLO notes that are rated below AAA pertains to tranches in a CLO originated by the Group, which are held specifically to meet risk retention rules as required under the Capital Requirements Regulation (CRR).
The Group’s financial assets are managed on a portfolio basis, considering correlations between asset classes. The Group diversifies its exposures to avoid excessive concentration in particular countries, industries or types of financial institutions through its risk appetite framework and statement.
Accordingly the Group’s credit risk taking activities comprise principally lending to international and Maltese corporate clients, classified under the International Corporate Lending and Maltese Business Lending portfolios respectively; residential mortgage lending classified under the Dutch, Belgian and Maltese Mortgage portfolios; investments in debt securities classified under the Securities Investment portfolio; and investments in CLO structures classified under the Securitisation Investment portfolio, which activities are described below.
All exposures classified under the International Corporate Lending and Securitisation Investment portfolios undergo a thorough analysis process, not only from an internal credit perspective but also from a legal, financial and credit ratings perspective.
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Notes to the financial statements
approval and monitoring processes are provided within the Group’s Pillar 3 Disclosures report available in the following webpage: https://www.medirect.com.mt/about-us/investor-relations.
In respect of the Maltese Business Lending portfolio, MeDirect Malta’s Corporate lending team is responsible for performing the primary credit analysis on proposed credits, as well as performing regular borrower reviews to monitor the performance of the underlying exposures, recommending appropriate courses of action and co-ordinating the decision-making process. The local Risk team is responsible for reviewing the primary credit analysis performed by the Corporate Credit team, challenging key views and assumptions adopted by the first line of defence, including engaging in discussion during Management Credit Committee meetings and providing recommendations on the appropriate course of action. Portfolio and credit file reviews are performed regularly to monitor the performance of the underlying exposures and to evaluate the level of credit risk within the portfolio, including the performance of market sectors and concentrations therein, with the objective to build and maintain assets of high quality.
The Maltese Mortgage lending portfolio is not managed on an individual borrower basis, due to the high volume of relatively low value and homogenous exposures but is instead monitored on a portfolio level basis. The Maltese lending unit will alert the Management Credit Committee of any material issues or early warning signs identified and any MCC member may ask for any credit to be reviewed in detailed.
As referred to previously, the Group also has a Dutch and Belgian mortgage business line. The Dutch national-guaranteed mortgage business line benefits from a private non-profit fund guarantee and government guarantee (indirectly), credit risk is deemed to be low. The residual credit risk arising therefrom is managed by MeDirect Belgium’s Credit and Risk teams. On a regular basis a sample file review is performed by the Business and Credit Teams with the Risk and Compliance Teams shadowing the process. A number of mortgages that would have been originated in the prior months are selected, some of which are subject to a detailed and complete file review with the remaining subject to a high-level review. Emphasis is placed on NHG compliance, the borrower’s labour situation and income as well as on the veracity of the collateral valuation. Furthermore, meetings are held on a regular basis in which the Dutch economy, Dutch mortgage market, NHG developments and the snapshot of the credit risk profile of the portfolio is discussed, by reference to risk appetite limits, internal credit classification of the current portfolio along with the development of the staging and expected credit losses of the portfolio.
The Treasury function is responsible for managing the Securities investment portfolio, overseen by the risk function, under the oversight of the Management Credit Committee (“MCC”) and the Board Risk Committee. The Group focuses on acquiring debt securities meeting the criteria of high-quality liquid assets (“HQLA”). Permitted assets in this portfolio include covered bonds issued by governments (including regional governments), agencies and supranational institutions, as well as securities issued by financial institutions (some of which may carry a government guarantee).
Credit risk involved in both the Dutch buy-to-let activity as well as the Belgian mortgage activity differs from Dutch mortgages as they do not benefit from a third-party guarantee. Moreover, the Belgian Mortgage business line focuses on a higher though controlled risk segment (including higher DSTI’s). In order to remediate higher risk every application undergoes a thorough screening based on a predefined set of criteria. If one or more requirements is not met, credit files are reviewed by a Joint Credit Committee, comprised of a MeDirect Belgium’s Business and Risk delegation. To check the exhaustive and correct application of predefined criteria, regular sample checks are organised on both data collected as well as assessments performed. Moreover, regular controls are put in place to confirm the adequacy of processes, staffing, systems and controls by 2nd and 3rd line of defence.
The Group focuses on the quality and timeliness of the data used to inform management decisions. In particular it enhanced credit risk monitoring within the International Corporate Loan portfolio and reviewed in a timelier manner those borrowers that are more vulnerable to the impacts of Covid-19. The active risk management performed at the level of both management and the board, particularly in the case of loan recoveries, continued during 2021 and 2022, most recently with a focus on the potential impact on borrowers of the Ukraine crisis, inflationary cost pressures including energy price rises, and risk of energy rationing.
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Notes to the financial statements
The following table presents the maximum exposure to credit risk from on-balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements. For financial assets recognised on balance sheet, the maximum exposure to credit risk equals their carrying amount. For financial guarantees granted, it is the maximum amount that the Group would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities.
For the purposes of Note 2.2 – Credit risk, amounts related to “Investments measured at amortised cost” are inclusive of basis adjustments attributable to the hedged risk.
Group Bank
2022 2021 2022 2021 €000 €000 €000 €000
Net exposure:
Financial assets measured at amortised cost
Balances with central banks 149,925 328,625 42,442 141,620
Loans and advances to financial institutions 402,987 193,724 89,837 111,370
Loans and advances to customers 2,389,293 2,324,303 518,106 502,693
- International Corporate Lending portfolio 512,114 593,359 319,656 377,614
- Dutch Mortgage portfolio 1,818,002 1,643,014 - -
- Belgian Mortgage portfolio 132,000 - - -
- IFRS basis adjustment: International Mortgage portfolio (271,273) (37,149) - -
- Maltese Business Lending portfolio 130,852 106,126 130,852 106,126
- Maltese Mortgage portfolio 67,598 18,953 67,598 18,953
Investments measured at amortised cost 1,262,175 298,796 457,660 152,389
- Securities portfolio 688,746 119,700 299,267 64,031
- Securitisation portfolio 573,429 179,096 158,393 88,358
Accrued income 14,097 10,873 4,338 5,602
Loans to related parties (included in other assets) 654 283 8,618 23,595
Other receivables (included in other assets) 27,680 12,363 1,609 582
4,246,811 3,168,967 1,122,610 937,851
Instruments measured at fair value through other comprehensive income - 977,327 - 283,611 - Investments - Securities portfolio - 650,217 - 213,693 - Investments - Securitisation portfolio - 327,110 - 69,918
Instruments mandatorily measured at fair value through profit or loss 7,879 1,658 6,302 1,657
- Held for trading derivative financial instruments 2,015 513 1,257 512
- Investments - Securities portfolio 5,292 - 4,473 -
- Investments - Securitisation portfolio 572 1,145 572 1,145
4,254,690 4,147,952 1,128,912 1,223,119
Commitments to purchase financial assets - 11,000 - 1,000
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Annual Report and Financial Statements 2022
Notes to the financial statements
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
The following disclosures present the gross carrying/nominal amount of financial instruments measured at amortised cost to which the impairment requirements in IFRS 9 are applied and the associated credit loss allowances, as well as the fair value of financial instruments measured at FVOCI and the associated credit loss allowances.
Group 2022 2021
Gross carrying/ Credit loss Gross carrying/ Credit loss
nominal amount allowance nominal amount allowance
€000 €000 €000 €000
Financial assets measured at amortised cost
Balances with central banks 149,927 (2) 328,627 (2)
Loans and advances to financial institutions 402,988 (1) 193,725 (1)
Loans and advances to customers 2,404,714 (15,421) 2,346,218 (21,915)
- International Corporate Lending portfolio 526,813 (14,699) 614,814 (21,455)
- Dutch Mortgage portfolio 1,818,186 (184) 1,643,163 (149)
- Belgian Mortgage portfolio 132,130 (130) - -
- IFRS basis adjustment: International Mortgage portfolio (271,273) - (37,149) -
- Maltese Business Lending portfolio 131,065 (213) 106,360 (234)
- Maltese Mortgage portfolio 67,793 (195) 19,030 (77)
Investments measured at amortised cost 1,262,550 (375) 299,072 (276)
- Securities portfolio 688,942 (196) 119,836 (136)
- Securitisation portfolio 573,608 (179) 179,236 (140)
Accrued income 14,392 (295) 10,983 (110)
Loans to related parties (included in other assets) 654 - 283 -
Other receivables (included in other assets) 27,680 - 12,363 -
4,262,905 (16,094) 3,191,271 (22,304)
Commitments to purchase financial assets - - 11,000 -
Commitments to extend credit, guarantees and other commitments 343,496 (1,263) 378,730 (1,158)
343,496 (1,263) 389,730 (1,158)
Total 4,606,401 (17,357) 3,581,001 (23,462)
Credit loss Credit loss
Fair value allowance Fair value allowance
€000 €000 €000 €000
Instruments measured at fair value through
other comprehensive income
- Investments - Securities portfolio - - 650,217 (27)
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Annual Report and Financial Statements 2022
Notes to the financial statements
Bank 2022 2021
Gross carrying/ Credit loss Gross carrying/ Credit loss nominal amount allowance nominal amount allowance €000 €000 €000 €000
Financial assets measured at amortised cost 42,443 (1) 141,621 (1)
Loans and advances to financial institutions 89,838 (1) 111,371 (1)
Loans and advances to customers 530,267 (12,161) 521,917 (19,224)
- International Corporate Lending portfolio 331,409 (11,753) 396,527 (18,913)
- Maltese Business Lending portfolio 131,065 (213) 106,360 (234)
- Maltese Mortgage portfolio 67,793 (195) 19,030 (77)
Investments measured at amortised cost 457,936 (276) 152,647 (258)
- Securities portfolio 299,406 (139) 64,159 (128)
- Securitisation portfolio 158,530 (137) 88,488 (130)
Accrued income 4,615 (277) 5,685 (83)
Loans to related parties (included in other assets) 8,618 - 23,595 -
Other receivables (included in other assets) 1,609 - 582 -
1,135,326 (12,716) 957,418 (19,567)
Commitments to purchase financial assets - - 1,000 -
Commitments to extend credit, guarantees and other commitments 166,311 (1,111) 286,613 (1,105)
166,311 (1,111) 287,613 (1,105)
Total 1,301,637 (13,827) 1,245,031 (20,672)
Credit loss Credit loss Fair value allowance Fair value allowance €000 €000 €000 €000
Investments measured at fair value through other comprehensive income
- Investments - Securities portfolio - - 213,693 (13)
- Investments - Securitisation portfolio - - 69,918 (7)
The following table contains an analysis of the maximum credit risk exposure from financial assets not subject to impairment. Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Instruments mandatorily measured at fair value through profit or loss
- Held for trading derivative financial instruments 2,015 513 1,257 512
- Investments - Securities portfolio 5,292 - 4,473 -
- Investments - Securitisation portfolio 572 1,145 572 1,145
7,879 1,658 6,302 1,657
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Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.2 Summary of credit quality of financial assets to which impairment requirements in IFRS 9 are applied
The Group’s credit risk rating processes are designed to highlight exposures which require closer management attention because of their greater probability of default and potential loss.
As previously explained in the accounting policy (refer to Note 1.5), the Group adopts a five-point internal credit classification rating scale in order to assess the relative credit quality of exposures within its portfolios of financial instruments. In this respect, the members of the respective Management Credit Committees review the grading proposed by the business and the Group’s Credit Risk teams. Each of the five internal credit classification ratings within the scale is aligned to the Group’s approach for determining the relative staging of financial assets in line with the requirements emanating from IFRS 9 as follows:
Stage 1 (Performing)
1. Regular - no material credit concerns.2. Focus - no immediate prospect that a credit loss will ultimately be suffered, but worthy of close credit oversight.
Stage 2 (Underperforming)
3. Under Surveillance - significant increase in credit risk with identified concerns and some prospect that a credit loss may ultimately be suffered.
Stage 3 (Non-performing)
4. Doubtful - it is likely that the contractual terms of the debt will not be met and that a credit loss will be suffered.
5. Write-off - full or partial write-down of exposures with little prospect of recovery.
The financial assets recorded in each stage have the following characteristics:
• Stage 1: Non credit-impaired and without significant increase in credit risk on which a 12-month ECL is recognised (Regular and Focus internal classifications)
• Stage 2: A significant increase in credit risk has been experienced since initial recognition on which a lifetime ECL is recognised (Under Surveillance internal classification)
• Stage 3: Objective evidence of impairment and are therefore considered to be in default or otherwise credit-impaired on which a lifetime specific ECL is recognised (Doubtful and Write-off internal classifications)
Deteriorating Credits
The Group determines that a financial instrument is credit-impaired and in Stage 3 by considering relevant objective evidence, primarily whether:
• contractual payments of either principal or interest are past due by more than 90 days;
• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition; and
• the loan is otherwise considered to be in default.
Credit impaired loans and advances are those that are classified as “Doubtful” or “Write-off”. These grades are assigned when the Group considers that either the customer is unlikely to pay its credit obligations in full, without recourse to security, or when the customer is more than 90 days past due on any material credit obligation to the Group. If unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is more than 90 days past due.
The Group is required to identify non-performing exposures (“NPEs”) and to assess the recoverability of the recognised exposures.
The principal guidance on the definition of NPEs, as referred to in Commission Implementing Regulation (EU) No 680/2014 (referred to as the “EBA International Technical Standard on supervisory reporting”), seeks to ensure the consistent implementation of the key drivers of the NPE definition, namely the “past due” and the “unlikely-to-pay” criteria.
According to the EBA International Technical Standards on supervisory reporting, “non-performing exposures” are those that satisfy either or both of the following criteria:
a) material exposures which are more than 90 days past-due; and
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Annual Report and Financial Statements 2022
Notes to the financial statements
Assessment is made at an obligor (rather than facility) level. This implies that in those cases where a particular debtor has multiple facilities with the Group, the Group considers whether there are indications of unlikeliness to pay at the level of the debtor, irrespective of the different levels of losses that can be incurred in respect of the different facilities resulting from different levels of seniority.
Therefore, the definitions of credit-impaired is aligned as far as possible to the regulatory definition of ‘non-performing’ so that Stage 3 represents all loans that are considered defaulted or otherwise credit-impaired. For further clarity, exposures in respect of which a “default” is considered to have occurred, and exposures that have been found “credit impaired” in accordance with IFRS as adopted by the EU, shall always be considered as “non-performing exposures”.
As described in more detail in section 1.5 of the financial statements, the Group’s staging assessment in respect of exposures classified within the International Corporate Lending portfolio takes into consideration both qualitative and quantitative criteria.
The impact on borrowers’ financial performance of post COVID-19 pandemic headwinds and the macroeconomic impacts of the Ukraine conflict, seeing increased cost inflation, energy inflation and interest rate rises on the financial performance of borrowers within the Group’s lending portfolios, is captured within the quantitative assessment determined within the Group’s IFRS 9 model, since it is taken into account within the macro-economic scenarios used to determine the probability weighted ECL, as well as in the life-time PiT PDs at reporting date used to determine SICR by comparing the magnitude of the difference between the corresponding reporting date implied rating and the origination date implied rating.
The Group exercises a degree of caution in respect of determining whether a significant increase in credit risk has occurred since origination. In this respect, management has introduced certain caps/notch downgrades to the implied ratings assigned to borrowers within the International Corporate portfolio that have undergone significant restructuring to reflect an increased level of credit risk since origination. Notch downgrades were also applied to exposures that have qualitatively been considered ‘under surveillance’, due to management’s concerns that credit losses may potentially be incurred in the future.
Credit information in respect of exposures classified within the Maltese Business Lending portfolio is typically more limited when compared to that in the International Corporate Lending portfolio. As a result, the Group prioritised the performance of credit risk assessments in respect of exposures that requested general public moratoria in line with the conditions established within Directive No. 18 On Moratoria on Credit Facilities in Exceptional Circumstances (‘Directive No. 18’) issued by the Central Bank of Malta or customers requesting financial relief in the form of guaranteed financial assistance packages (e.g., MeAssist), which are guaranteed under the MDB CGS. In such cases, there was the risk that relief measures designed to alleviate liquidity shortfalls in the aftermath of the outbreak of the pandemic might conceal a long-term deterioration in financial condition, thereby delaying the identification of SICR or UTP events. In this respect, exposures benefiting from such relief measures are being monitored on a more frequent basis in order to follow progress on the situation. No SICR and UTP events were observed, and all moratoria expired by December 2021 and repayments resumed as expected.
As described in more detail in section 1.5 of the financial statements, the staging criteria applied in respect of exposures classified within the Dutch Mortgage portfolio are based on credit deterioration indicators such as delinquency levels, forbearance activity and changes in PDs modelled by an external vendor on the basis of forecasted macro-economic scenarios which are revised to reflect the elevated level of economic uncertainty driven by the outbreak of the pandemic and the military conflict between Russia and Ukraine, as explained in more detail in Note 2.2.7 - ‘Current Conditions and Forward-looking information incorporated in the ECL model’. In this regard, the staging criteria are still deemed to be appropriate, with the impact of the pandemic on the credit risk profile of the Dutch Mortgage portfolio being captured in the modelling of PDs. By comparison to the Maltese Business Lending portfolio, the Dutch and Belgian Mortgage portfolio were not subject to COVID-19 relief measures in the form of the moratoria referred to above.
With respect to the Maltese and Belgian Residential Mortgages outstanding, no loans have shown any deterioration in credit risk and no Covid-19 relief measures were granted.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The following table presents information about the credit quality of financial assets held by the Group and the Bank to which the impairment requirements in IFRS 9 are applied:
Under Non-
Performing performing performing
Under
Regular Focus surveillance Doubtful POCI Total
Group €000 €000 €000 €000 €000 €000
As at 31 December 2022
On balance sheet at amortised cost:
Balances with central banks 149,925 - - - - 149,925
Gross 149,927 - - - - 149,927
Credit loss allowances (2) - - - - (2)
Loans and advances to financial institutions 402,987 - - - - 402,987
Gross 402,988 - - - - 402,988
Credit loss allowances (1) - - - - (1)
Loans and advances to customers 2,083,930 156,626 94,854 53,672 211 2,389,293
- International Corporate Lending portfolio 272,553 127,688 74,649 37,013 211 512,114
Gross 275,644 129,762 77,591 43,381 435 526,813
Credit loss allowances (3,091) (2,074) (2,942) (6,368) (224) (14,699)
- Dutch Mortgage portfolio 1,809,918 810 6,775 499 - 1,818,002
Gross 1,810,024 810 6,846 506 - 1,818,186
Credit loss allowances (106) - (71) (7) - (184)
- Belgian Mortgage portfolio 107,191 23,037 1,772 - - 132,000
Gross 107,286 23,056 1,788 - - 132,130
Credit loss allowances (95) (19) (16) - - (130)
- IFRS basis adjustment: International Mortgage portfolio (271,273) - - - - (271,273)
- Maltese Business Lending portfolio 97,943 5,091 11,658 16,160 - 130,852
Gross 98,146 5,096 11,662 16,161 - 131,065
Credit loss allowances (203) (5) (4) (1) - (213)
- Maltese Mortgage portfolio 67,598 - - - - 67,598
Gross 67,793 - - - - 67,793
Credit loss allowances (195) - - - - (195)
Investments measured at amortised cost 1,249,738 - 12,437 - - 1,262,175
- Securities portfolio 676,711 - 12,035 - - 688,746
Gross 676,805 - 12,137 - - 688,942
Credit loss allowances (94) - (102) - - (196)
- Securitisation portfolio 573,027 - 402 - - 573,429
Gross 573,085 - 523 - - 573,608
Credit loss allowances (58) - (121) - - (179)
Accrued income 12,126 1,480 438 48 5 14,097
Gross 12,146 1,504 454 283 5 14,392
Credit loss allowances (20) (24) (16) (235) - (295)
Loans to related parties (included in other assets) 654 - - - - 654
Other receivables (included in other assets) 27,680 - - - - 27,680
3,927,040 158,106 107,729 53,720 216 4,246,811
Off balance sheet at nominal amount:
Commitments to extend credit, guarantees
and other commitments
Nominal amount 294,892 35,214 7,781 5,609 - 343,496
Credit loss allowances (393) (167) (63) (640) - (1,263)
96
Annual Report and Financial Statements 2022
Notes to the financial statements
Performing performing performing
Under
Regular Focus surveillance Doubtful Total
Group €000 €000 €000 €000 €000
As at 31 December 2021
On balance sheet at amortised cost:
Balances with central banks 328,625 - - - 328,625
Gross 328,627 - - - 328,627
Credit loss allowances (2) - - - (2)
Loans and advances to financial institutions 193,724 - - - 193,724
Gross 193,725 - - - 193,725
Credit loss allowances (1) - - - (1)
Loans and advances to customers 1,902,706 149,118 180,024 92,455 2,324,303
- International Corporate Lending portfolio 210,756 131,125 170,894 80,584 593,359
Gross 211,661 132,350 174,749 96,054 614,814
Credit loss allowances (905) (1,225) (3,855) (15,470) (21,455)
- Dutch Mortgage portfolio 1,637,997 1,168 3,441 408 1,643,014
Gross 1,638,068 1,168 3,503 424 1,643,163
Credit loss allowances (71) - (62) (16) (149)
- IFRS basis adjustment: Dutch Mortgage portfolio (37,149) - - - (37,149)
- Maltese Business Lending portfolio 72,149 16,825 5,689 11,463 106,126
Gross 72,240 16,840 5,704 11,576 106,360
Credit loss allowances (91) (15) (15) (113) (234)
- Maltese Mortgage portfolio 18,953 - - - 18,953
Gross 19,030 - - - 19,030
Credit loss allowances (77) - - - (77)
Investments measured at amortised cost 286,074 12,327 395 - 298,796
- Securities portfolio 107,373 12,327 - - 119,700
Gross 107,399 12,437 - - 119,836
Credit loss allowances (26) (110) - - (136)
- Securitisation portfolio 178,701 - 395 - 179,096
Gross 178,720 - 516 - 179,236
Credit loss allowances (19) - (121) - (140)
Accrued income 7,403 1,110 1,814 546 10,873
Gross 7,409 1,119 1,855 600 10,983
Credit loss allowances (6) (9) (41) (54) (110)
Loans to related parties (included in other assets) 283 - - - 283
Other receivables (included in other assets) 12,363 - - - 12,363
2,731,178 162,555 182,233 93,001 3,168,967
97
Annual Report and Financial Statements 2022
Notes to the financial statements
Performing performing performing
Under
Regular Focus surveillance Doubtful Total
Group €000 €000 €000 €000 €000
Off balance sheet at nominal amount:
Commitments to purchase financial assets
Nominal amount 11,000 - - - 11,000
Credit loss allowances - - - - -
Commitments to extend credit,
guarantees and other commitments
Nominal amount 209,416 121,966 42,490 4,858 378,730
Credit loss allowances (93) (221) (330) (514) (1,158)
220,323 121,745 42,160 4,344 388,572
Instruments measured at fair value
through other comprehensive income
- Investments - Securities portfolio
Fair value 650,217 - - - 650,217
Credit loss allowances (27) - - - (27)
- Investments - Securitisation portfolio
Fair value 327,110 - - - 327,110
Credit loss allowances (32) - - - (32)
98
Annual Report and Financial Statements 2022
Notes to the financial statements
Under Non-
Performing performing performing
Under
Regular Focus surveillance Doubtful POCI Total
Bank €000 €000 €000 €000 €000 €000
As at 31 December 2022
On balance sheet at amortised cost:
Balances with central banks 42,442 - - - - 42,442
Gross 42,443 - - - - 42,443
Credit loss allowances (1) - - - - (1)
Loans and advances to financial institutions 89,837 - - - - 89,837
Gross 89,838 - - - - 89,838
Credit loss allowances (1) - - - - (1)
Loans and advances to customers 320,411 76,205 68,174 53,105 211 518,106
- International Corporate Lending portfolio 154,870 71,114 56,516 36,945 211 319,656
Gross 156,525 72,444 58,692 43,313 435 331,409
Credit loss allowances (1,655) (1,330) (2,176) (6,368) (224) (11,753)
- Maltese Business Lending portfolio 97,943 5,091 11,658 16,160 - 130,852
Gross 98,146 5,096 11,662 16,161 - 131,065
Credit loss allowances (203) (5) (4) (1) - (213)
- Maltese Mortgage portfolio 67,598 - - - - 67,598
Gross 67,793 - - - - 67,793
Credit loss allowances (195) - - - - (195)
Investments measured at amortised cost 445,223 - 12,437 - - 457,660
- Securities portfolio 287,232 - 12,035 - - 299,267
Gross 287,269 - 12,137 - - 299,406
Credit loss allowances (37) - (102) - - (139)
- Securitisation portfolio 157,991 - 402 - - 158,393
Gross 158,007 - 523 - - 158,530
Credit loss allowances (16) - (121) - - (137)
Accrued income 3,964 20 306 48 - 4,338
Gross 3,995 20 317 283 - 4,615
Credit loss allowances (31) - (11) (235) - (277)
Loans to related parties (included in other assets) 8,618 - - - - 8,618
Other receivables (included in other assets) 1,609 - - - - 1,609
912,104 76,225 80,917 53,153 211 1,122,610
Commitments to extend credit, guarantees
and other commitments
Nominal amount 128,626 26,062 6,014 5,609 - 166,311
Credit loss allowances (337) (83) (51) (640) - (1,111)
128,289 25,979 5,963 4,969 - 165,200
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Annual Report and Financial Statements 2022
Notes to the financial statements
Under Non-
Performing performing performing
Under
Regular Focus surveillance Doubtful Total
Bank €000 €000 €000 €000 €000
As at 31 December 2021
On balance sheet at amortised cost:
Balances with central banks 141,620 - - - 141,620
Gross 141,621 - - - 141,621
Credit loss allowances (1) - - - (1)
Loans and advances to financial institutions 111,370 - - - 111,370
Gross 111,371 - - - 111,371
Credit loss allowances (1) - - - (1)
Loans and advances to customers 183,033 90,633 138,531 90,496 502,693
- International Corporate Lending portfolio 91,931 73,808 132,842 79,033 377,614
Gross 92,373 74,601 135,280 94,273 396,527
Credit loss allowances (442) (793) (2,438) (15,240) (18,913)
- Maltese Business Lending portfolio 72,149 16,825 5,689 11,463 106,126
Gross 72,240 16,840 5,704 11,576 106,360
Credit loss allowances (91) (15) (15) (113) (234)
- Maltese Mortgage portfolio 18,953 - - - 18,953
Gross 19,030 - - - 19,030
Credit loss allowances (77) - - - (77)
Investments measured at amortised cost 139,667 12,327 395 - 152,389
- Securities portfolio 51,704 12,327 - - 64,031
Gross 51,722 12,437 - - 64,159
Credit loss allowances (18) (110) - - (128)
- Securitisation portfolio 87,963 - 395 - 88,358
Gross 87,972 - 516 - 88,488
Credit loss allowances (9) - (121) - (130)
Accrued income 2,965 1,008 1,113 516 5,602
Gross 2,969 1,016 1,130 570 5,685
Credit loss allowances (4) (8) (17) (54) (83)
Loans to related parties (included in other assets) 23,595 - - - 23,595
Other receivables (included in other assets) 582 - - - 582
602,832 103,968 140,039 91,012 937,851
100
Annual Report and Financial Statements 2022
Notes to the financial statements
Under Non-
Performing performing performing
Under
Regular Focus surveillance Doubtful Total
Bank €000 €000 €000 €000 €000
Off balance sheet at nominal amount
Commitments to purchase financial assets
Nominal amount 1,000 - - - 1,000
Credit loss allowances - - - - -
Commitments to extend credit, guarantees and other commitments
Nominal amount 139,322 107,831 34,602 4,858 286,613
Credit loss allowances (92) (189) (310) (514) (1,105)
140,230 107,642 34,292 4,344 286,508
Investments measured at fair value through other comprehensive income
- Investments - Securities portfolio
Fair value 213,693 - - - 213,693
Credit loss allowances (13) - - - (13)
- Investments - Securitisation portfolio
Fair value 69,918 - - - 69,918
Credit loss allowances (7) - - - (7)
101
Annual Report and Financial Statements 2022
Notes to the financial statements
For securities within both the Securities Investment and Securitisation Investment portfolios, the Group’s credit quality classifications encompass a range of more granular external rating grades attributed by external agencies to debt securities. The following table illustrates this information:
Measured at amortised cost Measured at fair value through
other comprehensive income
Group Bank Group Bank
2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000
Securities Investment portfolio
National and regional government
securities, supranationals and agencies · AAA 348,689 30,477 86,598 - - 35,984 - 35,982
· AA+ to AA- 303,760 55,691 200,634 30,499 - 196,743 - 144,153
· A- to BBB- 24,262 - - - - 17,511 - -
Other securities
· AAA - 10,020 - 10,020 - 266,964 - 1,027
· AA+ to AA- - 11,185 - 11,185 - 133,015 - 32,531
Not rated 12,035 12,327 12,035 12,327 - - - -
688,746 119,700 299,267 64,031 - 650,217 - 213,693
Securitisation Investment portfolio
AAA 567,553 173,238 152,517 82,500 - 327,110 - 69,918
AA+ to AA- 2,950 2,950 2,950 2,950 - - - -
A- to BBB- 1,399 1,399 1,399 1,399 - - - -
BB+ to B- 1,527 1,509 1,527 1,509 - - - -
573,429 179,096 158,393 88,358 - 327,110 - 69,918
Total 1,262,175 298,796 457,660 152,389 - 977,327 - 283,611
These portfolios are also categorised under the five credit quality classifications used by the Group (i.e. regular, focus, under surveillance, doubtful and write-off) and these ratings are determined by MeDirect Malta’s Management Credit Committee.
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Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.3 Detailed information on credit quality of financial assets
The following table provides an overview of the Group’s credit risk by stage and business segment, and the associated ECL coverage.
Summary of credit risk (excluding financial instruments not subject to impairment requirements) by stage distribution and ECL coverage
Gross carrying/nominal amount Credit loss allowance ECL coverage %
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
Group €000 €000 €000 €000 €000 €000 €000 €000 €000 €000 % % % % %
As at 31 December 2022
On balance sheet at
amortised cost:
Balances with
central banks 149,927 - - - 149,927 (2) - - - (2) - - - - -
Loans and advances to
financial institutions 402,988 - - - 402,988 (1) - - - (1) - - - - -
Loans and advances
to customers
- International Corporate
Lending portfolio 405,406 77,591 43,381 435 526,813 (5,165) (2,942) (6,368) (224) (14,699) 1.3 3.8 14.7 51.5 2.8
- Dutch Mortgage
portfolio 1,810,834 6,846 506 - 1,818,186 (106) (71) (7) - (184) - 1.0 1.4 - -
- Belgian Mortgage
portfolio 130,342 1,788 - - 132,130 (114) (16) - - (130) 0.1 0.9 - - 0.1
- IFRS basis adjustment:
Dutch Mortgage portfolio (271,273) - - - (271,273) - - - - - - - - - -
- Maltese Business
Lending portfolio 103,242 11,662 16,161 - 131,065 (208) (4) (1) - (213) 0.2 - - - 0.2
- Maltese Mortgage
portfolio 67,793 - - - 67,793 (195) - - - (195) 0.3 - - - 0.3
Investments
- Securities portfolio 676,805 12,137 - - 688,942 (94) (102) - - (196) - 0.8 - - -
- Securitisation portfolio 573,085 523 - - 573,608 (58) (121) - - (179) - 23.1 - - -
Accrued income 13,650 454 283 5 14,392 (44) (16) (235) - (295) 0.3 3.5 83.0 0.0 2.0
Loans to related parties 654 - - - 654 - - - - - - - - -
(included in other assets)
Other receivables 27,680 - - - 27,680 - - - - - - - - - -
(included in other assets)
Off balance sheet at
nominal amount:
Commitments to extend
credit, financial 330,106 7,781 5,609 - 343,496 (560) (63) (640) - (1,263) 0.2 0.8 11.4 - 0.4
guarantees and
other commitments
4,421,239 118,782 65,940 440 4,606,401 (6,547) (3,335) (7,251) (224) (17,357) 0.1 2.8 11.0 50.9 0.4
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Annual Report and Financial Statements 2022
Notes to the financial statements
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000 % % % %
Group
As at 31 December 2021
On balance sheet at amortised cost:
Balances with central banks 328,627 - - 328,627 (2) - - (2) - - - -
Loans and advances to
financial institutions 193,725 - - 193,725 (1) - - (1) - - - -
Loans and advances to customers
- International Corporate
Lending portfolio 344,011 174,749 96,054 614,814 (2,130) (3,855) (15,470) (21,455) 0.6 2.2 16.1 3.5
- Dutch Mortgage portfolio 1,639,236 3,503 424 1,643,163 (71) (62) (16) (149) - 1.8 3.8 -
- IFRS basis adjustment: Dutch
Mortgage portfolio (37,149) - - (37,149) - - - - - - - -
- Maltese Business Lending portfolio 89,080 5,704 11,576 106,360 (106) (15) (113) (234) 0.1 0.3 1.0 0.2
- Maltese Mortgage portfolio 19,030 - - 19,030 (77) - - (77) 0.4 - - 0.4
Investments
- Securities portfolio 119,836 - - 119,836 (136) - - (136) 0.1 - - 0.1
- Securitisation portfolio 178,720 516 - 179,236 (19) (121) - (140) - 23.4 - 0.1
Accrued income 8,528 1,855 600 10,983 (15) (41) (54) (110) 0.2 2.2 9.0 1.0
Loans to related parties 283 - - 283 - - - - - - - -
(included in other assets)
Other receivables 12,363 - - 12,363 - - - - - - - -
(included in other assets)
Off balance sheet at nominal amount:
Commitments to purchase financial assets 11,000 - - 11,000 - - - - - - - -
Commitments to extend credit, financial 331,382 42,490 4,858 378,730 (314) (330) (514) (1,158) 0.1 0.8 10.6 0.3
guarantees and other commitments
3,238,672 228,817 113,512 3,581,001 (2,871) (4,424) (16,167) (23,462) 0.1 1.9 14.2 0.7
Gross carrying/nominal amount Credit loss allowance ECL coverage %
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000 % % % %
As at 31 December 2021
Investments at fair value through
other comprehensive income
- Investments - Securities portfolio 650,217 - - 650,217 (27) - - (27) - - - -
- Investments - Securitisation portfolio 327,110 - - 327,110 (32) - - (32) - - - -
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Annual Report and Financial Statements 2022
Notes to the financial statements
Gross carrying/nominal amount Credit loss allowance ECL coverage %
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
Bank €000 €000 €000 €000 €000 €000 €000 €000 €000 €000 % % % % %
As at 31 December 2022
On balance sheet at
amortised cost:
Balances with central banks 42,443 - - - 42,443 (1) - - - (1) - - - - -
Loans and advances to
financial institutions 89,838 - - - 89,838 (1) - - - (1) - - - - -
Loans and advances
to customers
- International Corporate
Lending portfolio 228,969 58,692 43,313 435 331,409 (2,985) (2,176) (6,368) (224) (11,753) 1.3 3.7 14.7 51.5 3.5
- Maltese Business
Lending portfolio 103,242 11,662 16,161 - 131,065 (208) (4) (1) - (213) 0.2 - - - 0.2
- Maltese Mortgage portfolio 67,793 - - - 67,793 (195) - - - (195) 0.3 - - - 0.3
Investments measured
at amortised cost
- Securities portfolio 287,269 12,137 - - 299,406 (37) (102) - - (139) - 0.8 - - -
- Securitisation portfolio 158,007 523 - - 158,530 (16) (121) - - (137) - 23.1 - - 0.1
Accrued income 4,015 317 283 - 4,615 (31) (11) (235) - (277) 0.8 3.5 83.0 - 6.0
Loans to related parties
(included in other assets) 8,618 - - - 8,618 - - - - - - - - - -
Other receivables
(included in other assets) 1,609 - - - 1,609 - - - - - - - - - -
Off balance sheet at
nominal amount:
Commitments to extend
credit, financial
guarantees and other
commitments 154,688 6,014 5,609 - 166,311 (420) (51) (640) - (1,111) 0.3 0.8 11.4 0.0 0.7
1,146,491 89,345 65,366 435 1,301,637 (3,894) (2,465) (7,244) (224) (13,827) 0.3 2.8 11.1 51.5 1.1
105
Annual Report and Financial Statements 2022
Notes to the financial statements
Gross carrying/nominal amount Credit loss allowance ECL coverage %
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000 % % % %
As at 31 December 2021
On balance sheet at amortised cost:
Balances with central banks 141,621 - - 141,621 (1) - - (1) - - - -
Loans and advances to financial institutions 111,371 - - 111,371 (1) - - (1) - - - -
Loans and advances to customers
- International Corporate Lending portfolio 166,974 135,280 94,273 396,527 (1,235) (2,438) (15,240) (18,913) 0.7 1.8 16.2 4.8
- Maltese Business Lending portfolio 89,080 5,704 11,576 106,360 (106) (15) (113) (234) 0.1 0.3 1.0 0.2
- Maltese Mortgage portfolio 19,030 - - 19,030 (77) - - (77) 0.4 - - 0.4
Investments measured at amortised cost
- Securities portfolio 64,159 - - 64,159 (128) - - (128) 0.2 - - 0.2
- Securitisation portfolio 87,972 516 - 88,488 (9) (121) - (130) 0.0 23.4 - 0.1
Accrued income 3,985 1,130 570 5,685 (12) (17) (54) (83) 0.3 1.5 9.5 1.5
Loans to related parties
(included in other assets) 23,595 - - 23,595 - - - - - - - -
Other receivables
(included in other assets) 582 - - 582 - - - - - - - -
Off balance sheet at nominal amount:
Commitments to purchase financial assets 1,000 - - 1,000 - - - - - - - -
Commitments to extend credit, financial
guarantees and other commitments 247,153 34,602 4,858 286,613 (281) (310) (514) (1,105) 0.1 0.9 10.6 0.4
956,522 177,232 111,277 1,245,031 (1,850) (2,901) (15,921) (20,672) 0.2 1.6 14.3 1.7
Fair Value Credit loss allowance ECL coverage %
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000 % % % %
As at 31 December 2021
Investments at fair value through
other comprehensive income
- Investments - Securities portfolio 213,693 - - 213,693 (13) - - (13) - - - -
- Investments - Securitisation portfolio 69,918 - - 69,918 (7) - - (7) - - - -
106
Annual Report and Financial Statements 2022
Notes to the financial statements
An exposure is “past due” when any amount of principal, interest or fee has not been paid on the date it was due. Past due but not credit-impaired loans are those loans and advances for which contractual interest or principal payments are past due but do not meet the Group’s criteria for “credit-impaired” as outlined in the Three stage expected credit loss (ECL) approach.
MeDirect Malta and MeDirect Belgium do not have any exposures forming part of the International Corporate Lending, Securities Investment and Securitisation Investment portfolios which are past due but not credit impaired. Past due but not credit-impaired facilities are attributable to the Maltese Business Lending portfolio, representing exposures to counterparties domiciled in Malta and concentrated within the real estate and construction sector, the Dutch Mortgage portfolio, representing residential mortgage exposures to households and individuals domiciled in the Netherlands, as well as a small portfolio of professional lending exposures held for rental purposes and the Maltese Mortgage portfolio, representing home loans granted to Malta individuals.
Unless identified at an earlier stage, all financial assets are deemed to have experienced a significant increase in credit risk when they are more than 30 days past due. As at 31 December 2022 and 2021, no exposures within the Belgian and Maltese Mortgage portfolio, Securities Investment and Securitisation Investment portfolios were classified as Stage 2, with the exception of the Group’s investment in the most junior GHI-2019 tranche measured at amortised cost, which was not past due but classified as “Under Surveillance” as at 31 December 2022 and 2021. None of the Stage 2 exposures within the International Corporate Lending portfolio were past due as at 31 December 2022 and 2021.
In this regard, the following disclosure only presents the ageing of Stage 2 financial assets in the Maltese Business Lending and Dutch Mortgage portfolios. It distinguishes between those assets that are classified as Stage 2 when they are either not past due or up to 30 days past due from those that are classified as Stage 2 due to ageing and are more than 30 days past due (>30 DPD). Past due financial instruments are those loans where customers have failed to make payments in accordance with the contractual terms of their facilities. Stage 1 exposures with a gross carrying amount of €0.7 million as at 31 December 2022 (2021: €1.2 million) classified within the Dutch Mortgage portfolios and Stage 1 exposures with a gross carrying amount of €0.2 million as at 31 December 2021 classified within the Maltese Business Lending portfolio were classified as past due but not credit-impaired.
Gross exposure Credit loss allowance
Stage 2 Of which up Of which Stage 2 Of which up Of which more
to 30 DPD more than to 30 DPD more than
30 DPD 30 DPD
€000 €000 €000 €000 €000 €000
Group
As at 31 December 2022
Dutch Mortgage portfolio
- Loans and advances to customers 6,846 5,667 1,179 (71) (1) (70)
Maltese Business Lending portfolio
- Loans and advances to customers 11,662 11,662 - (4) (4) -
- Accrued income 44 44 - - - -
Belgian Mortgage portfolio
- Loans and advances to customers 1,788 352 1,436 (24) (16) (8)
107
Annual Report and Financial Statements 2022
Notes to the financial statements
Stage 2 Of which up Of which Stage 2 Of which up Of which more
to 30 DPD more than to 30 DPD more than
30 DPD 30 DPD
€000 €000 €000 €000 €000 €000
Group
As at 31 December 2021
Dutch Mortgage portfolio
- Loans and advances to customers 3,503 782 2,721 (62) (1) (61)
Maltese Business Lending portfolio
- Loans and advances to customers 5,704 5,687 17 (15) (15) -
- Accrued income 9 9 - - - -
Gross exposure Credit loss allowance
Stage 2 Of which up Of which Stage 2 Of which up Of which more
to 30 DPD more than to 30 DPD more than
30 DPD 30 DPD
€000 €000 €000 €000 €000 €000
Bank
As at 31 December 2022
Maltese Business Lending portfolio
- Loans and advances to customers 11,662 11,662 - (4) (4) -
- Accrued income 44 44 - - - -
11,706 11,706 - (4) (4) -
Gross exposure Credit loss allowance
Stage 2 Of which up Of which Stage 2 Of which up Of which more
to 30 DPD more than to 30 DPD more than
30 DPD 30 DPD
€000 €000 €000 €000 €000 €000
Bank
As at 31 December 2021
Maltese Business Lending portfolio
- Loans and advances to customers 5,704 5,687 17 (15) (15) -
- Accrued income 9 9 - - - -
5,713 5,696 17 (15) (15) -
108
Annual Report and Financial Statements 2022
Notes to the financial statements
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage distribution.
Gross carrying amount/nominal amount
Under Credit loss Regular Focus surveillance Doubtful POCI Total allowance Net
€000 €000 €000 €000 €000 €000 €000 €000
Group As at 31 December 2022
On balance sheet at amortised cost:
Balances with central banks 149,927 - - - - 149,927 (2) 149,925
Loans and advances to
financial institutions 402,988 - - - - 402,988 (1) 402,987
Loans and advances to customers
- International Corporate
Lending portfolio
- Stage 1 275,644 129,762 - - - 405,406 (5,165) 400,241
- Stage 2 - - 77,591 - - 77,591 (2,942) 74,649
- Stage 3 - - - 43,381 435 43,816 (6,592) 37,224
- Dutch Mortgage portfolio
- Stage 1 1,810,024 810 - - - 1,810,834 (106) 1,810,728
- Stage 2 - - 6,846 - - 6,846 (71) 6,775
- Stage 3 - - - 506 - 506 (7) 499
- Belgian Mortgage portfolio
- Stage 1 107,286 23,056 - - - 130,342 (114) 130,228
- Stage 2 - - 1,788 - - 1,788 (16) 1,772
-
- IFRS basis adjustment:
International Mortgage portfolio (271,273) - - - - (271,273) - (271,273)
- Maltese Business Lending portfolio
- Stage 1 98,146 5,096 - - - 103,242 (208) 103,034
- Stage 2 - - 11,662 - - 11,662 (4) 11,658
- Stage 3 - - - 16,161 - 16,161 (1) 16,160
- Maltese Mortgage portfolio
- Stage 1 67,793 - - - - 67,793 (195) 67,598
Investments measured
at amortised cost
- Securities portfolio
- Stage 1 676,805 - - - - 676,805 (94) 676,711
- Stage 2 - - 12,137 - - 12,137 (102) 12,035
- Securitisation portfolio
- Stage 1 573,085 - - - - 573,085 (58) 573,027
- Stage 2 - - 523 - - 523 (121) 402
Accrued income
- Stage 1 12,146 1,504 - - - 13,650 (44) 13,606
- Stage 2 - - 454 - - 454 (16) 438
- Stage 3 - - - 283 5 288 (235) 53
Loans to related parties
(included in other assets)
- Stage 1 654 - - - - 654 - 654
Other receivables
(included in other assets) - Stage 1 27,680 - - - - 27,680 - 27,680
109
Annual Report and Financial Statements 2022
Notes to the financial statements
Under Credit loss Regular Focus surveillance Doubtful POCI Total allowance Net
€000 €000 €000 €000 €000 €000 €000 €000
Group As at 31 December 2022
Off balance sheet
at nominal amount:
Commitments to extend credit,
financial guarantees and other
commitments
- Stage 1 294,892 35,214 - - - 330,106 (560) 329,546
- Stage 2 - - 7,781 - - 7,781 (63) 7,718
- Stage 3 - - - 5,609 - 5,609 (640) 4,969
110
Annual Report and Financial Statements 2022
Notes to the financial statements
Under Credit loss Regular Focus surveillance Doubtful Total allowance Net
€000 €000 €000 €000 €000 €000 €000
Group As at 31 December 2021 On balance sheet at amortised cost:
Balances with central banks 328,627 - - - 328,627 (2) 328,625
Loans and advances
to financial institutions 193,725 - - - 193,725 (1) 193,724
Loans and advances to customers
- International Corporate Lending portfolio
- Stage 1 211,661 132,350 - - 344,011 (2,130) 341,881
- Stage 2 - - 174,749 - 174,749 (3,855) 170,894
- Stage 3 - - - 96,054 96,054 (15,470) 80,584
- Dutch Mortgage portfolio
- Stage 1 1,638,068 1,168 - - 1,639,236 (71) 1,639,165
- Stage 2 - - 3,503 - 3,503 (62) 3,441
- Stage 3 - - - 424 424 (16) 408
- IFRS basis adjustment:
Dutch Mortgage portfolio (37,149) - - - (37,149) - (37,149)
- Maltese Business Lending portfolio
- Stage 1 72,240 16,840 - - 89,080 (106) 88,974
- Stage 2 - - 5,704 - 5,704 (15) 5,689
- Stage 3 - - - 11,576 11,576 (113) 11,463
- Maltese Mortgage portfolio
- Stage 1 19,030 - - - 19,030 (77) 18,953
Investments measured at amortised cost
- Securities portfolio - Stage 1 107,399 12,437 - - 119,836 (136) 119,700
- Securitisation portfolio - Stage 1 178,720 - - - 178,720 (19) 178,701
- Stage 2 - - 516 - 516 (121) 395
Accrued income
- Stage 1 7,409 1,119 - - 8,528 (15) 8,513
- Stage 2 - - 1,855 - 1,855 (41) 1,814
- Stage 3 - - - 600 600 (54) 546
Loans to related parties
(included in other assets)
- Stage 1 283 - - - 283 - 283
Other receivables
(included in other assets)
- Stage 1 12,363 - - - 12,363 - 12,363
111
Annual Report and Financial Statements 2022
Notes to the financial statements
Under Credit loss Regular Focus surveillance Doubtful Total allowance Net
€000 €000 €000 €000 €000 €000 €000
Group As at 31 December 2021
Off balance sheet
at nominal amount:
Commitments to
purchase financial assets
- Stage 1 11,000 - - - 11,000 - 11,000
Commitments to extend credit,
financial guarantees and other
commitments
- Stage 1 209,416 121,966 - - 331,382 (314) 331,068
- Stage 2 - - 42,490 - 42,490 (330) 42,160
- Stage 3 - - - 4,858 4,858 (514) 4,344
2,952,792 285,880 228,817 113,512 3,581,001 (23,462) 3,557,539
Gross carrying amount/nominal amount
Under Credit loss Regular Focus surveillance Doubtful Total allowance
€000 €000 €000 €000 €000 €000
Group
As at 31 December 2021
Investments measures at fair value
through other comprehensive income
- Securities portfolio - Stage 1 650,217 - - - 650,217 (27)
- Securitisation portfolio
112
Annual Report and Financial Statements 2022
Notes to the financial statements
Gross carrying amount/nominal amount
Under Credit loss Regular Focus surveillance Doubtful POCI Total allowance Net
€000 €000 €000 €000 €000 €000 €000 €000
Bank
As at 31 December 2022
On balance sheet at amortised cost:
Balances with central banks
- Stage 1 42,443 - - - - 42,443 (1) 42,442
Loans and advances to
financial institutions
- Stage 1 89,838 - - - - 89,838 (1) 89,837
Loans and advances to customers - International Corporate Lending portfolio - Stage 1 156,525 72,444 - - - 228,969 (2,985) 225,984
- Stage 2 - - 58,692 - - 58,692 (2,176) 56,516
- Stage 3 - - - 43,313 435 43,748 (6,592) 37,156
- Maltese Business Lending portfolio
- Stage 1 98,146 5,096 - - - 103,242 (208) 103,034
- Stage 2 - - 11,662 - - 11,662 (4) 11,658
- Stage 3 - - - 16,161 - 16,161 (1) 16,160
- Maltese Mortgage portfolio
- Stage 1 67,793 - - - - 67,793 (195) 67,598
Investments measured at amortised cost - Securities portfolio
- Stage 1 287,269 - - - - 287,269 (37) 287,232
- Stage 2 - - 12,137 - - 12,137 (102) 12,035
- Securitisation portfolio - Stage 1 158,007 - - - - 158,007 (16) 157,991
- Stage 2 - - 523 - - 523 (121) 402
Accrued income
- Stage 1 3,995 20 - - - 4,015 (31) 3,984
- Stage 2 - - 317 - - 317 (11) 306
- Stage 3 - - - 283 - 283 (235) 48
Loans to related parties
(included in other assets)
- Stage 1 8,618 - - - - 8,618 - 8,618
Other receivables
(included in other assets) - Stage 1 1,609 - - - - 1,609 - 1,609
Off balance sheet at nominal amount:
Commitments to extend credit, financial
guarantees and other commitments - Stage 1 128,626 26,062 - - - 154,688 (420) 154,268
- Stage 2 - - 6,014 - - 6,014 (51) 5,963
- Stage 3 - - - 5,609 - 5,609 (640) 4,969
1,042,869 103,622 89,345 65,366 435 1,301,637 (13,827) 1,287,810
113
Annual Report and Financial Statements 2022
Notes to the financial statements
Gross carrying amount/nominal amount
Under Credit loss Regular Focus surveillance Doubtful Total allowance Net
€000 €000 €000 €000 €000 €000 €000
Bank
As at 31 December 2021
On balance sheet at amortised cost:
Balances with central banks
- Stage 1 141,621 - - - 141,621 (1) 141,620
Loans and advances
to financial institutions
- Stage 1 111,371 - - - 111,371 (1) 111,370
Loans and advances to customers
- International Corporate
Lending portfolio
- Stage 1 92,373 74,601 - - 166,974 (1,235) 165,739
- Stage 2 - - 135,280 - 135,280 (2,438) 132,842
- Stage 3 - - - 94,273 94,273 (15,240) 79,033
- Maltese Business Lending portfolio
- Stage 1 72,240 16,840 - - 89,080 (106) 88,974
- Stage 2 - - 5,704 - 5,704 (15) 5,689
- Stage 3 - - - 11,576 11,576 (113) 11,463
- Maltese Mortgage portfolio
- Stage 1 19,030 - - - 19,030 (77) 18,953
Investments measured at amortised cost
- Securities portfolio
- Stage 1 51,722 12,437 - - 64,159 (128) 64,031
- Securitisation portfolio
- Stage 1 87,972 - - - 87,972 (9) 87,963
- Stage 2 - - 516 - 516 (121) 395
Accrued income
- Stage 1 2,969 1,016 - - 3,985 (12) 3,973
- Stage 2 - - 1,130 - 1,130 (17) 1,113
- Stage 3 - - - 570 570 (54) 516
Loans to related parties
(included in other assets)
- Stage 1 23,595 - - - 23,595 - 23,595
Other receivables
(included in other assets)
- Stage 1 582 - - - 582 - 582
Off balance sheet at
nominal amount:
Commitments to purchase
financial assets
- Stage 1 1,000 - - - 1,000 - 1,000
Commitments to extend credit,
financial guarantees and other
commitments
- Stage 1 139,322 107,831 - - 247,153 (281) 246,872
- Stage 2 - - 34,602 - 34,602 (310) 34,292
- Stage 3 - - - 4,858 4,858 (514) 4,344
743,797 212,725 177,232 111,277 1,245,031 (20,672) 1,224,359
114
Annual Report and Financial Statements 2022
Notes to the financial statements
Gross carrying amount/nominal amount
Under Credit loss Regular Focus surveillance Doubtful Total allowance
€000 €000 €000 €000 €000 €000
Bank As at 31 December 2021
Investments measured at
fair value through
other comprehensive income
- Securities portfolio
- Stage 1 213,693 - - - 213,693 (13)
- Securitisation portfolio
- Stage 1 69,918 - - - 69,918 (7)
Reconciliation of changes in gross carrying/nominal amount and credit loss allowances for loans and advances to customers, including accrued income, and other credit-related commitments.
The following disclosure provides a reconciliation by stage of the Group’s gross carrying/nominal amounts and credit loss allowances for loans and advances to customers for the International Corporate Lending portfolio, including credit-related commitments. On-balance sheet exposures are shown at their gross carrying amounts whereas off-balance sheet exposures are shown at their nominal amounts.
Within the following tables the line items “New business” and “Repayments and disposals” represent movements within the Group’s International Corporate Lending portfolio in respect of gross carrying/nominal amounts and associated credit loss allowances. “New business” represents new lending sanctioned during the financial year. Meanwhile, “Repayments and disposals” reflect loan repayments and disposals that occurred during the financial year, which however relate to loans that would only have existed on the Group’s balance sheet as at the end of the preceding financial reporting period. Accordingly, repayments and disposals relating to loans sanctioned during the financial reporting period are netted off against new lending included within “New business”.
The line item “Transfers of financial instruments” represents the impact of stage transfers on gross carrying/nominal amounts and associated credit loss allowances determined as at the end of the financial reporting period. The line item “Net re-measurement of ECL arising from stage transfers and changes in risk parameters” represents the increase or decrease in credit loss allowances due to modified measurement basis from 12-month to lifetime in relation to stage transfers. It also includes the effects of changes in other expected credit loss measurement factors and model parameters such as, but not limited to, changes in time to maturity of assets; changes in underlying credit ratings; changes in measurement of loss given default and changes in respect of multiple economic scenarios. Finally, this line item also comprises the increase in ECL in respect of assets written off during the period measured as the movement between 1 January and the date of write-off.
The decrease in credit loss allowances in the financial year ended 31 December 2022 was principally driven by the general improvement in financial condition experienced by borrowers within the portfolio, leading to significant repayments and in turn a decrease in ECLs of €6.5 million. Also, the expected credit loss allowances decreased as a result of the disposal of Stage 3 loans and the realisation of ECLs on Stage 3 loans by way of write-off amounting to €7.7 million as disclosed in the line item “Realisation
of ECL through restructuring and disposals”.
115
Annual Report and Financial Statements 2022
Notes to the financial statements
As per the table below, no exposures were transferred out of Stage 1 into Stages 2 or 3 during the year (2021: €12 million), with net transfers to Stage 3 amounting to €22 million (2021: €41 million). The net remeasurement of ECLs reflects in the increase in PDs and LGDs driven by point-in-time economic adjustments and more pessimistic forward-looking macroeconomic scenarios being forecasted in the modelling of ECLs. As explained in more detail in Note 2.2.7 – ‘Current Conditions and Forward-looking information incorporated in the ECL model’, the Group deemed that forward-looking macroeconomic scenarios provided by the external supplier now appropriately reflected the uncertainty within the wider economy and reflects this increase in PDs and LGDs.
The table below provides a reconciliation of movements in gross carrying/nominal amounts and credit loss allowances, by stage, for the International Corporate Lending portfolio.
Non credit-impaired Credit-impaired Total
Stage 1 Stage 2 Stage 3 POCI
Gross Gross Gross Gross Gross
carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit
nominal loss nominal loss nominal loss nominal loss nominal loss
amount allowance amount allowance amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
International Corporate
Lending portfolio
Group
Year ended 31 December 2022
At beginning of year 522,117 (2,455) 215,631 (4,226) 101,296 (16,038) - - 839,044 (22,719)
New business 99,903 (1,510) 1,759 (62) - - 435 (224) 102,097 (1,796)
Repayments and disposals (198,913) 918 (55,757) 1,319 (30,704) 11,291 - - (285,374) 13,528
Transfers of financial
instruments
- Transfers from
Stage 2 to Stage 1 88,881 (1,232) (88,881) 1,232 - - - - - -
- Transfers to Stage 3 - - (22,319) 86 22,319 (86) - - - -
- Transfers from Stage 3 10,560 (1,460) 33,283 (4,926) (43,843) 6,386 - - - -
Net remeasurement of ECL
arising from stage transfers
and changes in risk parameters - 8 - 3,556 - (8,796) - - - (5,232)
At end of year 522,548 (5,731) 83,716 (3,021) 49,068 (7,243) 435 (224) 655,767 (16,219)
ECL released for the year 6,502
Assets written off (7,673)
Other (112)
Change in expected credit losses and other credit impairment charges for the year (1,283)
116
Annual Report and Financial Statements 2022
Notes to the financial statements
As at 31 December 2022 31 December 2022
Gross carrying/ Credit loss ECL (charge)/
nominal amount allowance release
€000 €000 €000
Group
As per preceding table 655,767 (16,219) (1,283)
Balances at central banks 149,927 (2) -
Loans and advances to financial institutions 402,988 (1) -
Loans and advances to customers
- Dutch Mortgage portfolio: drawn exposures 1,546,913 (184) (35)
- Dutch Mortgage portfolio: undrawn commitments 92,420 (4) (2)
- Belgian Mortgage portfolio: drawn exposures 132,130 (130) (130)
- Belgian Mortgage portfolio: undrawn commitments 63,808 (34) (34)
- Maltese Business Lending portfolio: drawn exposures 131,065 (213) 3,691
- Maltese Business Lending portfolio: undrawn commitments 13,370 - -
- Maltese Mortgage portfolio: drawn exposures 67,793 (169) (92)
- Maltese Mortgage portfolio: undrawn commitments 33,248 - -
Investments measured at amortised cost
- Securities portfolio 688,942 (196) (65)
- Securitisation portfolio 573,608 (179) (7)
Other accrued income 27,680 (4) (2)
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied through profit or loss 4,579,659 (17,335) 2,041
Total credit loss allowance/total income statement ECL release for the year (17,335) 2,041
Non credit-impaired Credit-impaired Total
Stage 1 Stage 2 Stage 3 POCI
Gross Gross Gross Gross Gross
carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit
nominal loss nominal loss nominal loss nominal loss nominal loss
amount allowance amount allowance amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
International Corporate
Lending portfolio
Bank
Year ended 31 December 2022
At beginning of year 315,834 (1,511) 173,629 (2,778) 108,068 (15,803) - - 597,531 (20,092)
New business 17,692 (255) 1,594 (61) - - 435 (224) 19,721 (540)
Repayments and disposals (106,018) 381 (42,853) 1,046 (39,250) 11,291 - - (188,121) 12,718
Transfers of financial
instruments
- Transfers from
Stage 2 to Stage 1 78,655 (877) (78,655) 877 - - - - - -
- Transfers to Stage 3 - - (22,214) 86 22,214 (86) - - - -
- Transfers from Stage 3 10,561 (1,460) 31,471 (4,691) (42,032) 6,151 - - - -
Net remeasurement of ECL
arising from stage transfers - -
and changes in risk parameters - 443 - 3,283 - (8,796) - - - (5,070)
At end of year 316,724 (3,279) 62,972 (2,238) 49,000 (7,243) 435 (224) 429,131 (12,984)
ECL released for the year 7,108
Assets written off (7,673)
Other (266)
Change in expected credit losses and other credit impairment charges for the year (831)
117
Annual Report and Financial Statements 2022
Notes to the financial statements
Year ended
As at 31 December 2022 31 December 2022
Gross carrying/ Credit loss ECL (charge)/
nominal amount allowance release
€000 €000 €000
Bank
As per preceding table 429,131 (12,984) (831)
Balances at central banks 42,443 (1) -
Loans and advances to financial institutions 89,838 (1) -
Loans and advances to customers
- Maltese Business Lending portfolio: drawn exposures 131,065 (213) 3,691
- Maltese Business Lending portfolio: undrawn commitments 13,370 - -
- Maltese Mortgage portfolio: drawn exposures 67,793 (169) (92)
- Maltese Mortgage portfolio: undrawn commitments 33,248 - -
Investments measured at amortised cost
- Securities portfolio 299,406 (139) (16)
- Securitisation portfolio 158,530 (137) (7)
Other accrued income 1,609 - 1
Summary of financial instruments to which
the impairment requirements in IFRS 9 are applied through profit or loss 1,266,433 (13,644) 2,746
Total credit loss allowance/total income statement ECL release for the year (13,644) 2,746
Expected credit losses measured in respect of exposures within the Maltese Business Lending portfolio classified as Stage 1 and Stage 2 remained constant at €0.2 million during the year (2021: a decrease from €0.5 million to €0.2 million). The impact of the pandemic on the Group’s Maltese Business Lending portfolio has been limited since the majority of exposures within the Maltese Business Lending portfolio relate to the real estate and construction sectors, which sectors have largely managed to resume operations in the aftermath of the outbreak of the pandemic and are more dependent on the longer-term economic recovery of the country. The Group’s credit risk is also mitigated through the maintenance of adequate levels of collateralisation, typically by charges on real estate properties. In this regard, movements in expected credit losses were largely driven by model and risk parameter changes, primarily due to the economic recovery during the year, improving macroeconomic scenarios and to a lesser extent due to stage transfers and net book movements during the year.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The table below provides a reconciliation of movements in gross carrying/nominal amounts and credit loss allowances by stage for the International Corporate Lending portfolio for the financial year ended 31 December 2021:
Non credit-impaired Credit-impaired Total
Stage 1 Stage 2 Stage 3
Gross Gross Gross Gross
carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit
nominal loss nominal loss nominal loss nominal loss
amount allowance amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000 €000 €000
International Corporate
Lending portfolio
Group
Year ended 31 December 2021
At beginning of year 857,774 (8,958) 239,061 (5,285) 176,859 (43,125) 1,273,694 (57,368)
New business 50,217 (145) 1,475 (11) - - 51,692 (156)
Repayments and disposals (373,581) 4,005 (14,480) 537 (60,264) 29,139 (448,325) 33,681
Transfers of financial
instruments
- Transfers from
Stage 1 to Stage 2 (67,388) 1,375 67,388 (1,375) - - - -
- Transfers from
Stage 2 to Stage 1 67,953 (1,411) (67,953) 1,411 - - - -
- Transfers to Stage 3 (12,858) 127 (28,492) 933 41,350 (1,060) - -
- Transfers from Stage 3 - - 18,632 (8,300) (18,632) 8,300 - -
Net remeasurement of ECL
arising from stage transfers
and changes in risk parameters - 3,309 - 9,246 - (47,309) - (34,754)
Uncertainty adjustment - (757) - (1,382) - - - (2,139)
Realisation of ECL through
restructuring and disposals - - - - (38,017) 38,017 (38,017) 38,017
At end of year 522,117 (2,455) 215,631 (4,226) 101,296 (16,038) 839,044 (22,719)
ECL charge for the year 34,649
Effect of foreign exchange differences (38,017)
Realisation of ECL through restructuring and disposals 557
Change in expected credit losses and other credit impairment charges for the year (2,811)
119
Annual Report and Financial Statements 2022
Notes to the financial statements
Year ended
As at 31 December 2021 31 December 2021
Gross carrying/ Credit loss ECL (charge)/
nominal amount allowance release
€000 €000 €000
Group
As per preceding table 839,044 (22,719) (2,811)
Balances at central banks 328,627 (2) -
Loans and advances to financial institutions 198,776 (1) -
Loans and advances to customers
- Dutch Mortgage portfolio: drawn exposures 1,606,014 (149) (2)
- Dutch Mortgage portfolio: undrawn commitments 72,079 (2) 15
- Maltese Business Lending portfolio: drawn exposures 106,360 (234) 307
- Maltese Business Lending portfolio: undrawn commitments 60,737 - -
- Maltese Mortgage portfolio: drawn exposures 19,030 (77) (77)
- Maltese Mortgage portfolio: undrawn commitments 37,504 - -
Investments measured at amortised cost
- Securities portfolio 119,836 (136) 107
- Securitisation portfolio 179,236 (140) 11
Other accrued income 10,992 (2) -
Summary of financial instruments to which the impairment requirements in IFRS 9
are applied through profit or loss 3,578,235 (23,462) (2,450)
Investments measured at fair value through other comprehensive income
- Securities portfolio 650,217 (27) 156
- Securitisation portfolio 327,110 (32) (32)
120
Annual Report and Financial Statements 2022
Notes to the financial statements
Non credit-impaired Credit-impaired Total
Stage 1 Stage 2 Stage 3
Gross Gross Gross Gross
carrying/ Credit carrying/ Credit carrying/ Credit carrying/ Credit
nominal loss nominal loss nominal loss nominal loss
amount allowance amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000 €000 €000
International Corporate Lending portfolio
Bank
Year ended 31 December 2021
At beginning of year 787,355 (7,736) 219,670 (4,881) 151,616 (35,924) 1,158,641 (48,541)
New business 17,728 (118) 1,246 (9) - - 18,974 (127)
Repayments and disposals (496,635) 4,555 (14,484) 473 (46,878) 22,421 (557,997) 27,449
Transfers of financial instruments
- Transfers from Stage 1 to Stage 2 (46,767) 942 46,767 (942) - - - -
- Transfers from Stage 2 to Stage 1 67,953 (1,411) (67,953) 1,411 - - - -
- Transfers to Stage 3 (12,796) 127 (28,047) 925 40,843 (1,052) - -
- Transfers from Stage 3 - - 16,421 (3,320) (16,421) 3,320 - -
Net remeasurement of ECL arising from stage
transfers and changes in risk parameters - 2,696 - 4,445 - (34,249) - (27,108)
Uncertainty adjustment - (581) - (867) - - - (1,448)
Realisation of ECL through
restructuring and disposals - - - - (29,676) 29,676 (29,676) 29,676
At end of year 316,838 (1,526) 173,620 (2,765) 99,484 (15,808) 589,942 (20,099)
ECL charge for the year 28,442
Effect of foreign exchange differences 563
Realisation of ECL through restructuring and disposals (29,676)
Change in expected credit losses and other
credit impairment charges for the year (671)
121
Annual Report and Financial Statements 2022
Notes to the financial statements
Year ended
As at 31 December 2021 31 December 2021
Gross carrying/ Credit loss ECL (charge)/
nominal amount allowance release
€000 €000 €000
Bank
As per preceding table 589,942 (20,099) (671)
Balances at central banks 141,621 (1) -
Loans and advances to financial institutions 111,371 (1) -
Loans and advances to customers
- Maltese Business Lending portfolio: drawn exposures 106,360 (234) 307
- Maltese Business Lending portfolio: undrawn commitments 60,737 - -
- Maltese Mortgage portfolio: drawn exposures 19,030 (77) (77)
- Maltese Mortgage portfolio: undrawn commitments 37,504 - -
Investments measured at amortised cost
- Securities portfolio 64,159 (128) 93
- Securitisation portfolio 88,488 (130) 8
Other accrued income 1,645 (2) -
Summary of financial instruments to which the impairment requirements in IFRS 9
are applied through profit or loss 1,220,857 (20,672) (340)
Investments measured at fair value through other comprehensive income
- Securities portfolio 213,693 (13) 48
- Securitisation portfolio 69,918 (7) (7)
Total credit loss allowance/total income statement ECL charge for the year (20,692) (299)
122
Annual Report and Financial Statements 2022
Notes to the financial statements
Credit loss allowances attributable to loans and advances to customers
The following table shows the credit loss allowances on loans and advances to customers recognised on the Group’s and Bank’s balance sheets as at 31 December 2022 and 2021, excluding credit loss allowances on accrued interest and other credit-related commitments, analysed by stage distribution.
Group Bank
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
As at 31 December 2022
International Corporate Lending portfolio 5,165 2,942 6,368 224 14,699 2,985 2,176 6,368 224 11,753
Dutch Mortgage portfolio 106 71 7 - 184 - - - - -
Belgian Mortgage portfolio 114 16 - - 130 - - - - -
Maltese Business Lending portfolio 208 4 1 - 213 208 4 1 - 213
Maltese mortgage portfolio 195 - - - 195 195 - - - 195
5,788 3,033 6,376 224 15,421 3,388 2,180 6,369 224 12,161
Group Bank
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000
As at 31 December 2021
International Corporate Lending portfolio 2,130 3,855 15,470 21,455 1,235 2,438 15,240 18,913
Dutch Mortgage portfolio 71 62 16 149 - - - -
Maltese Business Lending portfolio 106 15 113 234 106 15 113 234
Maltese mortgage portfolio 77 - - 77 77 - - 77
2,384 3,932 15,599 21,915 1,418 2,453 15,353 19,224
The movement in credit loss allowances and the ECL charge for the financial year ended 31 December 2022 and 2021 are analysed in detail in the tables presented in the previous section.
During the financial year ended 31 December 2022, interest income amounting to €4.2 million (2021: €5.1 million) and €4.1 million (2021: €5 million) of the Group and the Bank respectively was recognised in profit or loss on credit-impaired loans.
123
Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.4 Loans and advances to customers with renegotiated terms and the Group’s forbearance policy
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. An existing loan whose terms have been modified would be derecognised in certain circumstances and the renegotiated loan recognised as a new loan at fair value.
Forbearance measures always aim to return the exposure to a situation of sustainable repayment capacity. Forbearance measures consist of concessions towards a debtor facing or about to face difficulties in meeting its financial commitments (“financial difficulties”).
The Group renegotiates loans 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.
A concession is defined in the European Banking Authority (“EBA”) final draft Implementing Technical Standards (2014) and further set out in the EBA final guidance on Management of Non-performing and Forborne Exposures (2018), which refer to either of the following actions:
• a modification of the previous terms and conditions of a contract which the debtor was considered unable to comply with 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; or
• a total or partial refinancing of a troubled debt contract, that would not have been granted had the debtor not been in financial difficulties.
The revised terms usually applied by the Group include extending the maturity, amending the terms of loan covenants and partial write-offs where there is reasonable financial evidence to demonstrate the borrower’s inability to repay the loan in full. MeDirect Malta’s Management Credit Committee regularly reviews reports on forbearance activities.
For the purposes of these financial statements, “loans with renegotiated terms” are defined as loans that have been restructured due to a deterioration in the borrower’s financial position, for which the Group has made concessions by agreeing to terms and conditions that are more favourable for the borrower than the Group had provided initially and that it would not otherwise consider. A loan continues to be presented as part of loans with renegotiated terms until maturity, early repayment or write-off, unless certain prescriptive conditions are met.
Typically, the Group either categorises a forborne exposure as performing or classifies the exposure as forborne non-performing if unlikely-to-pay indicators are evidenced, as outlined in the Non-Performing and Default Exposure section of the Group’s Credit Policy.
Renegotiated loans can be classified as non-credit-impaired where the renegotiation has resulted from significant concern about a borrower’s ability to meet their contractual payment terms, but the renegotiated terms are based on current market rates and contractual cash flows are expected to be collected in full following the renegotiation.
Non-credit-impaired renegotiated loans also include previously impaired renegotiated loans that have demonstrated satisfactory performance over a period of time or have been assessed based on all available evidence as having no remaining indicators of impairment.
On renegotiation, where the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified, such that the renegotiated loan is substantially a different financial instrument, the loan would be derecognised and a new loan is recognised, for accounting purposes. However, newly recognised loans retain the “non-performing forborne” classification for regulatory reporting purposes.
124
Annual Report and Financial Statements 2022
Notes to the financial statements
As outlined previously, renegotiated loans that are classified as credit-impaired/Stage 3 exposures at the renegotiation date which have not had a substantial modification in terms, are not derecognised and remain disclosed as credit-impaired/Stage 3 exposures until there is sufficient evidence of cure to demonstrate a significant reduction in the risk of non-payment of future cash flows observed over a one-year period and there are no other indicators of impairment. In contrast, when substantial modification has been made to the terms of the renegotiated loan, the old financial asset is derecognised and a new financial asset is recognised, the latter being classified as a Stage 1 asset unless originated credit-impaired, in which case it is classified as a POCI financial asset.
During the previous year it was determined that substantial modifications were deemed to have occurred in respect of a renegotiated loan with a pre-restructuring gross carrying amount of €11.3 million and €11.3 million for the Group and Bank respectively, thereby requiring derecognition in accordance with the principles emanating from IFRS 9. Group and Bank balances amounting to €3.4 million and €3.4 million respectively were written off in 2021 as at the date of renegotiation. The new financial assets attributable to these exposures was classified as Stage 1 on the basis that contractual cash flows under the renegotiated terms are expected to be recovered in full.
In response to the outbreak of the pandemic, during the financial year ended 31 December 2020, a number of government support schemes and regulatory relief measures were implemented. This is particularly relevant in the context of the Maltese Business Lending portfolio, which comprises exposures that benefited from the granting of government induced moratoria on capital and/or interest payments aimed at providing relief to individual and corporate customers to enable them to overcome temporary liquidity constraints. In this regard, during 2020 the Central Bank of Malta issued 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’). Moratoria meeting the conditions emanating from Directive No. 18 and the EBA Guidelines are referred to as general payment moratoria. As a consequence of the protracted impact of the Covid-19 pandemic, on 14 January 2021 the Central Bank of Malta reactivated Directive 18 by reopening the application period for moratoria until 31 March 2021. Under the amendments introduced during 2021, first time applicants were eligible for moratoria of maximum durations of up to nine months from the application date, whereas existing moratoria were allowed to be extended for a further six months as long as the total moratorium period would not exceed nine months.
In line with the guidelines mentioned above, borrowers availing themselves of general payment moratoria are not classified as renegotiated/forborne loans, unless such borrowers were already experiencing financial difficulties prior to the granting of the general payment moratorium, in which case the exposure would be classified as non-performing forborne / Stage 3.
Nevertheless, the regulatory relief measure afforded to exposures benefiting from a general payment moratorium does not automatically lead to a Stage 1 classification, nor does the granting of the general payment moratorium automatically trigger the assumption that credit deterioration has occurred, requiring a downgrade in classification to Stage 2. In this respect and in accordance with the requirements emanating from Directive No. 18 and the EBA Guidelines, the Group performed an assessment on the basis of available information in order to determine whether the financial difficulties being experienced by borrowers benefiting from a general payment moratorium are temporary in nature. If, notwithstanding the granting of the general payment moratorium, the impact of the pandemic was deemed to have led to a more permanent deterioration in the borrower’s financial condition, the exposure was downgraded to Stage 2 or Stage 3, depending on the magnitude of the assessed impact. In case of extensions of general payment moratoria beyond the maximum period prescribed by Directive No. 18, such exposures are considered to be renegotiated / forborne.
No similar COVID-19 relief measures are applicable in respect of exposures classified within the Dutch Mortgage portfolio and, in this regard, the treatment of modifications and renegotiations of such exposures follows the regular principles established in the Group’s accounting and credit policies.
As at 31 December 2022 and 2021, none of the exposures within the Maltese Mortgage portfolio, the Dutch Buy to Let Mortgage portfolio, the Belgian Mortgage portfolio, Securities Investment and Securitisation Investment portfolios were forborne reflecting the fact that both the Securitisation Investment portfolio and the Securities Investment portfolio principally comprise of investment-grade exposures and that the Maltese, the Dutch Buy to Let mortgage and Belgian Mortgage portfolios are relatively new portfolios. In this regard, any amounts disclosed in this section relate to forbearance activity within the International Corporate Lending, Dutch Mortgage and Maltese Business Lending portfolios.
125
Annual Report and Financial Statements 2022
Notes to the financial statements
Group International Corporate Lending portfolio Maltese Business Lending portfolio
Non-forborne Forborne Non-forborne Forborne
exposures exposures exposures exposures Total
€000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
Neither past due nor credit-impaired 383,078 22,328 101,101 - 506,507
Past due but not credit-impaired
- by up to 30 days - - 2,098 43 2,141
Stage 2
Neither past due nor credit-impaired 24,321 53,270 8,351 1,272 87,214
Past due but not credit-impaired
- by up to 30 days - - 2,039 - 2,039
Stage 3
Credit-impaired, net of credit loss allowances 27,548 9,465 960 15,200 53,173
POCI
Credit-impaired, net of credit loss allowances - 211 - - 211
Loans and advances to customers,
net of Stage 3 and POCI credit loss allowances 434,947 85,274 114,549 16,515 651,285
Stage 1 credit loss allowances 4,674 491 208 - 5,373
Stage 2 credit loss allowances 655 2,287 1 3 2,946
Stage 3 credit loss allowances 5,059 1,309 - 1 6,369
POCI credit loss allowances - 224 - - 224
Group International Corporate Lending portfolio Maltese Business Lending portfolio
Non-forborne Forborne Non-forborne Forborne
exposures exposures exposures exposures Total
€000 €000 €000 €000 €000
As at 31 December 2021
Stage 1
Neither past due nor credit-impaired 276,284 67,727 - - 344,011
Past due but not credit-impaired
- by up to 30 days - - 89,080 - 89,080
Stage 2
Neither past due nor credit-impaired 77,449 97,300 3,409 312 178,470
Past due but not credit-impaired
- by up to 30 days - - 1,022 944 1,966
- by up to 60 days - - 17 - 17
Stage 3
Credit-impaired, net of credit loss allowances 20,185 60,399 1,041 10,422 92,047
Loans and advances to customers,
net of Stage 3 credit loss allowances 373,918 225,426 94,569 11,678 705,591
Stage 1 credit loss allowances 1,280 850 106 - 2,236
Stage 2 credit loss allowances 1,258 2,597 15 - 3,870
Stage 3 credit loss allowances 6,651 8,819 112 1 15,583
126
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank International Corporate Lending portfolio Maltese Business Lending portfolio
Non-forborne Forborne Non-forborne Forborne
exposures exposures exposures exposures Total
€000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
Neither past due nor credit-impaired 206,641 22,328 101,101 - 330,070
Past due but not credit-impaired
- by up to 30 days - - 2,098 43 2,141
Stage 2
Neither past due nor credit-impaired 24,321 34,371 8,351 1,272 68,315
Past due but not credit-impaired
- by up to 30 days - - 2,039 - 2,039
Stage 3
Credit-impaired, net of credit loss allowances 27,480 9,465 960 15,200 53,105
POCI
Credit-impaired, net of credit loss allowances - 211 - - 211
Loans and advances to customers, net of
Stage 3 and POCI credit loss allowances 258,442 66,375 114,549 16,515 455,881
Stage 1 credit loss allowances 2,494 491 208 - 3,193
Stage 2 credit loss allowances 656 1,520 1 3 2,180
Stage 3 credit loss allowances 5,059 1,309 - 1 6,369
POCI credit loss allowances - 224 - - 224
Bank International Corporate Lending portfolio Maltese Business Lending portfolio
Non-forborne Forborne Non-forborne Forborne
exposures exposures exposures exposures Total
€000 €000 €000 €000 €000
As at 31 December 2021
Stage 1
Neither past due nor credit-impaired 119,684 47,290 - - 166,974
Past due but not credit-impaired
- by up to 30 days - - 89,080 - 89,080
Stage 2
Neither past due nor credit-impaired 67,327 67,953 3,409 312 139,001
Past due but not credit-impaired
- by up to 30 days - - 1,022 944 1,966
- by up to 60 days - - 17 - 17
Stage 3
Credit-impaired, net of credit loss allowances 20,185 58,848 1,041 10,422 90,496
Loans and advances to customers, net of
Stage 3 credit loss allowances 207,196 174,091 94,569 11,678 487,534
Stage 1 credit loss allowances 576 659 106 - 1,341
Stage 2 credit loss allowances 905 1,533 15 - 2,453
Stage 3 credit loss allowances 6,652 8,588 112 1 15,353
127
Annual Report and Financial Statements 2022
Notes to the financial statements
During the financial year ended 31 December 2021, general payment moratoria meeting the criteria emanating from Directive No. 18 and the EBA Guidelines were granted to 6 borrowers in respect of gross exposures amounting to €5.8 million for both Group and Bank. As at 31 December 2022, there were no exposures subject to general payment moratoria within the Maltese Business Lending portfolio given that in terms of the Directive, applications for such moratoria ended on 31 March 2021 and could only be granted for a maximum period of 9 months.
As at 31 December 2022 and 2021 no forborne exposures within the Maltese Business Lending portfolio were benefitting from general payment moratoria.
In May 2020, MeDirect Malta launched the MeAssist lending product to enhance access to bank financing to corporate customers in the Group’s Maltese Business Lending portfolio in Malta. Individual loan facilities offered in the form of working capital facilities granted to assist customers with their operational requirements in view of the market disruptions brought about by the outbreak of the COVID-19 pandemic under this product are up to 90% secured by guarantees provided under the MDB CGS, capped at 50% of the actual portfolio volume. In this respect, total commitments entered into with corporate customers within the Group’s Maltese Business Lending portfolio meeting the criteria of the MeAssist lending product amounted to €1.4 million as at 31 December 2022 (2021: €1.4 million), of which €0.5 million (2021: €0.5 million) was drawn down and classified in Stage 1 and €0.9 million was classified in Stage 3 (2021: €0.9 million).
The following table shows the carrying amount of the Group’s loans and advances to customers classified within the Dutch Mortgage portfolio reflecting forbearance activity, by stage and by past due status.
Group Dutch Mortgage Portfolio Belgian Mortgage Portfolio
Non-forborne Forborne Non-forborne Forborne
exposures exposures exposures exposures Total
€000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
Neither past due nor credit-impaired 1,810,834 - 107,286 - 1,918,120
Past due but not credit-impaired:
- by up to 30 days - - 23,056 - 23,056
Stage 2
Neither past due nor credit-impaired 1,790 3,877 - 352 6,019
Past due but not credit-impaired:
- by more than 30 days and up to 90 days 1,179 - 1,436 - 2,615
Stage 3
Credit-impaired, net of credit loss allowances - 499 - - 499
Loans and advances to customers, net of
Stage 3 credit loss allowances 1,813,803 4,376 131,778 352 1,950,309
Stage 1 credit loss allowances 106 - 114 - 220
Stage 2 credit loss allowances 63 8 8 8 87
Stage 3 credit loss allowances - 7 - - 7
128
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Dutch Mortgage Portfolio
Non-forborne Forborne exposures exposures Total
€000 €000 €000
As at 31 December 2021
Stage 1
Neither past due nor credit-impaired 1,638,068 - 1,638,068
Past due but not credit-impaired:
- by up to 30 days 1,168 - 1,168
Stage 2
Neither past due nor credit-impaired - 782 782
Past due but not credit-impaired:
- by more than 30 days and up to 90 days 1,842 879 2,721
Stage 3
Credit-impaired, net of credit loss allowances 408 - 408
Loans and advances to customers, net of
Stage 3 credit loss allowances 1,641,486 1,661 1,643,147
Stage 1 credit loss allowances 71 - 71
Stage 2 credit loss allowances 33 29 62
Stage 3 credit loss allowances 16 - 16
As at 31 December 2022 and 2021, all exposures within the Maltese Mortgage portfolio were classified as Stage 1 – neither past due nor credit-impaired. In addition, none of the exposures classified therein were forborne as at 31 December 2022 and 2021.
As at 31 December 2022, total gross forborne loans and advances to customers as a percentage of total gross loans and advances to customers of the Group and Bank were equivalent to 4.5% (2021: 10.6%) and 16.3% (2021: 37.2%) respectively.
Interest income recognised by the Group and the Bank during the financial year ended 31 December 2022 in respect of forborne exposures amounted to €8.9 million (2021: €13.8 million) and €7.6 million (2021: €12.9 million) respectively.
The movement in the gross carrying amount of forborne loans and advances to customers, before credit loss allowances is analysed below:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Year ended 31 December
At beginning of year 247,585 328,514 194,358 263,743
Loans to which forbearance measures have been
extended during the year/period without derecognition 12,934 40,876 12,582 38,098
Capitalised interest 10,347 5,234 7,080 3,779
Capitalised fees (29) (60) (10) (22)
Repayments or disposals (65,262) (86,532) 33,282 (86,141)
Derecognised forborne loans due to further forbearance measures - (19,209) - (8,117)
Loans exiting forborne status during the year without derecognition (85,742) - (85,637) -
Newly recognised loans as a result of forbearance measures - 7,896 - 7,896
Write-offs (15,341) (38,017) (15,349) (29,676)
Write-backs 6,338 - 6,338 -
Amortisation of premium or discount 692 1,855 673 1,442
Exchange differences (3,464) 7,028 (2,329) 3,356
At end of year 108,058 247,585 84,424 194,358
129
Annual Report and Financial Statements 2022
Notes to the financial statements
As at 31 December 2022, credit loss allowances in respect of the Group’s and Bank’s forborne loans were equivalent to €4.3 million (2021: €12.3 million) and €3.5 million (2021: €10.8 million) respectively. Additions to credit loss allowances on forborne loans during the year ended 31 December 2022 amounted to €1.6 million (2021: €6.1 million) and €1.6 million (2021: €5.1 million) for the Group and Bank respectively. Reversals of credit loss allowances on forborne loans during the year ended 31 December 2022 amounted to €9.6 million (2021: €26.2 million) and €8.8 million (2021: €20.8 million).
The following tables show the gross carrying amounts of the Group’s and Bank’s holdings of renegotiated loans and advances to customers analysed by industry sector and stage:
Group Bank
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
As at 31 December 2022
Accommodation and food service activities - 17,704 - - 17,704 - 8,012 - - 8,012
Administrative and support services - - 9,220 - 9,220 - - 9,220 - 9,220
Real estate and construction 43 1,272 15,184 - 16,499 43 1,272 15,184 - 16,499
Financial and insurance activities 7,895 23,721 1,220 434 33,270 7,895 14,514 1,220 434 24,063
Information and communication 14,433 - - - 14,433 14,433 - - - 14,433
Professional, scientific and technical activities - - 1 - 1 - - 1 - 1
Households and individuals - 4,229 506 - 4,735 - - - - -
Wholesale and retail trade;
Repair of motor vehicles and motorcycles - 11,845 351 - 12,196 - 11,845 351 - 12,196
22,371 58,771 26,482 434 108,058 22,371 35,643 25,976 434 84,424
Group Bank
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
€000 €000 €000 €000 €000 €000 €000 €000
As at 31 December 2021
Accommodation and food service activities - 18,692 - 18,692 - 8,458 - 8,458
Administrative and support services - - 22,620 22,620 - - 10,000 10,000
Real estate and construction - 1,256 10,423 11,679 - 1,256 10,423 11,679
Financial and insurance activities 26,940 35,873 45,219 108,032 18,471 28,103 44,576 91,150
Human health and social work activities 14,931 - - 14,931 14,931 - - 14,931
Information and communication - 16,893 - 16,893 - 16,894 - 16,894
Manufacturing 16,471 11,935 - 28,406 4,503 11,935 - 16,438
Professional, scientific and
technical activities 9,385 13,907 - 23,292 9,385 2,563 - 11,948
Households and individuals - 1,661 - 1,661 - - - -
Wholesale and retail trade; Repair of
motor vehicles and motorcycles - - 1,379 1,379 - - 12,860 12,860
67,727 100,217 79,641 247,585 47,290 69,209 77,859 194,358
The Group’s and Bank’s forborne loans classified within the International Corporate Lending portfolio as at 31 December 2022 consist of corporate exposures based in Europe, amounting to €74.5 million (2021: €198.2 million) and €56.3 million (2021: €158.8 million) respectively, and in the United States, amounting to €8.0 million (2021: €23.8 million) and €8.0 million (2021: €23.8 million) respectively. The forborne loans classified within the Maltese Business Lending portfolio are mainly categorised as exposures to corporate customers within the real estate and construction sector. Forbearance measures in respect of exposures classified within the Dutch Mortgage portfolio are limited to payment arrangements, allowing customers to repay the amounts in arrears in addition to the regular monthly instalment. Past due amounts are thereby regularised within an agreed number of months. The forborne loans classified within the Dutch Mortgage portfolio are categorised as exposures to households and individuals in the tables above.
2.2.5 Write-offs
Financial assets written off by the Group and Bank during the financial year ended 31 December 2022 amounted to €7.7 million (2021: €38 million) and €7.7 million (2021: €29.7 million) and were all resulting from renegotiations of financial instruments as described in further detail in note 2.2.4 – “Loans and advances to customers with renegotiated terms and the Group’s forbearance policy”.
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Notes to the financial statements
2.2.6 Collateral
The Group holds collateral against loans and advances to customers classified under the Maltese Business Lending and the Dutch, Belgian and Maltese Mortgage portfolios in the form of hypothecary rights over immovable assets, and registered rights over movable assets and guarantees. The assets held as collateral are assigned a fair value at the time of credit approval. The assigned value is regularly monitored to identify assets that need revaluation.
Depending on the customer’s standing and the type of product, in certain circumstances facilities may be provided on an unsecured basis, although the Group has limited appetite for such agreements. In most lending facilities, a charge over collateral is obtained and considered in determining the credit risk appetite and risk-return profile of all lending decisions. In the event of a default, the Group may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating exposure to credit risk.
Collateral received by the Group includes residential and commercial property, as well as financial collateral such as debt securities and cash on deposit. The immovable property collateral received in respect of exposures within the Maltese Business Lending, the Maltese mortgage, the Dutch Mortgage portfolios and the Belgian Mortgage portfolios are mainly located in Malta, the Netherlands and Belgium respectively.
Exposures meeting the eligibility criteria of the MeAssist lending product launched by MeDirect Malta to aid Maltese corporate customers classified within the Maltese Business Lending portfolio in the aftermath of the outbreak of the pandemic benefit from unfunded credit risk protection in the form of guarantees covering up to 90% of individual exposure amounts capped at 50% of the portfolio and provided under the MDB CGS.
The following tables show the gross carrying amount (before credit loss allowances) of the loans and advances to customers classified under the Maltese Business Lending portfolio by level of collateral expressed through the loan-to-value (“LTV”) ratio. The collateral measured for the purposes of the tables below consists of fixed first charges on real estate, and charges over cash and marketable financial instruments, as well as guarantees provided under the MDB CGS. The collateral amounts represent the expected market value on an open market basis for real estate: no adjustment has been made to the collateral for any expected costs of recovery. Cash is valued at its nominal value and marketable securities at their fair value. If an exposure is fully cash secured (100% LTV), no ECL is measured in this respect, whereas ECL is calculated on exposures which are partially cash secured and having a LTV ratio less than 100%. Guarantees provided in respect of the MeAssist lending product under the MDB CGS are shown at 90% of the guaranteed exposure amount.
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Notes to the financial statements
Group and Bank Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
a) Not collateralised 457 (2) 43 - 500 (2)
b) Fully collateralised
- Up to 50% LTV 52,396 (4) - - 52,396 (4)
- 51% to 75% LTV 44,288 (149) - - 44,288 (149)
- 76% to 90% LTV 5,073 (50) - - 5,073 (50)
- 91% to 100% LTV 985 (3) - - 985 (3)
103,199 (208) 43 - 103,242 (208)
Stage 2
a) Fully collateralised
- Up to 50% LTV 5,671 - - - 5,671 -
- 51% to 75% LTV 4,719 (1) 1,272 (3) 5,991 (4)
10,390 (1) 1,272 (3) 11,662 (4)
Stage 3
a) Not collateralised - - 274 (1) 274 (1)
b) Fully collateralised
- Up to 50% LTV 40 - 1,357 - 1,397 -
- 51% to 75% LTV - - 13,570 - 13,570 -
- greater than 100% LTV 920 - - - 920 -
960 - 15,201 (1) 16,161 (1)
Group and Bank Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2021
Stage 1
a) Not collateralised 712 (14) - - 712 (14)
b) Fully collateralised
- Up to 50% LTV 46,834 (1) - - 46,834 (1)
- 51% to 75% LTV 31,984 (48) - - 31,984 (48)
- 76% to 90% LTV 4,725 (16) - - 4,725 (16)
- 91% to 100% LTV 1,825 (11) - -
c) Partially collateralised
Greater than 100% LTV 3,000 (16) - - 3,000 (16)
89,080 (106) - - 87,255 (95)
Stage 2
a) Fully collateralised
- Up to 50% LTV 1,039 - 1,256 - 2,295 -
- 51% to 75% LTV 3,409 (15) - - 3,409 (15)
4,448 (15) 1,256 - 5,704 (15)
Stage 3
a) Not collateralised 2 (18) 55 (1) 57 (19)
b) Fully collateralised
- Up to 50% LTV 262 (5) 1,214 - 1,476 (5)
- 76% to 90% LTV - - 2,547 - 2,547 -
- 91% to 100% LTV 889 (89) - - 889 (89)
- greater than 100% LTV - - 6,607 - 6,607 -
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Notes to the financial statements
The following table shows the gross carrying amount (before credit loss allowances) of the loans and advances to customers classified under the Dutch Mortgage portfolio by level of collateral expressed through the LTV ratio. The collateral measured for the purposes of the table below consists of fixed first charges on real estate.
Group Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
a) Fully collateralised
- Up to 50% LTV 52,209 (5) - - 52,209 (5)
- 51% to 75% LTV 318,488 (18) - - 318,488 (18)
- 76% to 90% LTV 435,147 (24) - - 435,147 (24)
- 91% to 100% LTV 890,228 (52) - - 890,228 (52)
b) Partially collateralised
- greater than 100% 114,762 (7) - - 114,762 (7)
1,810,834 (106) - - 1,810,834 (106)
Stage 2
a) Fully collateralised
- 51% to 75% LTV 384 (6) 465 - 849 (6)
- 76% to 90% LTV 159 - 129 - 288 -
- 91% to 100% LTV 1,902 (48) 2,763 (7) 4,665 (55)
b) Partially collateralised
- greater than 100% 524 (9) 520 (1) 1,044 (10)
2,969 (63) 3,877 (8) 6,846 (71)
Stage 3
a) Fully collateralised
- 76% to 90% LTV - - 506 (7) 506 (7)
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Annual Report and Financial Statements 2022
Notes to the financial statements
Group Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2021
Stage 1
a) Fully collateralised
- Up to 50% LTV 33,290 - - - 33,290 -
- 51% to 75% LTV 238,738 (7) - - 238,738 (7)
- 76% to 90% LTV 373,003 (16) - - 373,003 (16)
- 91% to 100% LTV 896,559 (43) - - 896,559 (43)
b) Partially collateralised
- greater than 100% 97,646 (5) - - 97,646 (5)
1,639,236 (71) - - 1,639,236 (71)
Stage 2
a) Fully collateralised
- 51% to 75% LTV 124 (1) 119 (4) 243 (5)
- 76% to 90% LTV 223 - 133 - 356 -
- 91% to 100% LTV 1,307 (31) 956 (7) 2,263 (38)
b) Partially collateralised
- greater than 100% 188 (1) 453 (18) 641 (19)
1,842 (33) 1,661 (29) 3,503 (62)
Stage 3
a) Fully collateralised
- 51% to 75% LTV 267 (10) - - 267 (10)
- 76% to 90% LTV 157 (6) - - 157 (6)
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Annual Report and Financial Statements 2022
Notes to the financial statements
The following table shows the gross carrying amount (before credit loss allowances) of the loans and advances to customers classified under the Belgian Mortgage portfolio by level of collateral expressed through the LTV ratio. The collateral measured for the purposes of the table below consists of fixed first charges on real estate.
Group Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
a) Fully collateralised
- Up to 50% LTV 10,855 (7) - - 10,855 (7)
- 51% to 75% LTV 32,473 (26) - - 32,473 (26)
- 76% to 90% LTV 72,850 (67) - - 72,850 (67)
- 91% to 100% LTV 13,307 (13) - - 13,307 (13)
b) Partially collateralised
Greater than 100% LTV 857 (1) - - 857 (1)
130,342 (114) - - 130,342 (114)
Stage 2
a) Fully collateralised
- Up to 50% LTV 152 - - - 152 -
- 76% to 90% LTV 978 (8) 164 (4) 1,142 (12)
- 91% to 100% LTV - - 188 (4) 188 (4)
b) Partially collateralised
Greater than 100% LTV 306 - - - 306 -
1,436 (8) 352 (8) 1,788 (16)
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Annual Report and Financial Statements 2022
Notes to the financial statements
The following table shows the gross carrying amount (before credit loss allowances) of the loans and advances to customers classified under the Maltese Mortgage portfolio by level of collateral expressed through the LTV ratio. The collateral measured for the purposes of the table below consists of fixed first charges on real estate.
Group and Bank Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Stage 1
a) Fully collateralised
- Up to 50% LTV 11,158 (39) - - 11,158 (39)
- 51% to 75% LTV 22,377 (40) - - 22,377 (40)
- 76% to 90% LTV 34,258 (116) - - 34,258 (116)
67,793 (195) - - 67,793 (195)
Group and Bank Non-forborne Forborne Total
Gross carrying Credit loss Gross carrying Credit loss Gross carrying Credit loss
amount allowance amount allowance amount allowance
€000 €000 €000 €000 €000 €000
As at 31 December 2021
Stage 1
a) Fully collateralised
- Up to 50% LTV 2,923 (4) - - 2,923 (4)
- 51% to 75% LTV 7,147 (13) - - 7,147 (13)
- 76% to 90% LTV 8,609 (19) - - 8,609 (19)
- 91% to 100% LTV 351 (41) - - 351 (41)
19,030 (77) - - 19,030 (77)
As at 31 December 2022 the Group and the Bank held senior secured loans to international borrowers classified under the International Corporate Lending portfolio which amounted to €0.5 billion (2021: €0.6 billion) and €0.3 billion (2021: €0.4 billion). In respect of such financial assets, the Group normally has a right over the borrower’s unencumbered assets.
All the Group’s and Bank’s exposures classified under the Securities Investment portfolio as at 31 December 2022 and 2021 are unsecured with the exception of a sub-portfolio of covered bonds amounting to €386.8 million (2021: €471.2 million) and €101.8 million (2021: €79.3 million), respectively, which are backed by a separate group of assets in the form of loans. Similarly, all exposures classified under the Securitisation Investment portfolio as at 31 December 2022 and 2021 are also backed by a separate group of assets in the form of loans.
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Notes to the financial statements
2.2.7 Current Conditions and Forward-looking information incorporated in the ECL model
Point-in-time, forward-looking PD and LGD modelling methodology
The modelling methodology used by the Group in the measurement of credit loss allowances in respect of Stage 1 and Stage 2 exposures leverages current and multiple scenarios of future projections of macroeconomic data beyond the reporting date in order to determine point-in-time PDs and incorporate forward-looking information. Statistical models used are developed by an external vendor.
As explained in more detail in Note 1.5 of the financial statements, for the International and Maltese Corporate Lending and Securities portfolios the models use rating scale to TTC PD matrices calibrated on the basis of an underlying dataset of market observations to firstly determine a TTC PD and accordingly an implied rating for each borrower. The TTC PD/implied rating is determined by calibrating borrowers’ financial and non-financial profile with those of observable rated peers. An exposure’s implied rating is then converted to an unconditional PiT PD using a methodology which utilises market capitalisation/equity volatility and leverage of comparable firms, with shocks to a firm’s stock price translated into corresponding shocks to the credit risk metric attributable to the underlying exposure. Therefore, equity market performance is a key variable for incorporating current conditions into the Group’s ECL modelling methodology, particularly in the conversion from TTC to PiT PDs.
The methodology then utilises macroeconomic correlation models in order to determine the historical correlation of a borrower’s financial performance with overall country or region-level macroeconomic conditions, with the correlation factors estimated principally by reference to borrower size as well as the industry in which the borrower operates. Multiple macroeconomic forecasts developed by an external vendor are then applied to PiT PDs to produce probability-weighted forward-looking conditioned PiT PDs in line with the requirements of IFRS 9. The conditioning of PDs by reference to multiple macroeconomic scenarios reflects forecasted quarter-on-quarter changes in macroeconomic variables (such as GDP, unemployment and HPI) over the PD term structure of the exposure. The Group’s modelling methodology therefore estimates a point-in-time and forward-looking measure of default risk. The same methodology is also used to estimate PiT LGDs.
Input parameters similar to those of the Corporate and Securities portfolios do not exist for determining implied ratings of the Maltese Business Lending portfolio, mainly due to existing data limitations within the Maltese market. Therefore, implied ratings are assigned by the Credit Risk team using professional judgement by reference to default rates experienced in similar markets as well as the financial performance and position of the borrower in relation to financial performance and position at origination. A similar approach to that adopted for Corporate and Securities portfolios is applied to determine conditional PiT PDs, using the TTC implied risk ratings based on internal risk classifications by the Credit Risk team which are then adjusted to PiT forward looking PDs as described above.
For Dutch residential mortgages, PiT PDs and LGDs are determined using loan and borrower characteristics such as loan-to-value (‘LTV’) and loan-to-income (‘LTI’) inputs, calibrated based on historical data of proxy NHG loans from RMBS transactions which are adjusted to incorporate current and forward-looking macroeconomic variables and data such as unemployment rates, real GDP growth and house price indices.
PiT PDs for Maltese mortgages are based on the actual six months lagged NPL ratio published by the Central Bank of Malta in its Financial Stability Report adjusted to incorporate forward-looking macroeconomic variables including unemployment rates, real GDP growth and the House Price Index.
For the Belgian mortgages, the PiT PDs are mainly based on the actual NPL ratio published by the European Banking Authority in its Risk Dashboard Report adjusted to incorporate forward-looking macroeconomic variables including unemployment rates, real GDP growth and the House Price Index.
In respect of defaulted / Stage 3 exposures classified within the International Corporate Lending portfolio, the Group utilises an internally developed discounted cash flow methodology in order to estimate the net present value of forecasted operating cash flows under multiple forward-looking scenarios discounted using the borrower-specific weighted average cost of capital (“WACC”). In this regard, forward-looking expectations based on the impact of changing macroeconomic conditions on the borrower are reflected in multiple scenarios of operating cash flows developed by management, which are discounted and probability-weighted in accordance with the requirements of IFRS 9.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The model used to measure credit loss allowances in respect of all exposures classified within the Dutch, Belgian and Maltese Mortgage portfolio estimates PDs and LGDs by reference to historical information observed in that jurisdiction for similar assets as well as multiple forward-looking macroeconomic forecasts for the respective economy developed by the external vendor.
As at 31 December 2022, a degree of uncertainty remains as a mild contraction in the economic activity is expected owing to surging energy and food prices caused by the conflict between Russia and Ukraine combined with rapid tightening of monetary policy by the ECB. In this respect, the macroeconomic modelling aspect within the estimation of ECLs has been particularly affected by the Russia Ukraine conflict, and the forecasting of economic conditions is still subject to an inherent level of risk and highly subjective.
This has required an elevated level of review and expert judgement to ensure that the macroeconomic methodology used by the Group results in plausible scenarios which adequately capture the risks resulting from the end of the pandemic and the military conflict between Russia and Ukraine to the best extent possible.
Significant judgement is therefore still required in the determination of macroeconomic forecasts reflecting potential future economic conditions under different scenarios and their impact on PDs and LGDs.
Forecasts of future economic conditions
The Group applies macroeconomic scenarios sourced from an external vendor to the PD and LGD term structures for the estimation of credit loss allowances in respect of Stage 1 and Stage 2 exposures classified within the International Corporate Lending and Maltese Business Lending portfolios, as well as in respect of all exposures classified within the Dutch Mortgage, Belgian Mortgage, Maltese Mortgage, Securities Investment and Securitisation Investment portfolios. The macroeconomic scenarios represent the Group’s view of the range of potential outcomes, and application of these scenarios captures the non-linearity of expected credit losses under different scenarios for all portfolios.
The Group has chosen three macroeconomic scenarios that include a central, or baseline, scenario and two “alternative” scenarios to reflect upside and downside scenarios. The scenarios are constructed by the external vendor based on a target severity for each of the scenarios. While the baseline scenario is by design in the middle of possible future economic outcomes, the alternative scenarios capture alternative economic conditions that are equally distanced from the baseline in terms of their severity as per the assumptions of the external vendor. After their construction, the scenarios are each assigned probability weights based on the external vendor’s severity distribution and on how well they approximate (simulated) possible future economic developments. The scenarios are generated/refreshed on a quarterly basis.
The macroeconomic scenarios used in the Group’s modelling of credit loss allowances reflect possible macroeconomic paths taking into consideration a range of potential economic impacts driven by epidemiological assumptions in respect of future waves of the pandemic, monetary policy assumptions regarding the ECB tightening of the policy rates, as well as the continuation of the conflict between Russia and Ukraine. Therefore, economic forecasts remain subject to a high degree of uncertainty in the current environment.
In the aftermath of the outbreak of the COVID-19 pandemic and with the current Russia-Ukraine conflict, more rigorous monitoring of macroeconomic forecasts developed by the external vendor was performed by the Group in order to challenge the adequacy and reasonableness of the developed scenarios. In this respect, the macroeconomic scenarios were reviewed on a quarterly basis in full consideration of the guidance issued by the ECB to Significant Institutions on 1 April 2020 (“IFRS 9 in the context of the coronavirus (COVID-19) pandemic”).
The scenarios have been benchmarked and assessed against the macroeconomic forecasts for the Euro area published by the ECB, in line with ECB guidance, with the latest publication available being the one published in December 2022. In this respect, the Group’s forward-looking macroeconomic scenarios are deemed to be aligned with the ECB’s macroeconomic forecasts for the Euro area. Therefore, necessary adjustments were made to the number, selection, and probability weightings of macroeconomic forecasts from externally sourced modelled scenarios.
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Annual Report and Financial Statements 2022
Notes to the financial statements
The scenarios used for the purposes of determining the ECL as at 31 December 2022 are described below.
Baseline
• Economy experiences a growth recession, with growth suffering from the effects of energy crisis combined with a rapid tightening of monetary policy
• Global oil prices remain around current levels until mid-2023
• Natural gas prices remain extremely high
• Businesses and households conserve energy but there is no need for gas rationing
• Supply chain bottlenecks ease throughout the second half of 2022 but do not completely abate before 2023
• Inflation peaks during the fall and starts declining afterwards. The decline is drawn-out over the whole of 2023, and core inflation does not fall back to 2% before 2024.
Downside 1
• The fading of the pandemic and geopolitical tensions leads to a strong rebound in demand
• The supply side of the economy expands robustly, driven by productivity gains, while slack in the economy proves more substantial than initially thought, allowing output to expand quickly without causing higher inflation
• Global energy prices are slightly higher than in the baseline, reflecting stronger demand that is met by robust supply
Downside 2
• Geopolitical tensions caused by the conflict between Russia and Ukraine escalating further, causing a sharp deterioration in the economic sentiment
• Policy disagreements between the U.S. and China worsen, leading to barriers to shipping along the Taiwan Strait. The disruption further damages supply chains and exacerbate shortages for manufactured goods, pushing up prices
• Escalating geopolitical tensions combined with pressure on private and public finances lead to the re-emergence of domestic political tensions that cause a selloff in financial markets
• A sustained period of low investment in innovative industries and human capital weighs on productivity growth, eroding the economy’s potential
The year-on-year forecasts for 2022 to 2025 for key macro-economic variables (MEVs) under each of the scenarios described above together with the MEVs for the Severe Upside and Severe Downside scenarios are disclosed below.
Moreover, during 2022, Management has re-calibrated its probability weights with the severity of the scenarios. In this respect, the Group’s weighting allocation approach is that weights represent the share of outcomes that are best approximated by a scenario (not the likelihood of a specific scenario occurring). The Group has assigned the probability weightings to each scenario using the mid-point approach through which the probability weight assigned to each scenario would be dependent on the mid-points between the percentiles (representing the severity of the scenario) which each scenario represents along the distribution curve. Management selected this mid-point approach since it is an approach recommended by the external vendor and, the scenarios and probability weight chosen are deemed to be mostly aligned with the December 2022 ECB Staff projections.
The scenarios selected versus those selected in the prior year, together with the relative probability weightings relative to the severity distribution provided by the external vendor for each scenario, are disclosed in the table below:
External vendor Scenarios Severe Upside Upside Baseline Downside 1 Downside 2 Severe Downside
External Vendor Severity 96% 90% 50% 25% 10% 4%
Probability Weight 2021 25% 50% 20% 5%
Probability Weight 2022 30% 40% 30%
The following tables present the year-on-year growth rates for the key macroeconomic variables provided by the external vendor under the baseline and the five alternative scenarios referred to above for the measurement of ECL for all portfolios as at 31 December 2022 and 2021.
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Annual Report and Financial Statements 2022
Notes to the financial statements
With respect to the Dutch Mortgage portfolio, the Group utilises regional-level as well as national-level MEVs as appropriate in order to capture regional level peculiarities. The key MEVs used for the estimation of ECL in respect of exposures classified within the Dutch Mortgage portfolio comprise the House Price Index, unemployment rates and 10-year treasury rates, with the national level forecasts used in the ECL calculation being disclosed in the table hereunder.
For the Belgian Residential Mortgages portfolio, the key MEVs used for the estimation of ECL are national levels of House Price Index and Unemployment Rate, and real GDP growth.
With respect to the Maltese Residential Mortgages portfolio, the key MEVs used for the estimation of ECL are national levels of House Price Index, and Unemployment Rate and real GDP growth, and actual six months lagged NPL ratio published by the Central Bank of Malta in its Financial Stability Report.
The ECL model for the measurement of credit loss allowances in respect of exposures classified within the Securitisation Investment portfolio uses Euribor and GBP Libor 3-month and 1-month rates as well as the same MEVs used for the purposes of the International Corporate Lending portfolio, since the pool of underlying assets securing the Group’s investment in CLO structured tranches is similar to the exposures classified within the International Corporate Lending portfolio.
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Notes to the financial statements
UK US Eurozone Malta Netherlands Belgium
2022 2023 2024 2025 2022 2023 2024 2025 2022 2023 2024 2025 2022 2023 2024 2025 2022 2023 2024 2025 2022 2023 2024 2025
0.3% 3.1% 1.8% 1.0% 0.4% 6.2% 3.2% 2.9% 1.2% 4.5% 2.7% 2.0% 3.2% 10.0% 0.9% 4.1% - - - - 0.9% 6.2% 1.5% 1.1%
0.3% 1.9% 1.2% 1.1% 0.4% 3.5% 2.5% 2.3% 1.2% 3.5% 2.3% 2.0% 3.2% 9.2% 0.6% 4.0% - - - - 0.9% 4.8% 1.0% 1.2%
0.3% -0.8% 1.2% 1.4% 0.4% 1.0% 2.6% 2.8% 1.2% 1.2% 2.6% 2.2% 3.2% 7.3% 0.8% 4.1% - - - - 0.9% 2.1% 1.3% 1.3%
0.3% -4.4% 2.7% 1.6% 0.4% -1.3% 3.1% 3.4% 1.2% -1.0% 3.4% 2.3% 3.2% 5.8% 1.4% 4.2% - - - - 0.9% 0.7% 1.9% 1.4%
0.3% -6.9% 1.3% 2.5% 0.4% -2.3% 1.7% 3.8% 1.2% -5.0% 3.2% 3.5% 3.2% 0.5% 1.4% 5.5% - - - - 0.9% -4.3% 2.0% 2.6%
0.3% -8.3% -0.3% 3.5% 0.4% -4.1% 0.9% 3.9% 1.2% -7.1% 1.0% 4.9% 3.2% -1.4% -0.7% 6.8% - - - - 0.9% -6.7% -0.3% 4.1%
3.7% 3.5% 3.2% 3.3% 3.7% 3.1% 3.1% 3.0% 6.7% 6.7% 6.3% 6.4% 3.0% 3.3% 3.2% 3.4% 3.5% 3.2% 2.6% 3.0% 5.5% 4.7% 4.5% 5.3%
3.7% 3.8% 3.7% 3.7% 3.7% 3.5% 3.4% 3.4% 6.7% 6.8% 6.6% 6.6% 3.0% 3.3% 3.3% 3.4% 3.5% 3.3% 2.9% 3.3% 5.5% 4.7% 4.7% 5.5%
3.7% 4.2% 4.4% 4.5% 3.7% 4.0% 4.1% 3.8% 6.7% 7.1% 7.1% 7.0% 3.0% 3.3% 3.4% 3.5% 3.5% 3.5% 3.6% 3.7% 5.5% 5.0% 5.0% 5.5%
3.7% 4.6% 4.8% 4.7% 3.7% 5.7% 5.4% 3.9% 6.7% 7.4% 7.8% 7.6% 3.0% 3.3% 3.5% 3.6% 3.5% 3.7% 4.1% 4.0% 5.5% 5.2% 5.5% 5.8%
3.7% 5.3% 7.0% 7.3% 3.7% 6.8% 7.4% 5.9% 6.7% 8.3% 9.5% 8.9% 3.0% 3.5% 4.1% 4.3% 3.5% 4.0% 5.5% 5.1% 5.5% 5.8% 7.7% 8.5%
3.7% 6.0% 8.3% 8.2% 3.7% 7.4% 8.9% 8.4% 6.7% 8.6% 10.6% 10.5% 3.0% 3.5% 4.3% 4.9% 3.5% 4.1% 6.2% 6.2% 5.5% 6.1% 9.1% 11.0%
-1.3% 20.3% -1.3% 4.1% -17.6% 19.6% 0.1% 6.0% -12.5% 20.0% 0.9% 3.7% -6.9% 19.7% -0.5% 6.0% - - - - - - - -
-1.3% 15.8% 0.2% 3.8% -17.6% 14.3% -0.2% 5.2% -12.5% 15.9% 1.3% 3.7% -6.9% 14.4% 1.2% 7.6% - - - - - - - -
-1.3% 5.1% 2.9% 6.6% -17.6% 7.9% 0.3% 6.5% -12.5% 5.7% 1.5% 5.5% -6.9% 1.5% 3.3% 10.4% - - - - - - - -
-1.3% 2.0% 1.5% 7.5% -17.6% -20.8% 12.0% 16.4% -12.5% -4.5% 3.7% 8.0% -6.9% -6.2% 3.5% 12.0% - - - - - - - -
-1.3% -15.3% 11.8% 13.0% -17.6% -34.7% 7.3% 24.2% -12.5% -29.0% 22.8% 16.6% -6.9% -27.9% 15.3% 24.0% - - - - - - - -
-1.3% -29.3% 7.8% 19.4% -17.6% -41.6% 0.5% 17.6% -12.5% -42.1% 16.1% 32.1% -6.9% -36.1% 22.4% 39.4% - - - - - - - -
- - - - - - - - - - - - - - - - 1.4% 2.5% 2.7% 2.8% - - - -
- - - - - - - - - - - - - - - - 1.4% 2.5% 2.6% 2.6% - - - -
- - - - - - - - - - - - - - - - 1.4% 2.4% 2.5% 2.3% - - - -
- - - - - - - - - - - - - - - - 1.4% 1.9% 2.1% 2.2% - - - -
- - - - - - - - - - - - - - - - 1.4% 1.6% 1.4% 1.3% - - - -
- - - - - - - - - - - - - - - - 1.4% 1.3% 1.0% 0.8% - - - -
- - - - - - - - - - - - 1.5% 13.3% 6.9% 0.2% -1.7% -1.3% 4.6% 2.8% 1.5% 2.1% 6.1% 4.1%
- - - - - - - - - - - - 1.5% 11.3% 4.6% 0.0% -1.7% -4.0% 1.9% 2.1% 1.5% 0.6% 5.0% 3.7%
- - - - - - - - - - - - 1.5% 7.6% 1.2% 0.4% -1.7% -5.7% -0.7% 1.8% 1.5% -1.0% 3.5% 3.6%
- - - - - - - - - - - - 1.5% 8.7% -0.4% -1.7% -1.7% -6.1% -1.5% 1.6% 1.5% -0.5% 3.1% 2.8%
- - - - - - - - - - - - 1.5% 4.5% -10.2% -8.4% -1.7% -9.4% -6.7% 1.0% 1.5% -4.7% 1.5% 2.2%
- - - - - - - - - - - - 1.5% 9.1% -16.4% -12.9% -1.7% -7.3% -13.7% -3.6% 1.5% -3.6% 1.6% 0.7%
ECL Scenario
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Economic Scenarios: Year-on-Year Forecasts (2022-2025) for key MEVs
Key Drivers
Real GDP - Growth %
Unemployment Rate
- Average %
Stock Market Index
- Growth %
10Yr Treasury Rate
- Average %
House Price Index %
141
Annual Report and Financial Statements 2022
Notes to the financial statements
International Lending & Securities Maltese Lending Dutch Mortgages Belgian Mortgages
UK US Eurozone Malta Netherlands Belgium
2021 2022 2023 2024 2021 2022 2023 2024 2021 2022 2023 2024 2021 2022 2023 2024 2021 2022 2023 2024 2021 2022 2023 2024
6.6% 9.1% 2.1% 1.3% 5.4% 8.6% 2.2% 1.6% 4.5% 6.9% 2.9% 1.6% 4.5% 6.4% 3.5% 2.4% - - - - 4.4% 7.9% 2.0% 0.6%
6.6% 7.7% 1.7% 1.2% 5.4% 6.1% 1.5% 2.0% 4.5% 5.5% 2.4% 1.6% 4.5% 5.7% 2.8% 2.4% - - - - 4.4% 5.6% 2.0% 0.8%
6.6% 3.9% 3.1% 1.4% 5.4% 3.5% 2.9% 2.7% 4.5% 3.0% 2.4% 1.9% 4.5% 3.7% 2.8% 2.4% - - - - 4.4% 2.3% 2.3% 1.4%
6.6% 0.4% 4.4% 1.8% 5.4% 1.1% 2.8% 2.9% 4.5% 1.4% 2.6% 2.1% 4.5% 2.5% 3.3% 2.5% - - - - 4.4% 1.1% 2.8% 1.5%
6.6% -2.3% 5.7% 2.4% 5.4% -2.2% 2.8% 3.6% 4.5% -2.6% 2.9% 2.8% 4.5% -2.1% 3.5% 3.4% - - - - 4.4% -3.5% 3.0% 2.3%
6.6% -3.9% 5.4% 2.2% 5.4% -3.8% 0.3% 3.7% 4.5% -5.3% 3.3% 2.8% 4.5% -5.0% 4.1% 3.6% - - - - 4.4% -6.9% 3.8% 2.6%
4.6% 3.9% 2.7% 2.5% 5.4% 2.7% 2.5% 2.6% 8.3% 7.2% 6.6% 6.7% 3.7% 3.9% 4.1% 4.2% 3.2% 3.4% 3.3% 3.5% 6.3% 4.8% 3.3% 3.2%
4.6% 4.4% 3.4% 3.4% 5.4% 3.3% 3.0% 3.1% 8.3% 7.5% 7.1% 7.1% 3.7% 4.0% 4.3% 4.5% 3.2% 3.4% 3.6% 3.7% 6.3% 5.1% 4.2% 4.3%
4.6% 4.8% 4.5% 4.4% 5.4% 3.6% 3.5% 3.6% 8.3% 8.0% 7.7% 7.7% 3.7% 4.0% 4.4% 4.6% 3.2% 3.6% 3.8% 4.0% 6.3% 5.5% 5.3% 5.5%
4.6% 5.5% 5.6% 5.5% 5.4% 5.9% 4.3% 4.4% 8.3% 8.4% 8.4% 8.3% 3.7% 4.1% 4.4% 4.6% 3.2% 3.7% 4.1% 4.1% 6.3% 5.8% 5.7% 5.8%
4.6% 5.7% 6.6% 6.6% 5.4% 7.7% 8.2% 6.2% 8.3% 9.3% 10.1% 10.0% 3.7% 4.2% 5.0% 5.3% 3.2% 3.9% 5.3% 5.4% 6.3% 6.3% 7.8% 8.4%
4.6% 6.2% 7.6% 7.2% 5.4% 7.9% 10.0% 9.4% 8.3% 10.0% 11.3% 11.4% 3.7% 4.3% 5.3% 5.9% 3.2% 4.1% 5.8% 6.5% 6.3% 6.8% 9.3% 10.4%
17.1% 10.8% -2.7% -0.3% 28.6% 8.9% 1.4% 3.6% 25.0% 18.6% 0.1% -1.3% 3.4% 45.5% 3.5% -0.3% - - - - - - - -
17.1% 7.9% -2.4% -0.1% 28.6% 4.1% 1.2% 2.9% 25.0% 12.5% 0.1% -1.2% 3.4% 33.4% 2.8% 1.0% - - - - - - - -
17.1% -2.2% 0.2% 2.6% 28.6% -9.2% -1.9% 4.2% 25.0% 0.4% 0.9% 2.0% 3.4% 15.5% 2.8% 5.0% - - - - - - - -
17.1% -4.9% 0.1% 2.9% 28.6% -12.2% -2.3% 2.7% 25.0% -6.5% 3.2% 2.7% 3.4% 5.4% 3.3% 10.1% - - - - - - - -
17.1% -20.4% 9.2% 8.3% 28.6% -31.9% 8.9% 5.2% 25.0% -22.4% 12.2% 6.8% 3.4% -16.9% 3.5% 19.1% - - - - - - - -
17.1% -33.5% 5.7% 12.2% 28.6% -39.7% 0.6% 4.7% 25.0% -37.3% 15.5% 11.8% 3.4% -31.7% 4.1% 31.4% - - - - - - - -
- - - - - - - - - - - - - - - - -0.3% 0.4% 1.3% 2.4% - - - -
- - - - - - - - - - - - - - - - -0.3% 0.1% 0.8% 1.7% - - - -
- - - - - - - - - - - - - - - - -0.3% -0.1% 0.2% 0.7% - - - -
- - - - - - - - - - - - - - - - -0.3% -0.4% -0.3% 0.4% - - - -
- - - - - - - - - - - - - - - - -0.3% -0.6% -0.5% -0.1% - - - -
- - - - - - - - - - - - - - - - -0.3% -0.7% -0.6% -0.4% - - - -
- - - - - - - - - - - - -7.3% 8.9% 9.3% 0.7% 10.8% 3.3% 2.8% -0.8% 10.8% 14.1% 7.5% 2.3%
- - - - - - - - - - - - -7.3% 8.0% 7.2% 0.6% 10.8% 1.0% 0.9% -1.5% 10.8% 12.1% 6.1% 2.5%
- - - - - - - - - - - - -7.3% 4.8% 5.5% 2.1% 10.8% -0.1% -0.7% -1.4% 10.8% 8.6% 6.4% 3.9%
- - - - - - - - - - - - -7.3% 2.4% 4.2% 2.7% 10.8% -0.9% -2.0% -2.0% 10.8% 7.8% 5.8% 4.1%
- - - - - - - - - - - - -7.3% 1.1% 3.2% 1.9% 10.8% -5.4% -7.2% -3.5% 10.8% 7.6% 3.9% 2.8%
- - - - - - - - - - - - -7.3% 0.0% 1.5% 1.5% 10.8% -7.1% -12.2% -6.6% 10.8% 8.2% 3.6% 1.4%
Economic Scenarios: Year-on-Year Forecasts (2021-2024) for key MEVs
ECL Scenario
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Severe Upside
Upside
Baseline
Downside 1
Downside 2
Severe Downside
Key Drivers
Real GDP - Growth %
Unemployment Rate
- Average %
Stock Market Index
- Growth %
10Yr Treasury Rate
- Average %
House Price Index %
142
Annual Report and Financial Statements 2022
Notes to the financial statements
ECB guidance states that subjective model inputs and post-core model adjustments (overlays) may be used given the current level of uncertainties. These need to be directionally consistent with objective and verifiable evidence such as observable macroeconomic variables and forward-looking forecasts. Overlays should be supported by adequately documented processes and subject to strict governance oversight.
To ensure that the Group is adequately capturing the level of credit risk in its International Corporate Lending portfolio, an assessment was performed and the Group introduced caps to implied internal ratings to borrowers that have undergone distressed restructuring and where necessary have applied notch downgrades to exposures that are classified as ‘Under Surveillance’ through qualitative factors not captured by the models to reflect the increase in credit risk since origination.
Given the sensitivity of the models used by the Group to equity values of comparable firms in determining PiT PDs, the significant drop in equity prices during 2022 has led to a significant increase in PiT PDs within the Group’s ECL model for Corporates.
Management is confident that the modelled macroeconomic scenarios from the external vendor include reasonable epidemiological, economic, and geopolitical risk assumptions and the model outputs are appropriately reflecting the current market conditions.
ECL sensitivity analysis in respect of macroeconomic scenarios
Notwithstanding the significant number of assumptions and different aspects forming part of the Group’s methodology for modelling credit loss allowances in respect of exposures classified within the Group’s portfolios of financial instruments, the ECL measurement is deemed to be most sensitive to the inherent level of estimation uncertainty in respect of the modelling of macroeconomic forecasts.
The Group is hereby presenting the sensitivity analysis in respect of credit loss allowances attributable to Stage 1 and Stage 2 exposures classified within the International Corporate Lending portfolio as at 31 December 2022 and 2021, estimated by determining the range of credit loss allowances which would have been measured as at each date by assigning a 100% weighting to each of the macroeconomic scenarios developed by the external vendor, as presented in the table below.
Scenario sensitivity Severe Upside Upside Baseline Downside 1 Downside 2 Severe Downside
Group
2022
Probability Weight 2022 - 30% 40% - 30% -
ECL as at 31 December 2022 - 4,008,718 6,420,667 - 16,606,354 -
2021
Probability Weight 2021 - 25% 50% 20% 5%
ECL as at 31 December 2021 - 4,262,517 5,822,813 9,426,032 19,518,519 -
Bank
2022
Probability Weight 2022 - 30% 40% - 30% -
ECL as at 31 December 2022 - 2,751,553 4,258,611 - 10,484,767 -
2021
Probability Weight 2021 25% 50% 20% 5% -
ECL as at 31 December 2021 - 2,770,575 3,721,557 6,150,233 12,724,858 -
143
Annual Report and Financial Statements 2022
Notes to the financial statements
The estimated weighted average ECL under each scenario as at 31 December 2022, presented in the table above, is not directly comparable with the estimated weighted average ECL under each scenario as at 31 December 2021, since the size of the International Corporate Lending portfolio decreased significantly compared to the prior financial year.
Although duly taken into consideration, the impact of macroeconomic scenarios on the measurement of credit loss allowances in respect of credit-impaired / Stage 3 exposures classified within the International Corporate Lending portfolio is less pronounced compared to other borrower-specific factors used to forecast operating cash flows under different scenarios. Accordingly, the sensitivity impact was not considered to be significant.
144
Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.8 Concentration of credit risk exposures
2.2.8.1 Concentration of investment securities
Securities Investment portfolio
The Group’s and Bank’s exposure to sovereign Eurozone government bonds as at 31 December 2022 represented 22.9% (2021: 23.2%) and 43.1% (2022: 31.8%), respectively, of the total investment securities within the Securities Investment portfolio.
Credit loss allowances for the Group and Bank amounting to €23 thousand were recognised in respect of these exposures as at 31 December 2022 (2021: €11 thousand).
The Group monitors concentrations of investment securities for credit risk by type of exposure. An analysis of concentrations of credit risk at the reporting date for the financial year ended 31 December 2022 and 2021 is shown below.
Measured at fair value through Measured at amortised cost other comprehensive income
Group Bank Group Bank
2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000
Concentration by type
As at 31 December:
Carrying amount:
Covered bonds 387,035 21,209 101,764 21,206 - 399,979 - 33,557
National and regional government 135,590 25,194 61,524 - - 150,439 - 84,356
Supranational and agencies 154,086 60,970 123,944 30,498 - 99,799 - 95,780
Corporations 12,035 12,327 12,035 12,327 - - - -
Total 688,746 119,700 299,267 64,031 - 650,217 - 213,693
Securitisation Investment portfolio
The Group’s and Bank’s Securitisation Investment portfolio comprises the investment in GH1-2019 structured note tranches, amounting to €19.1 million as at 31 December 2022 (2021: €19.6 million), as well as CLO transactions managed by third-party entities, amounting to €555.1 million (2021: €487.8 million) and €140.0 million (2021: €139.9 million) for the Group and Bank respectively. The Group’s and Bank’s investment in GH1-2019 comprises a 5% vertical slice of each of the tranches for “Risk Retention” purposes, with a pool of leveraged loans as collateral. The Group’s and Bank’s investment in CLO transactions managed by third-party entities comprises positions in the most senior tranche of 27 different CLOs at Group (2021: 22) and 9 at Bank level (2021: 9), all of which are also collateralised by a pool of leveraged loans.
145
Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.8.2 Concentration of loans and advances to customers
An analysis of concentration of loans and advances to customers by industry sector and geography is shown in the following tables.
As at 31 December 2022, exposures to UK counterparties classified under the International Corporate Lending portfolio and categorised as ‘Other European countries’ in the tables below amounted to €147.0 million (2021: €150.1 million).
Exposures classified under Maltese Business Lending, Maltese Mortgage, Dutch and Belgian Mortgage portfolios are categorised as EU exposures in the following tables with the Maltese Business Lending portfolio classified under “real estate activities” and “construction” sectors whereas the Dutch, Belgian and Maltese retail mortgage portfolio classified under the “household and individuals” sector.
Group Gross carrying amount Credit loss allowance
Other Other European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Stage 1
As at 31 December 2022
Activities of holding companies 15,039 - - 15,039 (158) - - (158)
Administrative and support service activities 8,484 - - 8,484 (137) - - (137)
Construction 7,894 - - 7,894 (152) - - (152)
Financial and insurance activities 114,181 48,479 30,358 193,018 (1,867) (534) (312) (2,713)
Households and individuals 2,008,968 - - 2,008,968 (415) - - (415)
Human health and social work activities 14,960 - - 14,960 (334) - - (334)
Information and communication 10,001 14,433 - 24,434 (232) (147) - (379)
Manufacturing 32,002 - - 32,002 (349) - - (349)
Professional, scientific
and technical activities 48,679 32,068 - 80,747 (358) (188) - (546)
Real estate activities 103,242 - - 103,242 (208) - - (208)
Transportation and Storage 8,964 - - 8,964 (110) - - (110)
Wholesale and retail trade, repairs
of motor vehicles and motorcycles 11,889 - 7,976 19,865 (220) - (67) (287)
2,384,303 94,980 38,334 2,517,617 (4,540) (869) (379) (5,788)
Stage 2
As at 31 December 2022
Accommodation and food service activities - 17,704 - 17,704 - (1,278) - (1,278)
Administrative and support service activities 10,000 - - 10,000 (427) - - (427)
Financial and insurance activities 12,311 11,410 - 23,721 (129) (73) - (202)
Households and individuals 8,634 - - 8,634 (87) - - (87)
Information and communication - 14,321 - 14,321 - (229) - (229)
Real estate activities 11,662 - - 11,662 (4) - - (4)
Wholesale and retail trade, repairs of
motorvehicles and motorcycles - 11,845 - 11,845 - (806) - (806)
146
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Gross carrying amount Credit loss allowance
Other Other European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Stage 3
As at 31 December 2022
Administrative and support service activities - - 9,220 9,220 - - (1,193) (1,193)
Financial and insurance activities 16,687 - 17,123 33,810 (4,915) - (144) (5,059)
Households and individuals 506 - - 506 (7) - - (7)
Real estate activities 16,161 - - 16,161 (1) - - (1)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 351 - - 351 (116) - - (116)
33,705 - 26,343 60,048 (5,039) - (1,337) (6,376)
POCI
As at 31 December 2022
Financial and insurance activities 435 - - 435 (224) - - (224)
Commitments to purchase financial assets,
commitments to extend credit, guarantees
and other commitments
As at 31 December 2022
Accommodation and food service activities 69 3,143 - 3,212 - (22) - (22)
Administrative and support service activities 14,460 - 5,407 19,867 (34) - (640) (674)
Construction 3,452 - - 3,452 - - - -
Financial and insurance activities 56,174 - 27,313 83,487 (213) - (161) (374)
Households and individuals 201,753 - - 201,753 (38) - - (38)
Information and communication - 8,584 - 8,584 - (75) - (75)
Manufacturing 3,437 - - 3,437 (14) - - (14)
Professional, scientific and technical activities 10,060 - - 10,060 (66) - - (66)
Real estate activities 6,575 - - 6,575 - - - -
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 3,069 - - 3,069 - - - -
147
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Gross carrying amount Credit loss allowance
Other Other European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Stage 1
As at 31 December 2021
Administrative and support service activities 8,484 - - 8,484 (57) - - (57)
Construction 49,658 - - 49,658 (74) - - (74)
Financial and insurance activities 111,941 44,161 17,135 173,237 (742) (316) (89) (1,147)
Households and individuals 1,658,271 - - 1,658,271 (148) - - (148)
Human health and social work activities 18,423 - - 18,423 (249) - - (249)
Manufacturing 38,630 - - 38,630 (209) - - (209)
Professional, scientific and technical activities 55,033 33,869 - 88,902 (199) (184) - (383)
Real estate activities 39,422 - - 39,422 (32) - - (32)
Transportation and Storage 7,941 - - 7,941 (43) - - (43)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 6,958 1,431 - 8,389 (37) (5) - (42)
1,994,761 79,461 17,135 2,091,357 (1,790) (505) (89) (2,384)
Stage 2
As at 31 December 2021
Accommodation and food service activities - 18,692 - 18,692 - (1,253) - (1,253)
Construction 1,299 - - 1,299 (1) - - (1)
Financial and insurance activities 15,356 11,975 35,883 63,214 (431) (183) (274) (888)
Households and individuals 3,503 - - 3,503 (62) - - (62)
Information and communication - 27,250 - 27,250 - (310) - (310)
Manufacturing 15,089 5,844 - 20,933 (551) (246) - (797)
Professional, scientific and technical activities 44,660 - - 44,660 (607) - - (607)
Real estate activities 4,405 - - 4,405 (14) - - (14)
84,312 63,761 35,883 183,956 (1,666) (1,992) (274) (3,932)
Stage 3
As at 31 December 2021
Administrative and support service activities 21,352 - - 21,352 (1,846) - - (1,846)
Construction 1,442 - - 1,442 (1) - - (1)
Financial and insurance activities 61,842 - - 61,842 (10,514) - - (10,514)
Households and individuals 424 - - 424 (17) - - (17)
Real estate activities 10,134 - - 10,134 (112) - - (112)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 572 12,288 - 12,860 (181) (2,928) - (3,109)
95,766 12,288 - 108,054 (12,671) (2,928) - (15,599)
148
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Gross carrying amount Credit loss allowance
Other Other
European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Commitments to purchase financial assets,
commitments to extend credit, guarantees
and other commitments
As at 31 December 2021
Accommodation and food service activities - 3,318 - 3,318 - (21) - (21)
Administrative and support service activities 18,566 - - 18,566 (557) - - (557)
Construction 58,325 - - 58,325 (3) - - (3)
Financial and insurance activities 80,266 - 37,343 117,609 (136) - (76) (212)
Households and individuals 111,994 - - 111,994 (4) - - (4)
Information and communication 10,000 11,801 - 21,801 - (81) - (81)
Manufacturing 5,846 - - 5,846 (48) - - (48)
Professional, scientific and technical activities 14,762 - 26,509 41,271 (57) - (30) (87)
Transport and Storage 1,000 - - 1,000 - - - -
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 10,000 - - 10,000 (145) - - (145)
310,759 15,119 63,852 389,730 (950) (102) (106) (1,158)
149
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Gross carrying amount Credit loss allowance
Other Other
European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Stage 1
As at 31 December 2022
Activities of holding companies 15,039 - - 15,039 (158) - - (158)
Administrative and support service activities 1,001 - - 1,001 (16) - - (16)
Financial and insurance activities 56,989 24,761 13,364 95,114 (1,220) (222) (137) (1,579)
Households and individuals 67,793 - - 67,793 (195) - - (195)
Human health and social work activities 14,960 - - 14,960 (334) - - (334)
Information and communication - 14,433 - 14,433 - (147) - (147)
Manufacturing 22,022 - - 22,022 (254) - - (254)
Professional, scientific and technical activities 38,682 18,754 - 57,436 (267) (120) - (387)
Real estate 103,242 - - 103,242 (208) - - (208)
Transportation and Storage 8,964 - - 8,964 (110) - - (110)
328,692 57,948 13,364 400,004 (2,762) (489) (137) (3,388)
Stage 2
As at 31 December 2022
Accommodation and food service activities - 8,012 - 8,012 - (578) - (578)
Administrative and support service activities 10,000 - - 10,000 (427) - - (427)
Financial and insurance activities 10,406 4,108 - 14,514 (110) (26) - (136)
Information and communication - 14,321 - 14,321 - (229) - (229)
Real estate activities 11,662 - - 11,662 (4) - - (4)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles - 11,845 - 11,845 - (806) - (806)
32,068 38,286 - 70,354 (541) (1,639) - (2,180)
Stage 3
As at 31 December 2022
Administrative and support service activities - - 9,220 9,220 - - (1,193) (1,193)
Financial and insurance activities 16,688 - 17,054 33,742 (4,915) - (144) (5,059)
Real estate activities 16,161 - - 16,161 (1) - - (1)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 351 - - 351 (116) - - (116)
33,200 - 26,274 59,474 (5,032) - (1,337) (6,369)
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Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Gross carrying amount Credit loss allowance
Other Other
European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
POCI
As at 31 December 2022
Financial and insurance activities 435 - - 435 (224) - - (224)
Commitments to purchase financial assets,
commitments to extend credit, guarantees
and other commitments
As at 31 December 2022
Accommodation and food service activities 69 1,422 - 1,491 - (10) - (10)
Administrative and support service activities 14,460 - 5,407 19,867 (34) - (640) (674)
Construction 3,452 - - 3,452 - - - -
Financial and insurance activities 52,090 - 18,161 70,251 (194) - (77) (271)
General Banking 784 - - 784 - - - -
Households and individuals 39,525 - - 39,525 - - - -
Information and communication - 8,584 - 8,584 - (76) - (76)
Manufacturing 3,437 - - 3,437 (14) - - (14)
Media: broadcasting and subscription - - - - - - - -
Professional, scientific and technical activities 10,060 - - 10,060 (66) - - (66)
Real estate activities 6,575 - - 6,575 - - - -
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 2,285 - - 2,285 - - - -
132,737 10,006 23,568 166,311 (308) (86) (717) (1,111)
151
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Gross carrying amount Credit loss allowance
Other Other
European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Stage 1
As at 31 December 2021
Administrative and support service activities 1,002 - - 1,002 (7) - - (7)
Construction 49,657 - - 49,657 (74) - - (74)
Financial and insurance activities 54,396 27,697 2,970 85,063 (454) (203) (17) (674)
Households and individuals 19,030 - - 19,030 (77) - - (77)
Human health and social work activities 14,931 - - 14,931 (235) - - (235)
Manufacturing 19,316 - - 19,316 (70) - - (70)
Professional, scientific and technical activities 17,479 19,811 - 37,290 (63) (138) - (201)
Real estate 39,422 - - 39,422 (32) - - (32)
Transportation and Storage 7,942 - - 7,942 (43) - - (43)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles - 1,431 - 1,431 - (5) - (5)
223,175 48,939 2,970 275,084 (1,055) (346) (17) (1,418)
Stage 2
As at 31 December 2021
Administrative and support service activities - 8,458 - 8,458 - (567) - (567)
Construction 1,299 - - 1,299 (1) - - (1)
Financial and insurance activities 5,234 4,311 35,780 45,325 (79) (66) (274) (419)
Information and communication - 27,250 - 27,250 - (312) - (312)
Manufacturing 15,088 5,844 - 20,932 (550) (246) - (796)
Professional, scientific and technical activities 33,315 - - 33,315 (344) - - (344)
Real estate activities 4,405 - - 4,405 (14) - - (14)
59,341 45,863 35,780 140,984 (988) (1,191) (274) (2,453)
Stage 3
As at 31 December 2021
Administrative and support service activities 21,353 - - 21,353 (1,846) - - (1,846)
Construction 11,576 - - 11,576 (113) - - (113)
Financial and insurance activities 60,060 - - 60,060 (10,284) - - (10,284)
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 572 12,288 - 12,860 (182) (2,928) - (3,110)
93,561 12,288 - 105,849 (12,425) (2,928) - (15,353)
152
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Gross carrying amount Credit loss allowance
Other Other
European North European North
EU countries America Total EU countries America Total
€000 €000 €000 €000 €000 €000 €000 €000
Commitments to purchase financial assets,
commitments to extend credit, guarantees
and other commitments
As at 31 December 2021
Accommodation and food service activities - 1,502 - 1,502 - (10) - (10)
Administrative and support service activities 18,566 - - 18,566 (562) - - (562)
Construction 58,325 - - 58,325 - - - -
Financial and insurance activities 76,183 - 23,205 99,388 (128) - (44) (172)
Households and individuals 39,914 - - 39,914 - - - -
Information and communication - 11,801 - 11,801 - (81) - (81)
Manufacturing 5,846 - - 5,846 (48) - - (48)
Professional, scientific and technical activities 14,762 - 26,509 41,271 (57) - (30) (87)
Real estate activities 1,000 - - 1,000 - - - -
Wholesale and retail trade, repairs of motor
vehicles and motorcycles 10,000 - - 10,000 (145) - - (145)
224,596 13,303 49,714 287,613 (940) (91) (74) (1,105)
153
Annual Report and Financial Statements 2022
Notes to the financial statements
2.2.9 Offsetting financial assets and financial liabilities
The Group is eligible to present certain financial assets and financial liabilities on a net basis in the statement of financial position in accordance with the Group’s policy described in Note 1.6 ‘Offsetting Financial Instruments’.
The following tables set out:
• the impact of offsetting financial assets and financial liabilities on the consolidated statement of financial position.
• the financial impact of netting for instruments subject to an enforceable master netting arrangement or similar agreement; and
• the available financial collateral received or pledged in relation to the total amounts of assets and liabilities that were not offset.”
The Group enters into derivative transactions under International Swap and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. In certain circumstances such as when an event of default occurs, all outstanding transactions under the agreement are terminated and settled in a single net amount per currency.
The ISDA agreements do not meet the criteria for offsetting the positive and negative values in the statement of financial position. This is attributable to the fact that the Group and its counterparties do not have any currently legally enforceable right to settle on a net basis or to realise the asset and settle the liability simultaneously because the right to offset is enforceable only on the occurrence of future credit events.
The Group also pledges and receives collateral in the form of cash and marketable securities primarily for sale and repurchase agreements and for margining purposes on OTC derivative transactions. Pledges are generally conducted under terms that are usual and customary for standard contracts and transactions of this nature. The rights of set off relating to such collateral are conditional upon the default of the counterparty. The financial instruments subject to such collateral arrangements are included in the table below within ‘Financial collateral pledged/(received)’.
The net amount of financial instruments that do not meet the on-balance sheet offsetting criteria, including collateral pledged and received, presented within the following tables is equal to the amount presented in the statement of financial position for that instrument.
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Notes to the financial statements
€000 €000 €000 €000 €000 €000
Group
As at 31 December 2022
Financial assets
Derivative financial instruments 363,382 - 363,382 (1,500) - 361,882
Loans and advances to financial institutions 483,559 (80,572) 402,987 - (3,806) 399,181
Investments - Securities Portfolio 694,038 - 694,038 - (192,919) 501,119
Investments - Securitisation Portfolio 574,001 - 574,001 - (33,442) 540,559
2,114,980 (80,572) 2,034,408 (1,500) (230,167) 1,802,741
Financial liabilities
Derivative financial instruments (85,878) 80,572 (5,306) 1,500 3,806 -
Amounts owed to financial institutions (545,135) - (545,135) - 226,361 (318,774)
(631,013) 80,572 (550,441) 1,500 230,167 (318,774)
Group
As at 31 December 2021
Financial assets
Derivative financial instruments 42,688 - 42,688 (2) - 42,686
Loans and advances to financial institutions 198,775 (5,051) 193,724 - (1,129) 192,595
Investments - Securities Portfolio 769,917 - 769,917 - (170,451) 599,466
Investments - Securitisation Portfolio 507,351 - 507,351 - (30,962) 476,389
1,518,731 (5,051) 1,513,680 (2) (202,542) 1,311,136
Financial liabilities
Derivative financial instruments (6,182) 5,051 (1,131) 2 1,129 -
Amounts owed to financial institutions (273,349) - (273,349) - 201,413 (71,936)
(279,531) 5,051 (278,655) 2 202,542 (71,936)
155
Annual Report and Financial Statements 2022
Notes to the financial statements
Gross Net Related amounts not amounts of amounts of offset in the statement of recognised financial financial position financial instruments Gross instruments presented Financial amounts of offset in the in the Amounts collateral recognised statement statement subject to pledged financial of financial of financial master netting /(received) instruments position position arrangements (incl. cash) Net amount
€000 €000 €000 €000 €000 €000
Bank
As at 31 December 2022
Financial assets
Derivative financial instruments 8,045 - 8,045 (747) - 7,298
Loans and advances to financial institutions 61,515 - 61,515 - 747 62,262
Investments - Securities Portfolio 299,267 - 299,267 - (126,325) 172,942
Investments - Securitisation Portfolio 158,965 - 158,965 - - 158,965
527,792 - 527,792 (747) (125,578) 401,467
Financial liabilities
Derivative financial instruments - - - 747 (747) -
Amounts owed to financial institutions (279,725) - (279,725) - 126,325 (153,400)
(279,725) - (279,725) 747 125,578 (153,400)
Bank
As at 31 December 2021
Financial assets
Derivative financial instruments 1,240 - 1,240 (1) - 1,239
Loans and advances to financial institutions 111,370 - 111,370 - (144) 111,226
Investments - Securities Portfolio 277,724 - 277,724 - (170,451) 107,273
Investments - Securitisation Portfolio 159,421 - 159,421 - (30,962) 128,459
Amounts receivable from subsidiaries
(included in Other assets) 167,516 (144,204) 23,312 - - 23,312
717,271 (144,204) 573,067 (1) (201,557) 371,509
Financial liabilities
Derivative financial instruments (143) - (143) (1) 144 -
Amounts owed to financial institutions (264,830) - (264,830) - 201,413 (63,417)
Amounts owed to subsidiaries
(included in Other liabilities) (177,658) 144,204 (33,454) - - (33,454)
(442,631) 144,204 (298,427) (1) 201,557 (96,871)
156
Annual Report and Financial Statements 2022
Notes to the financial statements
2.3 Liquidity Risk
2.3.1 Management of liquidity risk
In line with the Group’s Liquidity Risk Management Policy, management of the Group’s liquidity position is the responsibility of its Treasury and ALM function under the oversight of the Asset and Liability Committee (“ALCO”), Management Risk Committee (“MRC”) and the Board Risk Committee. The Treasury and ALM function have primary responsibility for managing and reporting the Group’s projected liquidity position (the “base case”).
The Group’s Risk team ensures that all liquidity risks are identified, measured, overseen and appropriately reported. In particular, the Risk team has primary responsibility for monitoring liquidity risk, including defining potential adverse liquidity scenarios (“stress cases”) that are considered for assessing the Group’s exposure to these scenarios and for assessing the effectiveness of contingency plan funding measures.
The Group’s liquidity risks principally relate to its banking activities and the Group’s Board of Directors sets, approves and oversees the implementation of the targets for liquidity management of the Group. Analysis of liquidity risk is the joint responsibility of the Group’s Treasury and ALM and Risk functions under the oversight of the ALCO and of the Board Risk Committee.
Management Asset and Liability Committee
The Group has established an Asset and Liability Committee (“ALCO”) to ensure the Group has in place, and operates effectively, appropriate and robust strategies and policies to manage and optimise the Group’s asset-liability mix and oversee the Group’s capital, liquidity, funding, interest rate risk and foreign exchange (“FX”) risk position. Group ALCO cascades Group strategies down across each business line and legal entities and across risk types and products. Group ALCO oversees and, where necessary, approves Group policies and objectives for assets and liability management, capital and funding management and allocation, market risk position and hedging activity, liquidity monitoring, capital usage and efficiency, product-pricing, fund transfer pricing, dealing and trading activities according to the risk appetite statement set by the Group Board. Group ALCO’s authority covers MeDirect Bank (Malta) plc and MDB Group Limited. Belgium ALCO’s authority covers MeDirect Bank SA. Group ALCO provides oversight and ensures that decisions taken at Belgium ALCO are aligned to the interests of the Group. Group ALCO is a sub-committee of the Group EXCO.
Board Risk Committee
The Board delegates to the Board Risk Committee its oversight responsibilities of the risk function. Therefore, the Board Risk Committee represents the principal forum for overseeing the Group’s liquidity and funding risk. In addition, it is responsible for recommending to the Board an appropriate liquidity and funding risk appetite and for approving liquidity risk-related policies and recommendations. The Board Risk Committee is also responsible for ensuring that all liquidity risk controls are in accordance with regulatory requirements and best practice and for advising the Board on the coordination and prioritisation of liquidity risk management issues throughout the Group.
The Board Risk Committee reviews regular reports on the liquidity position of the Group, including the review of stress testing scenarios to assess the resilience of its liquidity buffers in relation to the minimum regulatory requirements comprising the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”). It is informed immediately of new and emerging liquidity concerns and ensures that Executive management takes appropriate remedial actions to address the concerns, including the viability of contingency funding options.
Roles and responsibilities
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Annual Report and Financial Statements 2022
Notes to the financial statements
The Group’s Risk team, under the leadership of the MeDirect Malta Chief Risk Officer (“CRO”), has primary responsibility for monitoring current liquidity performance as well as defining potential adverse liquidity scenarios that should be considered, and for reporting exposure to these scenarios (the “downside case”). Under the leadership of the MeDirect Malta CRO, it is responsible for ensuring that all significant risks relating to liquidity are properly identified and clearly incorporated into the Group’s risk management and reporting framework. It is also responsible for producing reports that show and analyse the Group’s sensitivity to external events related to liquidity, including the definition of severe but plausible events that could constitute stress scenarios.
Funding strategy
Banks traditionally perform a role of liquidity transformation, whereby they fund through liabilities that are liquid in the short to medium term, in order to invest in longer term and less liquid assets. This mismatch of liquid liabilities and less liquid assets is a near-universal feature of bank balance sheets and clearly leads to a risk if liabilities cannot be rolled over when they mature (which may be every day in the case of money held in current or savings accounts).
The Group’s strategy to mitigate this risk has four main components:
• Limiting its exposure to customer deposit withdrawal through the use of term and notice accounts rather than overnight deposits as its primary instrument of customer funding by focusing on the retail market to maximise granularity and by expanding outside Malta directly and indirectly through platforms to reduce its dependence on a single market;
• Limiting its exposure to wholesale funding withdrawal by locking in term, rather than short-dated, funding against illiquid assets (where this is used at all: illiquid assets are primarily deposit funded) and by either diversifying its sources of funding in general or ensuring that it does not rely on funding that is at the discretion of market counterparties;
• Maintaining a contingency source of funding by ensuring that substantially all of its HQLA Securities Investment portfolio is eligible for funding at the ECB or at Eurex, as well as ensuring that other AAA-rated debt instruments are eligible for use as collateral against multiple repo lines, if alternative sources are unavailable; and
• Holding a much higher than typical proportion of assets that could over time be liquidated in the secondary market.
The Group’s objective is to maintain a prudent funding structure drawn from diverse funding sources in the short-, medium- and long-term.
Potential funding sources may include, but are not limited to:
• Deposits from retail and corporate customers;
• Bond issuance, either secured (for example through CLO structures or the issuance of RMBSs, the latter representing one of the main sources of funding for the Dutch Mortgage portfolio), senior unsecured or subordinated;
• Issuance of capital instruments;
• Interbank funding (either secured, for example through repurchase agreements, warehouse lines obtained against the Dutch Mortgage portfolio, Total Return Swaps, or unsecured); and
• Central Bank funding (although it is the Group’s strategy not to rely on the Central Bank for funding in the normal course of events, but instead only used as a secondary source of financing).
To ensure that the Group and Bank have adequate liquidity to meet its near-term obligations, the Treasury team maintains good liquidity buffers and projects the Group’s and Bank’s expected liquidity position for each day over the subsequent week, as well as the “residual” cash balance that takes into account known inflows and outflows (for example settlements of asset purchases or sales) beyond this period.
MDB Group Limited is the parent company of MeDirect Malta and this parent company together with its subsidiaries are referred to as “the Regulatory Group” or “MDB Group”. The MDB Group and the MeDirect Malta Group comply with the Liquidity Coverage Ratio (“LCR”) in relation to short-term liquidity and monitor the Net Stable Funding Ratio (“NSFR”) in order to assess long-term liquidity:
158
Annual Report and Financial Statements 2022
Notes to the financial statements
The table below displays the MDB Group’s LCR as at 31 December 2022 and 2021:
Group
2022 2021
% %
Actual LCR 221 363
During the year ended 31 December 2022 and 2021, the LCR was within both the regulatory minimum and the risk appetite set by the Group. As at 31 December 2022 and 2021, the Group’s LCR was well above 100% at all times.
• The Net Stable Funding Ratio (“NSFR”): This ratio looks at the relationship between long-term assets and long-term funding. The NSFR requires institutions to maintain sufficient stable funding relative to required stable funding and reflects a bank’s long-term funding profile (funding with a term of more than a year). It is designed to complement the LCR. The NSFR requirement of 100% came into force with the implementation of CRR II as from June 2021.”
The table below displays the MDB Group’s NSFR as at 31 December 2022 and 2021:
Group
2022 2021
% %
Actual NSFR 119 134
The Group’s NSFR remained above the minimum legal requirement of 100% at all times during the financial year ended 31 December 2022.
2.3.2 Liquidity risk reporting
Reliable management reporting provides the Executive and the Board with timely and forward-looking information on the Group’s liquidity position. Reporting of risk measures is done on a frequent basis and compares current liquidity exposures to established limits to identify any emerging pressures and limit breaches.
The Group’s Risk team performs regular stress testing of its liquidity profile, as well as the availability of contingency funding options through both its ILAAP and monthly Maximum Cumulative Outflow (“MCO”) report. The MCO analyses the likely risks to the Group’s liquidity position and quantifies its ability to withstand the associated shocks through deployment of management contingency funding plan options. Summarised results from all the various analyses are used as inputs to the MCO, with the liquidity impacts of different levels of severity of both idiosyncratic and market-wide scenarios modelled across a twelve-month time horizon. In addition, the Group’s Liquidity Contingency Plan (“LCP”) analyses the availability and practicability of its contingency funding measures with regards to idiosyncratic and market-wide stress scenarios. Impacts are assessed at Group level, as well as at MeDirect Malta and MeDirect Bank SA individual levels.
The Group’s liquidity risk reporting reinforces the Group’s oversight of liquidity risk, by not only focusing its risk reporting on the ‘current’ state, but also providing regular and timely reporting of the potential ‘stress’ liquidity profile of the Group.
159
Annual Report and Financial Statements 2022
Notes to the financial statements
2.3.3 Contractual maturity ladder
The following is an analysis of financial assets and liabilities by remaining contractual maturities as at the reporting date, with the exception of the analysis of loans and advances to customers classified under the International Corporate Lending and Dutch, Belgian and Maltese Mortgage portfolios, debt securities in issue and subordinated liabilities, that are based on the expected maturities based on the date when the instruments are expected to be fully repaid, since this is how the liquidity of the Group is monitored on a regular basis. Refer also to Note 2.3.5 that provides an analysis of encumbered investments.
Group Not more Between Between Between More No
than 1 and 3 3 months 1 and than maturity
1 month months and 1 year 5 years 5 years date Total
€000 €000 €000 €000 €000 €000 €000
As at 31 December 2022
Assets
Balances with central banks 123,448 - - - - 26,477 149,925
Derivative financial instruments 1,179 320 483 79,336 281,553 511 363,382
Loans and advances to financial institutions 402,987 - - - - - 402,987
Loans and advances to customers 2,713 14 235,316 358,540 2,063,404 (270,694) 2,389,293
- International Corporate Lending portfolio - - 214,220 297,894 - - 512,114
- Dutch Mortgage portfolio 44 1 - 2,436 1,815,521 - 1,818,002
- Belgian Mortgage portfolio - - 858 1,685 129,457 - 132,000
- IFRS basis adjustment:
International Mortgage portfolio - - - - - (271,273) (271,273)
- Maltese Business Lending portfolio 2,669 13 20,238 56,525 50,828 579 130,852
- Maltese Mortgage portfolio - - - - 67,598 - 67,598
Investments - 26,758 157,573 455,808 622,608 5,292 1,268,039
- Securities portfolio - 26,758 157,573 455,808 48,607 5,292 694,038
- Securitisation portfolio - - - - 574,001 - 574,001
Accrued income 1,096 11,928 1,073 - - - 14,097
Loans to related parties (incl. in other assets) - - - - - 654 654
Other receivables (incl. in other assets) - - - - - 27,680 27,680
Total financial assets 531,423 39,020 394,445 893,684 2,967,565 (210,080) 4,616,057
Liabilities
Derivative financial instruments - 5,306 - - - - 5,306
Amounts owed to financial institutions 344,497 50,638 150,000 - - - 545,135
Amounts owed to customers 2,114,495 39,965 412,570 220,534 36 - 2,787,600
Debt securities in issue 7,802 15,812 72,771 873,184 - - 969,569
Subordinated liabilities - - 19,997 34,834 - - 54,831
Accrued interest expense
(incl. in accruals and deferred income) 1,589 522 5,746 3 2,912 - 10,772
Lease liabilities (incl. in other liabilities) 376 53 754 3,765 123 - 5,071
Amounts due to related parties
(incl. in other liabilities) - 950 - - 10,309 1,487 12,746
Total financial liabilities 2,468,759 113,246 661,838 1,132,320 13,380 1,487 4,391,030
Liquidity gap (1,937,336) (74,226) (267,393) (238,636) 2,954,185
160
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Not more Between Between Between More No
than 1 and 3 3 months 1 and than maturity
1 month months and 1 year 5 years 5 years date Total
€000 €000 €000 €000 €000 €000 €000
As at 31 December 2021
Assets
Balances with central banks 302,709 - - - - 25,916 328,625
Derivative financial instruments 5,053 - - 3,651 33,473 511 42,688
Loans and advances to financial institutions 193,724 - - - - - 193,724
Loans and advances to customers 11,094 22,291 262,171 593,444 1,472,452 (37,149) 2,324,303
- International Corporate Lending portfolio - 12,188 210,561 370,610 - - 593,359
- Dutch Mortgage portfolio 3,567 7,546 35,812 191,311 1,404,778 - 1,643,014
- IFRS basis adjustment:
Dutch Mortgage portfolio - - - - - (37,149) (37,149)
- Maltese Business Lending portfolio 7,464 2,431 15,229 28,488 52,514 - 106,126
- Maltese Mortgage portfolio 63 126 569 3,035 15,160 - 18,953
Investments 6,188 49,271 234,315 480,143 507,351 - 1,277,268
- Securities portfolio 6,188 49,271 234,315 480,143 - - 769,917
- Securitisation portfolio - - - - 507,351 - 507,351
Accrued income 5,010 3,589 2,274 - - - 10,873
Loans to related parties (incl. in other assets) - - - - - 283 283
Other receivables (incl. in other assets) 9,631 - - - - 2,732 12,363
Total financial assets 533,409 75,151 498,760 1,077,238 2,013,276 (7,707) 4,190,127
Liabilities
Derivative financial instruments 963 - 43 88 37 - 1,131
Amounts owed to financial institutions 147,879 125,470 - - - - 273,349
Amounts owed to customers 2,111,739 19,056 366,998 452,685 10,387 - 2,960,865
Debt securities in issue 7,268 5,883 32,185 612,957 - - 658,293
Subordinated liabilities - - 20,053 34,941 - - 54,994
Accrued interest expense
(incl. in accruals and deferred income) 337 593 4,276 103 1,548 - 6,857
Lease liabilities (incl. in other liabilities) 180 90 1,299 4,794 720 - 7,083
Amounts due to related parties
(incl. in other liabilities) - 968 - - 10,136 1,355 12,459
Total financial liabilities 2,268,366 152,060 424,854 1,105,568 22,828 1,355 3,975,031
Liquidity gap (1,734,957) (76,909) 73,906 (28,330) 1,990,448
Cumulative liquidity gap (1,734,957) (1,811,866) (1,737,960) (1,766,290) 224,158
161
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Not more Between Between Between More No
than 1 and 3 3 months 1 and than maturity
1 month months and 1 year 5 years 5 years date Total
€000 €000 €000 €000 €000 €000 €000
As at 31 December 2022
Assets
Balances with central banks 35,893 - - - - - 42,442
Derivative financial instruments 746 - 483 6,305 - 511 8,045
Loans and advances to financial institutions 89,837 - - - - - 89,837
Loans and advances to customers 2,669 13 192,177 204,242 118,426 579 518,106
- International Corporate Lending portfolio - - 171,939 147,717 - - 319,656
- Maltese Business Lending portfolio 2,669 13 20,238 56,525 50,828 579 130,852
- Maltese Mortgage portfolio - - - - 67,598 - 67,598
Investments - 12,035 70,002 183,344 192,851 4,473 462,705
- Securities portfolio - 12,035 70,002 183,344 33,886 4,473 303,740
- Securitisation portfolio - - - - 158,965 - 158,965
Accrued income 366 3,382 590 - - - 4,338
Loans to related parties (incl. in other assets) - - - - - 8,618 8,618
Other receivables (incl. in other assets) - - - - - 1,609 1,609
Total financial assets 129,511 15,430 236,252 393,891 311,277 22,339 1,135,700
Liabilities
Amounts owed to financial institutions 79,087 50,638 150,000 - - - 279,725
Amounts owed to customers 522,694 18,769 118,597 46,976 36 - 707,072
Subordinated liabilities - - 19,997 34,834 - - 54,831
Accrued interest expense
(incl. in accruals and deferred income) 239 297 1,005 3 - - 1,544
Lease liabilities (incl. in other liabilities) 479 248 1,374 4,313 328 - 6,742
Amounts due to related parties
(incl. in other liabilities) - 950 - - 10,309 33,280 44,539
Total financial liabilities 602,499 70,902 290,973 86,126 10,673 33,280 1,094,453
Liquidity gap (472,988) (55,472) (27,721) 307,765 300,604
Cumulative liquidity gap (472,988) (528,460) (556,181) (248,416) 52,188
162
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Not more Between Between Between More No
than 1 and 3 3 months 1 and than maturity
1 month months and 1 year 5 years 5 years date Total
€000 €000 €000 €000 €000 €000 €000
As at 31 December 2021
Assets
Balances with central banks 135,295 - - - - 6,325 141,620
Derivative financial instruments 1 - - 728 - 511 1,240
Loans and advances to financial institutions 111,370 - - - - - 111,370
Loans and advances to customers 241 14,746 136,942 275,804 67,674 7,286 502,693
- International Corporate Lending portfolio - 12,189 121,144 244,281 - - 377,614
- Maltese Business Lending portfolio 178 2,431 15,229 28,488 52,514 7,286 106,126
- Maltese Mortgage portfolio 63 126 569 3,035 15,160 - 18,953
Investments - 12,327 30,105 235,292 159,421 - 437,145
- Securities portfolio - 12,327 30,105 235,292 - - 277,724
- Securitisation portfolio - - - - 159,421 - 159,421
Accrued income 3,362 1,422 818 - - - 5,602
Loans to related parties (incl. in other assets) - - - - - 23,595 23,595
Other receivables (incl. in other assets) - - - - - 582 582
Total financial assets 250,269 28,495 167,865 511,824 227,095 38,299 1,223,847
Liabilities
Derivative financial instruments 132 - - 11 - - 143
Amounts owed to financial institutions 139,360 125,470 - - - - 264,830
Amounts owed to customers 512,815 2,278 48,448 250,862 221 - 814,624
Subordinated liabilities - - 20,053 34,941 - - 54,994
Accrued interest expense
(incl. in accruals and deferred income) 224 333 704 103 653 - 2,017
Lease liabilities (incl. in other liabilities) 330 371 2,175 5,455 630 - 8,961
Amounts due to related parties
(incl. in other liabilities) - 968 - - 10,136 34,809 45,913
Total financial liabilities 652,861 129,420 71,380 291,372 11,640 34,809 1,191,482
Liquidity gap (402,592) (100,925) 96,485 220,452 215,455
Cumulative liquidity gap (402,592) (503,517) (407,032) (186,580) 28,875
163
Annual Report and Financial Statements 2022
Notes to the financial statements
Current accounts and savings deposits payable on demand or at short notice of the Group and Bank amounted to €1,885 million (2021: €1,911 million) and €304 million (2021: €321 million), respectively, as at 31 December 2022. This amount is disclosed within the ‘Not more than 1 month’ maturity grouping. As at 31 December 2022 savings deposits with a withdrawal notice period of one month amounting to €2 million (2021: €3 million) and €760 (2021: €748 thousand) for the Group and the Bank respectively, are disclosed within the ‘Between 1 and 3 months’ maturity grouping. In addition, as at 31 December 2022 savings deposits with a withdrawal notice period of three to six months amounting to €299 million (2021: €364 million) and €29 million (2021: €47 million) for the Group and the Bank respectively, are disclosed within the ‘Between 3 months and 1 year’ maturity grouping. Furthermore, as at 31 December 2022, savings deposits with a withdrawal notice period of one year for the Group amounting to €108 million (2021: €163 million) and €28 million for the Bank in 2021 respectively, are disclosed within the ‘Between 1 year and 5 years’ maturity grouping. However, in practice these deposits are maintained with the Group and Bank for longer periods; hence the effective date of repayment is later than the contractual date.
As of 31 December 2021, unencumbered financial assets classified as Securities Investments measured at fair value through other comprehensive income, with a carrying amount of €387 million and €48.9 million for the Group and the Bank respectively and as at 31 December 2022 Securities Investments measured at amortised cost with a carrying amount of €370 million (2021: €91 million) and €109 million (2021: €35.7 million) for the Group and the Bank respectively, form part of the high quality liquid asset portfolio for LCR purposes. Accordingly, they may be liquidated within one month. In addition to these instruments the Group and Bank held unencumbered financial assets classified as Securities Investments measured at amortised cost with a carrying amount of €12 million (2021: €12 million) included in the category between 1 and 3 months in the preceding table (2021: Between 3 months and 1 year).
164
Annual Report and Financial Statements 2022
Notes to the financial statements
2.3.4 Residual contractual maturities of financial liabilities
The following is an analysis of undiscounted cash flows payable under the principal non-derivative financial liabilities by remaining contractual maturities as at the reporting date, except for debt securities in issue and subordinated liabilities for which undiscounted cash flows payable are presented by expected maturities in line with the Contractual Maturity Ladder presented in Note 2.3.3.
Group Less Between Between Between 1 More
Carrying Total than 1 and 3 months and 5 than
amount outflows 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2022
Non-derivative liabilities
Amounts owed to financial institutions
- Due to clearing houses 150,000 151,653 - - 151,653 - -
- Due to other banks 395,135 395,708 344,626 51,082 - - -
Amounts owed to customers 2,787,600 2,795,171 2,114,504 40,003 414,180 226,444 40
Debt securities in issue 969,569 995,254 6,916 16,698 72,771 411,799 487,070
Subordinated liabilities 54,831 58,953 - - 22,472 36,481 -
Lease liabilities (included in other liabilities) 5,071 5,838 422 77 857 4,278 204
4,362,206 4,402,577 2,466,468 107,860 661,933 679,002 487,314
Group Less Between Between Between 1 More
Carrying Total than 1 and 3 months and 5 than
amount outflows 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2021
Non-derivative liabilities
Amounts owed to financial institutions
- Due to clearing houses 258,121 258,429 132,709 125,720 - -
- Due to other banks 15,228 15,228 15,228 - - - -
Amounts owed to customers 2,960,865 2,974,598 2,111,739 19,057 367,279 465,669 10,854
Debt securities in issue 658,293 661,447 7,310 6,018 32,716 615,403 -
Subordinated liabilities 54,994 60,356 - - 22,472 37,884 -
Lease liabilities (included in other liabilities) 7,083 7,978 298 141 1,347 5,165 1,027
3,954,584 3,978,036 2,267,284 150,936 423,814 1,124,121 11,881
165
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Less Between Between Between 1 More
Carrying Total than 1 and 3 months and 5 than
amount outflows 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2022
Non-derivative liabilities
Amounts owed to financial institutions
- Due to clearing houses 150,000 151,653 - - 151,653 - -
- Due to other banks 129,725 130,298 79,216 51,082 - - -
Amounts owed to customers 707,072 710,271 522,702 18,805 119,734 48,990 40
Subordinated liabilities 54,831 58,953 - - 22,472 36,481 -
Lease liabilities (included in other liabilities) 6,742 7,730 485 310 1,582 4,870 483
1,048,370 1,058,905 602,403 70,197 295,441 90,341 523
Bank Less Between Between Between 1 More
Carrying Total than 1 and 3 months and 5 than
amount outflows 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2021
Non-derivative liabilities
Amounts owed to financial institutions
- Due to clearing houses 258,121 258,429 132,709 125,720 - - -
- Due to other banks 6,709 6,709 6,709 - - - -
Amounts owed to customers 814,624 822,337 512,815 2,278 48,525 258,489 230
Subordinated liabilities 54,994 60,356 - - 22,472 37,884 -
Lease liabilities (included in other liabilities) 8,961 9,882 401 450 2,230 5,991 810
1,143,409 1,157,713 652,634 128,448 73,227 302,364 1,040
The following is an analysis of undiscounted cash flows relating to the Group’s and Bank’s principal derivative financial instruments by remaining contractual maturities as at the reporting date:
Group Less Between Between Between 1 More
Carrying Inflows/ than 1 and 3 months and 5 than
amount (Outflows) 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2022
Derivative assets
Derivative financial instruments
- Interest rate swaps 361,368 330,780 287 3,870 28,190 134,727 163,706
- Foreign exchange swaps 1,503 (1,545) (1,212) (333) - - -
Inflows 85,481 70,258 15,223 - - -
Outflows (87,026) (71,470) (15,556) - - -
- Other derivative financial instruments
(no maturity) 511 - - - - - -
363,382 329,235 (925) 3,537 28,190 134,727 163,706
Derivative liabilities
Derivative financial instruments
- Interest rate swaps 5,306 6,112 976 - 5,136 - -
- Foreign exchange swaps - - - - - - -
Inflows 4,566 4,566 - - - -
Outflows (4,566) (4,566) - - - -
5,306 6,112 976 - 5,136 - -
166
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Less Between Between Between 1 More
Carrying Inflows/ than 1 and 3 months and 5 than
amount (Outflows) 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2021
Derivative financial instruments
- Interest rate swaps 37,124 38,687 (119) (882) (3,421) 10,430 32,679
- Foreign exchange swaps 2 2 2 - - - -
Inflows 3,998 3,998 - - - -
Outflows (3,996) (3,996) - - - -
- Other derivative financial instruments
(no maturity) 511 - - - - - -
37,637 38,689 (117) (882) (3,421) 10,430 32,679
Derivative liabilities
Derivative financial instruments
- Interest rate swaps 168 412 (18) (22) (187) 365 274
- Foreign exchange swaps 963 (977) (977) - - - -
Inflows 104,219 95,290 8,929 - - -
Outflows (105,196) (96,267) (8,929) - - -
1,131 (565) (995) (22) (187) 365 274
Bank Less Between Between Between 1 More
Carrying Inflows/ than 1 and 3 months and 5 than
amount (Outflows) 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2022
Derivative assets
Derivative financial instruments
- Interest rate swaps 6,788 7,794 45 225 2,410 5,114 -
- Foreign exchange swaps 746 (767) (767) - - - -
Inflows 48,306 48,306 - - - -
Outflows (49,073) (49,073) - - - -
- Other derivative financial instruments
(no maturity) 511 - - - - - -
8,045 7,027 (722) 225 2,410 5.114 -
Derivative liabilities
Derivative financial instruments
- Foreign exchange swaps - 1 1 - - - -
Inflows 4,519 4,519 - - - -
Outflows (4,518) (4,518) - - - -
- 1 1 - - - -
167
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Less Between Between Between 1 More
Carrying Inflows/ than 1 and 3 months and 5 than
amount (Outflows) 1 month 3 months and 1 year years 5 years
€000 €000 €000 €000 €000 €000 €000
31 December 2021
Derivative assets
Derivative financial instruments
- Interest rate swaps 728 688 (14) (17) (77) 796 -
- Foreign exchange swaps 1 1 1 - - - -
Inflows 3,896 3,896 - - - -
Outflows (3,895) (3,895) - - - -
- Other derivative financial instruments
(no maturity) 511 - - - - - -
1,240 689 (13) (17) (77) 796 -
Derivative liabilities
Derivative financial instruments
- Interest rate swaps 11 (15) - - (48) 33 -
- Foreign exchange swaps 132 (133) (133) - - - -
Inflows 20,346 20,346 - - - -
Outflows (20,479) (20,479) - - - -
143 (148) (133) - (48) 33 -
168
Annual Report and Financial Statements 2022
Notes to the financial statements
2.3.5 Encumbered assets
The following tables set out the availability of the Group’s and Bank’s financial assets to support future funding.
Group Encumbered Unencumbered
Pledged as collateral Other* Available as collateral Other** Total
€000 €000 €000 €000 €000
31 December 2022
Balances with central banks and cash (Note 4) - 26,477 123,452 - 149,929
Derivative financial instruments - - - 363,382 363,382
Loans and advances to financial institutions (Note 6) 249,634 - - 108,353 402,987
Loans and advances to customers - - - 2,389,293 2,389,293
- International Corporate Lending portfolio - - - 512,114 512,114
- Dutch Mortgage portfolio - - - 1,546,729 1,546,729
- Belgian Mortgage portfolio - - - 132,000 132,000
- Maltese Business Lending portfolio - - - 130,852 130,852
- Maltese Mortgage portfolio - - - 67,598 67,598
Investments (Note 8) 466,780 - 777,019 24,240 1,268,039
- Securities portfolio 290,017 - 398,729 5,292 694,038
- Securitisation portfolio 176,763 - 378,290 18,948 574,001
Accrued income - - - 14,097 14,097
Loans and advances to related parties
(included in other assets) - - - 654 654
Other receivables (included in other assets) - - - 27,680 27,680
761,414 26,477 900,471 2,927,699 4,616,061
Group Encumbered Unencumbered
Pledged as collateral Other* Available as collateral Other** Total
€000 €000 €000 €000 €000
31 December 2021
Balances with central banks and cash (Note 4) - 25,916 302,710 - 328,626
Derivative financial instruments - - - 42,688 42,688
Loans and advances to financial institutions (Note 6) 69,479 - - 124,245 193,724
Loans and advances to customers - - - 2,324,303 2,324,303
- International Corporate Lending portfolio - - - 593,359 593,359
- Dutch Mortgage portfolio - - - 1,605,865 1,605,865
- Maltese Business Lending portfolio - - - 106,126 106,126
- Maltese Mortgage portfolio - - - 18,953 18,953
Investments (Note 8) 379,263 - 878,502 19,503 1,277,268
- Securities portfolio 284,264 - 485,653 - 769,917
- Securitisation portfolio 94,999 - 392,849 19,503 507,351
Accrued income - - - 10,873 10,873
Loans and advances to related parties
(included in other assets) - - - 283 283
Other receivables (included in other assets) - - - 12,363 12,363
448,742 25,916 1,181,212 2,534,258 4,190,128
169
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Encumbered Unencumbered
Pledged as collateral Other* Available as collateral Other** Total
€000 €000 €000 €000 €000
31 December 2022
Balances with central bank and cash (Note 4) - 6,549 35,897 - 42,446
Derivative financial instruments - - - 8,045 8,045
Loans and advances to financial institutions (Note 6) 23,643 - - 66,194 89,837
Loans and advances to customers - - - 518,106 518,106
- International Corporate Lending portfolio - - - 319,656 319,656
- Maltese Business Lending portfolio - - - 130,852 130,852
- Maltese Mortgage portfolio - - - 67,598 67,598
Investments (Note 8) 361,831 - 77,453 23,421 462,705
- Securities portfolio 221,814 - 77,453 4,473 303,740
- Securitisation portfolio 140,017 - - 18,948 158,965
Accrued income - - - 4,338 4,338
Loans and advances to related parties
(included in other assets) - - - 8,618 8,618
Other receivables (included in other assets) - - - 1,609 1,609
385,474 6,549 113,350 630,331 1,135,704
Bank Encumbered Unencumbered
Pledged as collateral Other* Available as collateral Other** Total
€000 €000 €000 €000 €000
31 December 2021
Balances with central bank and cash (Note 4) - 6,325 135,296 - 141,621
Derivative financial instruments - - - 1,240 1,240
Loans and advances to financial institutions (Note 6) 14,104 - - 97,266 111,370
Loans and advances to customers - - - 502,693 502,693
- International Corporate Lending portfolio - - - 377,614 377,614
- Maltese Business Lending portfolio - - - 106,126 106,126
- Maltese Mortgage portfolio - - - 18,953 18,953
Investments (Note 8) 281,023 - 136,619 19,503 437,145
- Securities portfolio 186,024 - 91,700 - 277,724
- Securitisation portfolio 94,999 - 44,919 19,503 159,421
Accrued income - - - 5,602 5,602
Loans and advances to related parties
(included in other assets) - - - 23,595 23,595
Other receivables (included in other assets) - - - 582 582
295,127 6,325 271,915 650,481 1,223,848
*Represents assets that are not pledged for funding purposes but that the Group believes it is restricted from using to secure funding, for legal or other reasons.
170
Annual Report and Financial Statements 2022
Notes to the financial statements
2.4 Market risk
Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
2.4.1 Management of market risks
Management of market risk is the responsibility of the Group’s Treasury team and is overseen by the Group’s Risk team, under the oversight of the Group’s ALCO and the Board Risk Committee, and as set out in the foreign exchange (“FX”) risk policy and Interest Rate Risk in the Banking Book (“IRRBB”) policy.
2.4.2 Foreign exchange risk
FX risk is the risk that the value of the Group’s positions may fluctuate due to movements in underlying foreign currency exchange rates. The Group seeks to minimise FX risk and thus hedges all major exposures in accordance with its risk appetite. The Group is mainly exposed to currency risk on FX movements relating to the US Dollar and GB Pound, originating from the Group’s corporate banking business. In the majority of cases, the Group hedges this risk by ensuring that its foreign currency denominated liabilities are matched with corresponding assets in the same currency. Any mismatches that arise are monitored closely. The Group’s Treasury team is permitted to use spots, forwards and swaps in order to hedge the Group’s FX risk.
171
Annual Report and Financial Statements 2022
Notes to the financial statements
Group
EUR GBP USD
currency currency currency Other Total
€000 €000 €000 €000 €000
As at 31 December 2022
Financial assets
Balances with central banks and cash 149,929 - - - 149,929
Derivative financial instruments 361,882 1,150 220 130 363,382
Loans and advances to financial institutions 393,709 3,367 1,518 4,393 402,987
Loans and advances to customers 2,236,454 148,966 3,873 - 2,389,293
- International Corporate Lending portfolio 359,529 148,966 3,619 - 512,114
- Dutch Mortgage portfolio 1,546,729 - - - 1,546,729
- Belgian Mortgage portfolio 132,000 - - - 132,000
- Maltese Business Lending portfolio 130,598 - 254 - 130,852
- Maltese Mortgage portfolio 67,598 - - - 67,598
Investments 1,262,747 5,292 - - 1,268,039
- Securities portfolio 688,746 5,292 - - 694,038
- Securitisation portfolio 574,001 - - - 574,001
Accrued income 13,111 939 38 9 14,097
Loans to related parties (included in other assets) 614 39 - 1 654
Other receivables (included in other assets) 27,499 169 12 - 27,680
4,445,945 159,922 5,661 4,533 4,616,061
Financial liabilities
Derivative financial instruments 5,305 - 1 - 5,306
Amounts owed to financial institutions 545,135 - - - 545,135
Amounts owed to customers 2,673,837 60,663 40,096 13,004 2,787,600
Debt securities in issue 969,569 - - - 969,570
Subordinated liabilities 50,767 4,064 - - 54,831
Accrued interest expense (incl. in accruals and deferred income) 10,633 113 8 18 10,772
Lease liabilities (included in other liabilities) 4,741 330 - - 5,071
Amounts owed to related parties (incl. in other liabilities) 12,729 116 - 1 12,746
4,272,716 65,186 40,105 13,023 4,391,030
Net on-balance sheet financial position 94,736 (34,444) (8,490)
Notional of derivative financial instruments (89,995) 34,064 1,439
Residual exposure 4,741 (380) (7,051)
172
Annual Report and Financial Statements 2022
Notes to the financial statements
Group
EUR GBP USD
currency currency currency Other Total
€000 €000 €000 €000 €000
As at 31 December 2021
Financial assets
Balances with central banks and cash 328,626 - - - 328,626
Derivative financial instruments 42,686 - - 2 42,688
Loans and advances to financial institutions 150,087 20,200 13,104 10,333 193,724
Loans and advances to customers 2,154,037 158,517 11,749 - 2,324,303
- International Corporate Lending portfolio 426,889 158,517 7,953 - 593,359
- Dutch Mortgage portfolio 1,605,865 - - - 1,605,865
- Maltese Business Lending portfolio 102,330 - 3,796 - 106,126
- Maltese Mortgage portfolio 18,953 - - - 18,953
Investments 1,277,268 - - - 1,277,268
- Securities portfolio 769,917 - - - 769,917
- Securitisation portfolio 507,351 - - - 507,351
Accrued income 9,779 992 75 27 10,873
Loans to related parties (included in other assets) 244 39 - - 283
Other receivables (included in other assets) 12,324 39 - - 12,363
3,975,051 179,787 24,928 10,362 4,190,128
Financial liabilities
Derivative financial instruments 168 802 143 18 1,131
Amounts owed to financial institutions 273,349 - - - 273,349
Amounts owed to customers 2,826,505 83,967 29,544 20,849 2,960,865
Debt securities in issue 658,293 - - - 658,293
Subordinated liabilities 50,703 4,291 - - 54,994
Accrued interest expense (incl. in accruals and deferred income) 6,578 239 14 26 6,857
Lease liabilities (included in other liabilities) 6,961 122 - - 7,083
Amounts owed to related parties (incl. in other liabilities) 12,437 22 - - 12,459
3,834,994 89,443 29,701 20,893 3,975,031
Net on-balance sheet financial position 90,344 (4,773) (10,531)
Notional of derivative financial instruments (91,519) 4,341 8,456
Residual exposure (1,175) (432) (2,075)
173
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank
EUR GBP USD
currency currency currency Other Total
€000 €000 €000 €000 €000
As at 31 December 2022
Financial assets
Balances with central banks and cash 42,446 - - - 42,446
Derivative financial instruments 7,412 426 189 18 8,045
Loans and advances to financial institutions 79,900 5,063 976 3,898 89,837
Loans and advances to customers 402,202 112,031 3,873 - 518,106
- International Corporate Lending portfolio 204,006 112,031 3,619 - 319,656
- Maltese Business Lending portfolio 130,598 - 254 - 130,852
- Maltese Mortgage portfolio 67,598 - - - 67,598
Investments 458,232 4,473 - - 462,705
- Securities portfolio 299,267 4,473 - - 303,740
- Securitisation portfolio 158,965 - - - 158,965
Accrued income 3,600 691 38 9 4,338
Loans to related parties (included in other assets) 8,074 103 437 4 8,618
Other receivables (included in other assets) 1,461 136 12 - 1,609
1,003,327 122,923 5,525 3,929 1,135,704
Financial liabilities
Amounts owed to financial institutions 279,725 - - - 279,725
Amounts owed to customers 604,810 58,464 32,087 11,711 707,072
Subordinated liabilities 50,767 4,064 - - 54,831
Accrued interest expense (included in accruals and deferred income) 1,415 108 3 18 1,544
Lease liabilities (included in other liabilities) 6,412 330 - - 6,742
Amounts owed to related parties (included in other liabilities) 39,545 3,747 362 885 44,539
982,674 66,713 32,452 12,614 1,094,453
Net on-balance sheet financial position 56,210 (26,927) (8,685)
Notional of derivative financial instruments (52,823) 26,506 8,439
Residual exposure 3,387 (421) (246)
174
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank
EUR GBP USD
currency currency currency Other Total
€000 €000 €000 €000 €000
As at 31 December 2021
Financial assets
Balances with central banks and cash 141,621 - - - 141,621
Derivative financial instruments 1,239 - - 1 1,240
Loans and advances to financial institutions 73,223 18,110 10,096 9,941 111,370
Loans and advances to customers 367,393 123,552 11,748 - 502,693
- International Corporate Lending portfolio 246,110 123,552 7,952 - 377,614
- Maltese Business Lending portfolio 102,330 - 3,796 - 106,126
- Maltese Mortgage portfolio 18,953 - - - 18,953
Investments 437,145 - - - 437,145
- Securities portfolio 277,724 - - - 277,724
- Securitisation portfolio 159,421 - - - 159,421
Accrued income 4,604 897 75 26 5,602
Loans to related parties (included in other assets) 22,730 73 785 7 23,595
Other receivables (included in other assets) 579 3 - - 582
1,048,534 142,635 22,704 9,975 1,223,848
Financial liabilities
Derivative financial instruments 11 - 114 18 143
Amounts owed to financial institutions 264,830 - - - 264,830
Amounts owed to customers 690,910 81,716 21,916 20,082 814,624
Subordinated liabilities 50,703 4,291 - - 54,994
Accrued interest expense (included in accruals and deferred income) 1,622 362 8 25 2,017
Lease liabilities (included in other liabilities) 8,839 122 - - 8,961
Amounts owed to related parties (included in other liabilities) 4,807 40,622 - 484 45,913
1,021,722 127,113 22,038 20,609 1,191,482
Net on-balance sheet financial position 15,522 666 (10,634)
Notional of derivative financial instruments (15,902) (1,155) 8,513
Residual exposure (380) (489) (2,121)
The Group and Bank uses derivative financial instruments to hedge movements in foreign exchange rates by entering derivative contracts with notional amounts which substantially reflect the net exposure in each currency. As a result, the Group and Bank are not materially exposed to fluctuations in foreign exchange rates as evidenced in the tables above, reflecting the policy to eliminate foreign exchange risk as much as is practicable.
175
Annual Report and Financial Statements 2022
Notes to the financial statements
2.4.3 Interest rate risk
The Group’s and MeDirect Belgium’s Interest Rate Risk in the Banking Book (IRRBB) position is managed through the three lines of defence: the First Line of Defence comprising the asset and liability management process managed by the MeDirect Group/Belgium Treasury team, the Second Line of Defence being the Risk team and the Third Line of Defence being Internal Audit. It is managed according to the Group’s/MeDirect Belgium’s IRRBB policy with limits established by the Risk team and monitored by both the First and Second Lines of Defence.
The monitoring/reporting activity is reviewed and managed independently by Group/MeDirect Belgium ALCO for the First Line of Defence, by the Risk Committee for the Second Line of Defence, and by the Audit Committee for the Third Line of Defence.
Interest rate risk is managed by comparing the interest rate risk profile of assets with the profile of liabilities, and by hedging unmatched interest rate risk arising in the balance sheet by purchasing interest rate derivatives, primarily interest rate swaps.
Interest rate risk reporting and analysis
As part of its monitoring duties, the Group’s Risk team prepares and reports on the Group’s interest rate risk position on a monthly basis. The report outputs show the effects of a number of internal and regulatory interest rate shocks on the:
• Projected net interest margin – ∆NII;
• Group’s capital position – ∆EVE; and
• Time bucket sensitivity – PV01.
The Group measures its exposure adopting both contractual and behavioural views (where items without deterministic maturity are assigned certain level of stickiness). The impact of the automatic options embedded in the banking book structure is assessed under ∆NII, ∆EVE and PV01.
176
Annual Report and Financial Statements 2022
Notes to the financial statements
Group Repricing in:
Not more Between 3 Between Between More
Carrying than months 1 and 3 and 5 than
amount 3 months to 1 year 3 years years 5 years
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Balances with central banks 149,925 149,925 - - - -
Loans and advances to financial institutions 402,987 402,987 - - - -
Loans and advances to customers 2,389,293 628,640 69,239 3,407 16,074 1,671,933
- International Corporate Lending portfolio 512,114 431,283 65,950 - 14,881 -
- Dutch Mortgage portfolio 1,818,002 261 1,935 3,407 1,193 1,811,206
- Belgian Mortgage portfolio 132,000 - - - - 132,000
- IFRS basis adjustment: International Mortgage portfolio (271,273) - - - - (271,273)
- Maltese Business Lending portfolio 130,852 129,498 1,354 - - -
- Maltese Mortgage portfolio 67,598 67,598 - - - -
Investments 1,262,175 826,942 435,233 - - -
- Securities portfolio 688,746 253,513 435,233 - - -
- Securitisation portfolio 573,429 573,429 - - - -
4,204,380 2,008,494 504,472 3,407 16,074 1,671,933
Amounts owed to financial institutions: 545,135 395,135 150,000 - - -
- Due to clearing houses 150,000 - 150,000 - - -
- Due to other banks 395,135 395,135 - - - -
Amounts owed to customers 2,787,600 2,154,459 412,570 201,137 19,398 36
Debt securities in issue 969,569 23,615 79,224 649,832 216,898 -
Subordinated liabilities 54,831 - 19,997 34,834 - -
Amounts due to immediate parent company
(included in Other Liabilities) 11,748 - - - 11,748 -
4,368,883 2,573,209 661,791 885,803 248,044 36
Interest rate repricing gap (564,715) (157,319) (882,396) (231,970) 1,671,897
Impact of hedging interest rate derivatives
– notional amounts 361,368 1,450,550 - (95,500) (280,033) (1,075,017)
Net interest rate repricing gap 885,835 (157,319) (977,896) (512,003) 596,880
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Annual Report and Financial Statements 2022
Notes to the financial statements
Group Repricing in:
Not more Between 3 Between Between More
Carrying than months 1 and 3 and 5 than
amount 3 months to 1 year 3 years years 5 years
€000 €000 €000 €000 €000 €000
As at 31 December 2021
Balances with central banks 328,625 328,625 - - - -
Loans and advances to financial institutions 193,724 193,724 - - - -
Loans and advances to customers 2,324,303 588,260 131,616 77 800 1,603,550
- International Corporate Lending portfolio 593,359 467,112 126,247 - - -
- Dutch Mortgage portfolio 1,643,014 955 517 79 818 1,640,645
- IFRS basis adjustment: Dutch Mortgage portfolio (37,149) (22) (12) (2) (18) (37,095)
- Maltese Business Lending portfolio 106,126 101,262 4,864 - - -
- Maltese Mortgage portfolio 18,953 18,953 - - - -
Investments 1,276,123 417,185 378,795 251,205 228,938 -
- Securities portfolio 769,917 55,459 234,315 251,205 228,938 -
- Securitisation portfolio 506,206 361,726 144,480 - - -
4,122,775 1,527,794 510,411 251,282 229,738 1,603,550
Amounts owed to financial institutions: 273,349 273,349 - - -
- Due to clearing houses 258,121 258,121 - - - -
- Due to other banks 15,228 15,228 - - - -
Amounts owed to customers 2,960,865 2,130,795 366,998 361,385 91,300 10,387
Debt securities in issue 658,293 13,151 32,185 - 612,957 -
Subordinated liabilities 54,994 - 20,053 34,941 - -
Amounts due to immediate parent company
(included in Other Liabilities) 11,313 - - - 11,313 -
3,958,814 2,417,295 419,236 396,326 715,570 10,387
Interest rate repricing gap (884,450) 91,175 (145,044) (485,832) 1,593,163
Impact of hedging interest rate
derivatives – notional amounts 37,124 1,454,536 (50,200) (254,936) (256,183) (893,217)
Net interest rate repricing gap 570,086 40,975 (399,980) (742,015) 699,946
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Notes to the financial statements
Bank Repricing in:
Not more Between 3 Between Between More
Carrying than months 1 and 3 and 5 than
amount 3 months to 1 year 3 years years 5 years
€000 €000 €000 €000 €000 €000
As at 31 December 2022
Balances with central banks 42,442 42,442 - - - -
Loans and advances to financial institutions 89,837 89,837 - - - -
Loans and advances to customers 518,106 467,699 50,407 - - -
- International Corporate Lending portfolio 319,656 270,603 49,053 - - -
- Maltes Business Lending portfolio 130,852 129,498 1,354 - - -
- Maltese Mortgage portfolio 67,598 67,598 - - - -
Investments 457,660 250,993 206,667 - - -
- Securities portfolio 299,267 92,600 206,667 - - -
- Securitisation portfolio 158,393 158,393 - - - -
1,108,045 850,971 257,074 - - -
Amounts owed to financial institutions: 279,725 129,725 150,000 - - -
- Due to clearing houses 150,000 - 150,000 - - -
- Due to other banks 129,725 129,725 - - - -
Amounts owed to customers 707,072 541,462 118,597 45,035 1,942 36
Subordinated liabilities 54,831 - 19,997 34,834 - -
Amounts due to immediate parent company
(included in Other Liabilities) 11,748 - - - 11,748
Amounts due to subsidiaries (included in Other Liabilities) 31,789 31,789 - - - -
1,085,165 702,976 288,594 79,869 13,690 36
Interest rate repricing gap 147,995 (31,520) (79,869) (13,690) (36)
Impact of hedging interest rate derivatives
– notional amounts 6,788 71,300 - (46,000) (25,300) -
Net interest rate repricing gap 219,295 (31,520) (125,869) (38,990) 36
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Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Repricing in:
Not more Between 3 Between Between More
Carrying than months 1 and 3 and 5 than
amount 3 months to 1 year 3 years years 5 years
€000 €000 €000 €000 €000 €000
As at 31 December 2021
Balances with central banks 141,620 141,620 - - - -
Loans and advances to financial institutions 111,370 111,370 - - - -
Loans and advances to customers 502,693 442,809 59,884 - - -
- International Corporate Lending portfolio 377,614 322,594 55,020 - - -
- Maltese Business Lending portfolio 106,126 101,262 4,864 - - -
- Maltese Mortgage portfolio 18,953 18,953 - - - -
Investments 436,000 133,610 67,098 88,978 146,314 -
- Securities portfolio 277,724 12,327 30,105 88,978 146,314 -
- Securitisation portfolio 158,276 121,283 36,993 - - -
1,191,683 829,409 126,982 88,978 146,314 -
Amounts owed to financial institutions: 264,830 264,830 - - - -
- Due to clearing houses 258,121 258,121 - - - -
- Due to other banks 6,709 6,709 - - - -
Amounts owed to customers 814,624 515,093 48,448 231,046 19,816 221
Subordinated liabilities 54,994 - 20,053 34,941 - -
Amounts due to immediate parent company
(included in Other Liabilities) 11,313 - - - 11,313 -
Amounts due to subsidiaries
(included in Other Liabilities) 33,454 33,454 - - - -
1,179,215 813,377 68,501 265,987 31,129 221
Interest rate repricing gap 16,032 58,481 (177,009) 115,185 (221)
Impact of hedging interest rate derivatives –
notional amounts 728 120,300 - (67,500) (52,800)
Net interest rate repricing gap 136,332 58,481 (244,509) 62,385 (221)
The Group’s exposure to interest rate risk arises predominantly from its asset/liability structure, specifically mismatches between the repricing term of its International Corporate Lending and Mortgage lending portfolios and the term structure of customer deposits, as well as from possible impacts on the Mark-to-Market (“MtM”) value of its fixed rate instruments if market interest rates increase.
The Group’s assets mainly comprise the Group’s International Corporate Lending portfolio, that reprices periodically (generally every three months) and has a relatively short duration, and the Dutch Mortgage portfolio, that has a longer-term duration.
The presence of interest rate floors embedded in most of the International Corporate Lending portfolio enables the Group to mitigate its repricing risk from the Group’s asset/liability structure, whilst the Group generally hedges the repricing risk from its financial assets, namely the securities, and wholesale repo funding.
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Notes to the financial statements
The Group’s Securitisation Investment portfolio comprises an investment in the equity tranche of GH1-2019 amounting to €0.6 million (2021: €1.4 million). The returns relating to this financial instrument are variable, with repayments being equivalent to any residual amounts after the commitments relating to more senior tranches in GH1-2019 are repaid. In this regard, this financial instrument is not deemed to be subject to interest rate risk and has been excluded from the table above accordingly.
A positive interest rate sensitivity gap exists where more assets than liabilities reprice during a given period. Although a positive gap position tends to benefit net interest income in a rising interest rate environment, the actual effect will depend on several factors, including the extent to which repayments are made earlier or later than the contracted date and variations in interest rates within repricing periods and among currencies. Similarly, a negative interest rate sensitivity gap exists where more liabilities than assets re-price during a given period. A negative gap position tends to benefit net interest income in a declining interest rate environment, but the actual effect will depend on the same factors as for positive interest rate gaps.
The management of interest rate risk attributable to interest rate repricing gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to various interest rate scenarios under the stress testing framework whilst the extent of the difference between risk factors on the asset side and liability side is monitored through the re-fixing gap analysis.
The estimated impact on the Group’s Net Interest Margin (“NIM”) and on Economic Value based on scenarios and assumptions prescribed by the EBA guidelines on the management of interest rate risk arising from non trading book activities (EBA/GL/2018/02) would be as follows:
31 December 2022
• NIM would increase by €18.4 million in a parallel up scenario and decrease by €15.3 million in the parallel down scenario.
• Economic value of equity would increase by €1.9 million in a parallel up scenario and increase by €2.4 million in the parallel down scenario.
31 December 2021
• NIM would increase by €18.9 million in a parallel up scenario and decrease by €3.3 million in the parallel down scenario.
• Economic value of equity would increase by €13.8 million in a parallel up scenario and increase by €4.2 million in the parallel down scenario.
The main assumptions used in the model utilised to measure the benchmarks referred to above are:
• Interest bearing assets are assumed to mature on their expected maturity and are not replaced for the ∆EVE purposes (run off balance sheet);
• Interest bearing assets are assumed to mature on their expected maturity and are replaced on like for like basis for the ∆NII purposes (constant balance sheet);
• The Dutch NHG and Belgian Retail mortgages are assumed to follow a CPR curve over and above the contractual principal payment schedule;
• In addition to the legal floor on regulated savings accounts of MeDirect Belgium, there is an implicit zero floor option on retail customer deposits as the Group will not charge negative rates to the retail segment of its customer base;
• The ∆ NII and ∆ EV metrics includes the effect of changes in value of the contractual automatic options embedded in the banking book assets; and
• Customer deposits follow their behavioural schedule.
• Sensitivities to behavioural assumptions are measured on a quarterly basis as part of the ICAAP whereas the IRRBB measurement has been validated and adapted to cater for novel characteristics of new product lines.
Interest rate movements affect reported equity in the following ways:
• retained earnings arising from increases or decreases in net interest income after taking into consideration the net impact of interest rate hedging instruments; and
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Annual Report and Financial Statements 2022
Notes to the financial statements
2.5 Operational risk
In line with the Basel framework, operational risk is defined as the potential for loss arising from failed or inadequate internal processes, people, systems or from external events. Operational risks can arise from all business lines and from all activities which are carried out by the Group. Failure to manage operational risk may result in a direct or indirect financial loss, reputational damage, regulatory breaches or may even have a negative impact on the management of other risks such as credit, liquidity or market risk. There are various operational risk subtypes, including but not limited to fraud (internal/external), business disruption due to reduced or non-availability of systems, inadequate outsourcing arrangements, the Group’s inability to attract, retain, train and develop the right people, failed or inadequate business processes, data risk and project execution risk.
Operational Risk Management ensures that the Group’s risk appetite for operational risk is translated in a form that can be implemented and managed in practice. As covered in the Risk Appetite Statement, the Group has low tolerance for operational risk events that could jeopardise its financial performance, customer outcomes or reputation. The Group’s objective is to manage operational risk to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity while maintaining risk taking within a tolerable limit.
The governance of Operational Risk follows the Group’s Three Lines of Defence model. The First Line of Defence is accountable to manage its own risks, whilst the Operational Risk Management, which forms part of the Second Line of Defence oversees and challenges risk taking activities and ensures that operational risks are consistently identified and assessed, managed adequately, monitored and reported accordingly. The Third Line of Defence (Internal Audit) provides an independent assurance on the design and operating effectiveness of the control structure.
The Group also has an Operational Risk framework in place to make sure that it has a consistent and embedded approach for fully identifying and managing operational risks in an effective manner. The framework covers the following sections: Operational Risk Policy, Operational Risk Awareness, Operational Risk & Control Self-Assessment (RCSAs), Operational Risk Control Testing, Operational Risk Reporting and Incident Management & Business Continuity.
The Risk & Control Self-Assessment process, which at minimum, is carried out on an annual basis, is used to identify, document and assess the key risks and controls within the Group. The RCSA process provides a bottom-up approach to risk identification at granular level. The RCSA results are leveraged for creating key risk indicators and developing narratives for scenario analysis. The risk identification process is also supported through the use of audit findings and internal loss data. The Operational Risk Management uses a dedicated Operational Risk Management tool to manage the RCSA process and maintain a repository of loss data which captures and records operational loss events and “near misses” events.
Operational Risk is monitored through the development and ongoing evolution of the Key Risk Indicator (KRI) reporting process. Operational Risk Management aim to develop KRIs that allow for the monitoring of internal controls factors associated with significant risks. Operational Risk is also monitored through: Risk & Control Owners alerting Operational Risk Management of control deficiencies, Operational Risk Management identifying changes to the operational risk profiles and by Internal Audit through their assessment of Operational Risk Management and indirectly through their reviews of business areas. Control testing is also carried out using a risk-based approach to identify weaknesses in the control environment.
Operational Risk reporting provides management with a timely view of the Group’s Operational Risk profile and any breaches to the Risk Appetite Statement. Material risks and breaches are escalated to the Group’s governing bodies, such as Executive Committee and Board Committee, which serve as medium to ensure that corrective action plans are in place to mitigate significant risks and avoid reoccurrence of events impacting the Group’s operations. Operational risks are reported through the Monthly Group Risk Management Report, Incident Reporting, Internal Control Report and the annual lCAAP.
Operational Risk Management is also responsible to ensure that the Group has contingencies in the event of business disruption. The Group has in place a Business Continuity Plan (BCP) and an IT Disaster Recovery Plan (DRP), both of which are defined in separate documents respectively. Since the DRP focuses on the availability of IT/technology services, the document is maintained and tested by the IT department. The BCP is intended to provide the Group with a plan of actions necessary to restore critical business operations and ensuring the availability of resources whenever and wherever necessary and relies on the assumption that technology is available to support the business continuity efforts. The BCP is regularly tested to ensure the appropriateness of the responses in case of a business disruption.
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Notes to the financial statements
A financial measurement of this risk is calculated by the Group for the purpose of allocating risk capital using the Basic Indicator Approach under Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013, also known as the CRR. The risk weighted assets for operational risk under this method as at 31 December 2022 were calculated at €108.4 million (2021: €108.5 million).
ICT Security
ICT Risk is the risk of loss due to breach of confidentiality, failure of integrity of systems and data, inappropriateness or unavailability of systems and data or inability to change information technology within a reasonable time and with reasonable costs when the environment or business requirements change. This includes security risks resulting from inadequate or failed internal processes or external events including cyber-attacks or inadequate physical security.
The ICT Security function, led by the CISO manages the Group ICT and Security Risk management framework. The Framework documents the Group’s approach to managing ICT risks and is reviewed and approved by the Board annually and has been documented taking into consideration supervisory requirements, namely the EBA Guidelines on ICT and security risk management (EBA/GL/2019/04).
Responsibility to manage and mitigate ICT risks lies with all Group employees, employees follow the Group’s Information Security policies and procedures.
Residual ICT Security risks are managed in the context of the Group’s Risk Appetite Statement. ICT Security critical and non-critical risk appetite limits have been defined by the Group. Breaches at different levels will trigger a course of action – risk appetite breaches and notification thresholds are reported to the Board on a monthly basis.
The ICT security programme may be summarised into two sections: ICT Risk Identification and ICT Risk Mitigation:
• ICT Risk Identification: the group utilises multiple sources to identify ICT risks. Risk sources include ICT security risk assessments, cyber security and operational incidents, vulnerability management, IT security policy spot checks, RCSAs, external security assessments, ICT security audits, third-party risk assessments and IT Security policy exemptions;
• ICT Risk Mitigation: risks are documented in the ICT risk register and are followed up by the IT Security function. A risk treatment plan is documented for each risk. A control owner is defined and an implementation timeline for each control is documented. Implementation of controls is followed up by the IT Security function with the relevant control owner(s);
• ICT Security controls implemented by the Group through the IT Security strategy are grouped into the following categories:a) Physical Security.b) Logical Security.c) ICT Operations Security.d) Security monitoring; ande) Information Security reviews, assessment and training.
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Annual Report and Financial Statements 2022
Notes to the financial statements
2.6 Environmental, social and governance-related (“ESG”) risk
The Group has started to integrate climate-related and environmental risks (the ‘’CER’’) in the MeDirect framework in order to track these risks and analyse their impact.
CER is directly overseen by the ESG Committee, consisting of top managers managing main business areas including amongst others finance (Group CFO, BE CFO, Procurement manager), risk (Group CRO, BE CRO), compliance and business functions. The Group CFO is the chairman of the committee and Belgium CRO is the co-chairman.
The Board maintains oversight of CER via regular updates (standing agenda item) that are given during the routine Board meetings by the Group Head of Sustainability. In addition, the Board approves main risk policies and ESG Strategy that incorporated CER procedures and commitments.
Moreover, the Group incorporated CER across the three lines of defence (LoD) by updating business procedures and policies, the risk management framework, compliance monitoring plans and internal audit plan. The front-line business applies all the internal regulation related to CER and incorporates CER in the various stages of the business processes including credit process. Risk functions are responsible for developing and tracking a dashboard of relevant CER within the existing risk reporting frameworks of the Group, with continuous enhancement over time. The Compliance Function prepares compliance plans which are approved by the Risk Committee that may consider CER if required. The Compliance Function operates independently from the business units, albeit advising and assisting the business units and other internal functions to ensure that operations are in line with policies, procedures and regulation. The Internal Audit Functions (IAF) proceeds with the execution of an integrated perennial audit plan across the Group and on a cycle basis, provides (global or targeted) assurance on the integration and proper implementation of CER risks across the governance, internal control, operational and business processes of the Group.
The Group also recruited a Head of Sustainability that is the primary coordination point driving ESG/CER agenda, engaging with the MeDirect Boards and interacting with the Group’s business, support and control functions.
Climate risk was also embedded in the Group risk management framework and in ESG Strategy 2024/2025. A number of policies and procedures have been updated, in particular Credit Frameworks and the Stress Testing Framework to ensure CER is properly identified, managed, monitored, and mitigated.
In 2022 the Group conducted an initial CER materiality assessment to analyse the main CER that may impact MeDirect strategy, business model, asset portfolios, funding sources, treasury and hedging, wealth management services, as well as the business operating centres in which it operates.
The assessment included all balance sheet elements and off-balance sheet services, covering physical risks (Floods/ Fluvial, Sea Level Risk, Drought / Ext. Heat, Forest Fire / Wildfire, Biodiversity Loss, Water Stress) and transition risks (Policy / Regulations, Stranding Risk, Market Sentiment, Technology Change) including high-level impact horizons (short, medium and long). We used the European Climate Risk Typology, European Environment Agency maps and Moody’s Investor Services analysis including sectoral heatmaps while analysing individual physical risks. To analyse transition risk we used Moody’s Analytics researches and publicly available Grantham Research Institute on Climate Change and the Environment. The assessment was conducted on a proportional and risk-based approach, utilising currently available sources and data. The materiality assessment was conducted by Risk functions with the support of business functions responsible for respective MeDirect areas. The initial assessment was presented to the ESG Committee in 2022 and the updated assessment was validated in early 2023 by the Group Board. The Group will update the materiality assessment on an annual basis.
The materiality assessment concluded that the overall strategic Group’s exposure to CER is limited given the Group’s business profile and its strategy, however the Group continues to monitor and reassess the evolution of CER regularly and update its assessments accordingly.
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Annual Report and Financial Statements 2022
Notes to the financial statements
During the assessment the Group identified higher long-term inherent climate physical risk related to Floods/ Fluvial and Sea Level in Dutch and Belgium mortgage portfolios and to Drought / Ext. Heat in Malta corporate portfolio (CRE) and Malta operational centre. Higher water stress was identified in Malta corporate portfolio (CRE) and Malta residential mortgage portfolio. In terms of transition risk the Group identified higher risk in residential mortgage portfolios driven by stranding assets risk and in Malta corporate portfolio (CRE) driven by policy/regulation risks. Higher market sentiment risk was identified in wealth management services. Short-term risk related to physical, or transition climate risk is low. The Group implemented some initiatives to mitigates these risks.
The Group also assessed the impact of MeDirect Group on the climate. The direct impact of MeDirect operation is not material as the Group mainly operates in digital channels and its greenhouse gas emissions and resources consumption are limited. The impact is mainly indirect through financing clients from the sectors highly contributing to the climate change or through green financing.
2.7 Capital management - regulatory capital
The Group’s regulator, the ECB’s Joint Supervisory Team (the “JST”) sets and monitors capital requirements for the Group based on the capital requirements prescribed within CRR II and Capital Requirements Directive (“CRD V”).
As a result, the Group is required to maintain a prescribed ratio of total capital to total risk-weighted assets. The Group does not engage in trading and is exempt from having a trading book. Risk-weighted assets on the banking book are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets including balances with counterparties and other illiquid assets.
The Group complies with the provisions of the CRR in respect of regulatory capital and it applies the standardised approach for credit risk. For regulatory purposes, the Group’s capital base is divided in two main categories, namely Common Equity Tier 1 Capital and Tier 2 Capital.
• Common Equity Tier 1 Capital which includes ordinary share capital, share premium, shareholders’ contributions, retained earnings, fair value reserve and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes including deductions relating to Reserve for Depositor Compensation Scheme (‘Other reserves’) and certain other regulatory items; and
• Tier 2 Capital consists of unrealised gains included within the fair value reserve and subordinated liabilities in issue, which rank after the claims of all depositors (including financial institutions) and all other creditors.
MDB Group
2022 2021
% %
CET 1 Ratio 15.2 15.7
Total Capital Ratio 18.7 19.2
Group’s policy is to maintain a good capital base 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 Group 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
MDB Group Limited is subject to the same supervision as that exercised over institutions. Accordingly, in terms of article 7(2) of the CRR, the obligation of MeDirect Malta to comply with the disclosure requirements relating to own funds, capital requirements, large exposures, and transferred credit risk have been waived.
In this respect, the Regulatory Group has complied with all externally imposed capital requirements throughout the year.
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Notes to the financial statements
2.8 Fair value measurement
‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if the transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads.
If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.
The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price - i.e., the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by the quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price.
If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price.
2.8.1 Fair value hierarchy
The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
• Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments.
• Level 2: inputs other than quoted market prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Financial instruments which are generally included in this category include certain loans and advances to customers and over-the-counter derivatives where the fair value is based on observable inputs.
• Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
2.8.2 Use of valuation techniques
In the event that the market for a financial instrument is not active, a valuation technique is used. Valuation techniques may incorporate assumptions about factors that other market participants would use in their valuations, including:
• the likelihood and expected timing of future cash flows from the instrument.
• selecting an appropriate discount rate for the instrument; and
• judgement to determine what model to use to calculate fair value in areas where the choice of valuation model is particularly subjective.
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Annual Report and Financial Statements 2022
Notes to the financial statements
Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and foreign currency exchange rates and expected price volatilities and correlations.
The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
The Group uses widely recognised valuation models for determining the fair value of common and simple financial instruments, such as interest rate and currency swaps, that use only observable market data and require minimal management judgement and estimation.
Fair values of investment securities in inactive markets are based on:
• quoted prices of similar instruments, performing numerical procedures such as interpolation when input values do not directly correspond to the most active market trade parameters; or
• price quotations in respect of orderly transactions between market participants provided by reputable dealers.
2.8.3 Financial instruments measured at fair value
The following table analyses financial instruments measured at fair value at the end of the reporting year, in terms of the respective levels within the fair value hierarchy into which the respective fair value measurement is categorised. The fair value amounts are based on the carrying amounts reflected in the statement of financial position.
Group As at 31 December 2022 As at 31 December 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
€000 €000 €000 €000 €000 €000 €000 €000
Assets
Instruments measured at fair value
through other comprehensive income
- Securities investment portfolio
- Debt and other fixed income securities - - - - 650,217 - - 650,217
- Securitisation investment portfolio
- Debt and other fixed income securities - - - - - - 327,110 327,110
Instruments mandatorily measured
at fair value through profit or loss
- Securitisation investment portfolio - - 572 572 - - 1,145 1,145
- Derivative financial instruments - 282,810 80,572 363,382 - 37,128 5,560 42,688
- Securities investment portfolio - Equity instruments - - 5,292 5,292 - - - -
Total financial assets - 282,810 86,436 369,246 650,217 37,128 333,817 1,021,160
Liabilities
Derivative financial instruments - 5,306 - 5,306 - 1,131 - 1,131
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Notes to the financial statements
Bank As at 31 December 2022 As at 31 December 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
€000 €000 €000 €000 €000 €000 €000 €000
Assets
Instruments measured at fair value
through other comprehensive income
- Securities investment portfolio - Debt and other fixed income securities - - - - 213,693 - - 213,693
- Securitisation investment portfolio
- Debt and other fixed income securities - - - - - - 69,918 69,918
Instruments mandatorily measured
at fair value through profit or loss
- Securitisation investment portfolio - - 572 572 - - 1,145 1,145
- Derivative financial instruments - 7,534 511 8,045 - 729 511 1,240
- Securities investment portfolio - Equity instruments - - 4,473 4,473 - - - -
Total financial assets - 7,534 5,556 13,090 213,693 729 71,574 285,996
Liabilities
Derivative financial instruments - - - - - 143 - 143
As at 31 December 2021, the fair value of debt securities within the Securities Investment portfolio represented the closing bid price quoted in an active market, and such instruments are therefore categorised as Level 1 assets.
Level 2 assets principally comprise derivatives held for risk management that are fair valued based on valuation models with the key methodology utilised comprising the calculation of the net present value of a series of expected cash flows, considering the different terms of each specific contract/instrument (discounted cash flow approach). These models use as their basis independently sourced market parameters including, for example, interest rate yield curves. Market parameters are either directly observable or are implied from observable instrument prices. The model may perform numerical procedures in respect of pricing such as interpolation when input values do not directly correspond to the most active market trade parameters.
Level 3 assets consist of the following:
- As at 31 December 2021, the Group’s and Bank’s investments in tranches of securitisation structures with a carrying amount of €327.1 million and €69.9 million respectively were mainly rated AAA, and their fair value was determined using third party valuation models to estimate the net present value of a series of expected cash flows, taking into consideration instrument-specific contractual terms (discounted cash flow approach). Amongst other things, these models took into consideration the characteristics of the underlying portfolio of assets (including quality of underlying assets), historical portfolio performance, and the liability structure of the CLO transaction. These models also made use of independently sourced market parameters including, for example, interest rate yield curves. Throughout the year these investments were reclassified to the amortised cost category.
- The Group’s and Bank’s investment in the equity tranche of GH1-2019 with a carrying amount of €0.6 million (2021: €1.1 million), for which a fair value is determined using third party valuation models to estimate the net present value of a series of expected cash flows, taking into consideration instrument-specific contractual terms (discounted cash flow approach). Amongst other things, these models take into consideration the characteristics of the underlying portfolio of assets (including quality of underlying assets), historical portfolio performance, and the liability structure of the CLO transaction. These models also make use of independently sourced market parameters including, for example, interest rate yield curves.
- MeDirect has entered into back-to-back structured interest rate swaps that reinternalise interest rate risk of the securitised mortgage loan receivables. The valuation of these derivatives is performed based on the expected cashflows on the swap transaction measured until the First Optional Redemption Date (FORD) of these related securitisations transactions. The valuation includes both market observable inputs (interest rate curves) as well as mortgage loan prepayment estimates consistent with MeDirect IRRBB assumptions.
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Notes to the financial statements
an agreement to sell the corporation against which the Group would be receiving proceeds for the equity positions it held. Following the closing of this transaction the Group and Bank received €5.3 million and €4.5 million respectively.
The following table shows a reconciliation of the fair value measurements in Level 3 of the fair value hierarchy:
Group Securitisation Securitisation Securities Derivative
investment portfolio investment portfolio investment portfolio financial instruments
Measured at fair value Measured at fair value Measured at fair value Measured at fair value
other comprehensive income through profit or loss through profit or loss through profit or loss
2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 327,110 - 1,145 1,143 - - 5,560 8,373
Additions - 327,322 - - - - - -
Amortisation of premium/discount (1) 1 - - - - - -
Changes in fair value 212 (213) (573) 2 5,292 - 75,012 (2,813)
Transfer to amortised cost category (Note 8) (327,321) - - - - - - -
At end of year - 327,110 572 1,145 5,292 - 80,572 5,560
Bank Securitisation Securitisation Securities Derivative
investment portfolio investment portfolio investment portfolio financial instruments
Measured at fair value Measured at fair value Measured at fair value Measured at fair value
other comprehensive income through profit or loss through profit or loss through profit or loss
2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 69,918 - 1,145 1,143 - - 511 160
Additions - 70,000 - - - - - -
Amortisation of premium/discount (2) 2 - - - - -
Changes in fair value 84 (84) (573) 2 4,473 - - 351
Transfer to amortised cost category (Note 8) (70,000) - - - - - - -
At end of year - 69,918 572 1,145 4,473 - 511 511
As previously mentioned, the Group’s main exposure to Level 3 assets consist of derivative assets as part of back-to-back structured interest swaps. It has been determined that any changes to the unobservable inputs to the underlying models will result in changes to the value of the back-to-back structured interest swaps, but this will result in a corresponding change in the valuation of the derivative liabilities off-set with the loans and advances to financial institutions, as discussed further in note 2.2.9.
Accordingly, a sensitivity analysis of the fair value measurement to changes in observable inputs is not deemed relevant.
2.8.3.1 Transfers between levels
The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting year during which the transfer has occurred.
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Notes to the financial statements
2.8.4 Financial instruments not measured at fair value
The following table sets out the fair values of financial instruments not measured at fair value and analyses them in terms of the respective level within the fair value hierarchy into which the respective fair value measurement is categorised. This table includes only financial instruments in respect of which fair value is estimated to be materially different than the carrying amounts.
Group As at 31 December 2022
Total
Total carrying
Level 1 Level 2 Level 3 fair values amount €000 €000 €000 €000 €000
Assets
Loans and advances to customers - 51,724 1,736,937 1,788,661 2,132,516
- International Corporate Lending portfolio - 51,724 118,152 169,876 182,384
- Dutch Mortgage portfolio - - 1,486,918 1,486,918 1,818,002
- Belgian Mortgage portfolio - - 131,867 131,867 132,130
Investments 639,503 - 550,433 1,172,651 1,250,141
- Securities portfolio 639,503 - - 639,503 676,711
- Securitisation portfolio - - 550,433 550,433 573,430
Total financial assets 639,503 51,724 2,287,370 2,978,597 3,382,657
Liabilities
Debt securities in issue - - 971,209 971,209 969,569
Subordinated liabilities 53,827 - - 53,827 54,831
Total financial liabilities 53,827 - 971,209 1,025,036 1,024,400
Group As at 31 December 2021
Total Total carrying
Level 1 Level 2 Level 3 fair values amount
€000 €000 €000 €000 €000
Assets
Loans and advances to customers - 99,247 1,840,757 1,940,004 1,915,785
- International Corporate Lending portfolio - 99,247 163,321 262,568 272,771
- Dutch Mortgage portfolio - - 1,677,436 1,677,436 1,643,014
Investments 106,937 - 179,309 286,246 286,469
- Securities portfolio 106,937 - - 106,937 107,373
- Securitisation portfolio - - 179,309 179,309 179,096
Total financial assets 106,937 99,247 2,020,066 2,226,250 2,202,254
Liabilities
Debt securities in issue - - 663,606 663,606 658,293
Subordinated liabilities 56,668 - - 56,668 54,994
Total financial liabilities 56,668 - 663,606 720,274 713,287
The International mortgage portfolios disclosed in the preceding tables are presented exclusive of the IFRS basis adjustment.
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Notes to the financial statements
Bank As at 31 December 2022
Total
Total carrying
Level 1 Level 2 Level 3 fair values amount
€000 €000 €000 €000 €000
Assets
Loans and advances to customers –
International Corporate Lending portfolio - 30,254 109,292 139,546 152,482
Investments 273,774 - 134,645 408,419 445,626
- Securities portfolio 273,774 - - 273,774 287,232
- Securitisation portfolio - - 134,645 134,645 158,394
Total financial assets 273,774 30,254 243,937 547,965 598,108
Liabilities
Subordinated liabilities 53,827 - - 53,827 54,831
Bank As at 31 December 2021
Total
Total carrying
Level 1 Level 2 Level 3 fair values amount
€000 €000 €000 €000 €000
Assets
Loans and advances to customers –
International Corporate Lending portfolio - 52,501 108,053 160,554 170,382
Investments 51,507 - 88,526 140,033 140,062
- Securities portfolio 51,507 - - 51,507 51,704
- Securitisation portfolio - - 88,526 88,526 88,358
Total financial assets 51,507 52,501 196,579 300,587 310,444
Liabilities
Subordinated liabilities 56,668 - - 56,668 54,994
I
The proceeds from the issuance of these notes, which qualify as Tier 2 capital, have been lent to MeDirect Malta as a subordinated loan for general corporate purposes, including to strengthen and optimise its capital and to support the execution of its business strategy. As at 31 December 2022, the carrying amount of this loan, included by the Bank within “Other liabilities”, amounted to €10.3 million (2021: €10.1 million) and its fair value as at the same date was €10.0 million (2021: €10.9 million). The fair value was determined by projecting the cashflows to the first call date and discounting with January-end ESTR curves to obtain the spread over the said curve. In the absence of trades since issue of this these loans in February 2021, the fair value calculation considers the impact of the rise in interest rates throughout this period which is the most likely meaningful contribution to the change in fair value. The spread over the ESTR curves during this period was utilised to measure the present values of future cashflows.
191
Annual Report and Financial Statements 2022
Notes to the financial statements
The Level 2 and Level 3 fair value disclosures of the International Corporate Lending portfolio mainly comprise price quotations sourced from an online platform in respect of internationally traded loans and advances, consisting of the Group’s international loan book with foreign corporates. Loans and advances to customers forming part of the International Corporate Lending portfolio of the Group and Bank amounting to €329.7 million (2021: €320.6 million) and €199.6 million (2021: €207.2 million) respectively, net of expected credit losses, and a corporate debt security within the Group’s and Bank’s Securities Investment portfolio, with a carrying amount of €12.1 million (2021: €12.4 million), have not been reflected within the preceding table given that there were no observable market prices or any public information available but the contractual terms of these instruments, that mainly re-price within three months, and the nature of the borrowers, are similar to those of the instruments in the preceding table and thus their fair valuation characteristics would not differ significantly from those of the instruments included in the preceding table.
The Level 3 assets also include the following:
- The Group’s and Bank’s investments in tranches of securitisation structures amounting to €573.4 million (2021: €179.1 million) and €158.4 million (2021: €88.5 million) respectively, which are mainly rated AAA, and for which a fair value is determined using third party valuation models to estimate the net present value of a series of expected cash flows, taking into consideration instrument-specific contractual terms (discounted cash flow approach). Amongst other things, these models take into consideration the characteristics of the underlying portfolio of assets (including quality of underlying assets), historical portfolio performance, and the liability structure of the CLO transaction. These models also make use of independently sourced market parameters including, for example, interest rate yield curves.
- Dutch mortgages amounting to €1,546 million (2021: €1,606 million) and Belgium mortgages amounting to €132.0 million included in Loans and advances to customers. In order to derive their fair value as at 31 December 2022 and 2021, the Group bootstraps the average of the top three interest rate quotes offered by Dutch government-backed mortgage loan lenders in the Netherlands and Belgian mortgage loan lenders in Belgium respectively for every mortgage fixed rate tenor to create a zero coupon discount curve and applies this curve to discount the projected future cashflows. In addition, to estimate the future cashflows, the Group considers both instrument-specific contractual terms and estimated conditional prepayment rates.
As at 31 December 2022, the carrying amount for loans and advances to customers classified under the Maltese Business Lending portfolio amounting to €130.9 million (2021: €106.4 million) and Maltese mortgages amounting to €67.6 million (2021: €18.9 million) approximates their fair value because these loans are repriceable at the Group’s discretion.
The Group’s financial instruments not measured at fair value also comprise balances with central banks, loans and advances to financial institutions, and amounts owed to financial institutions and customers. The fair values of these financial assets and liabilities are not disclosed given that the carrying amount is a reasonable approximation of fair value because these are either re-priced to current market rates frequently or are short-term in nature.
As at 31 December 2022, all the Group’s and Bank’s exposures classified under loans and advances to financial institutions amounting to €403.0 million (2021: €193.7 million) and to €89.8 (2021: €111.4 million) respectively, and balances with central banks amounting to €149.9 million (2021: €328.6 million) and to €42.4 million (2021: €141.8 million) respectively, reprice or mature in less than one year. Hence their fair value is not deemed to differ materially from their carrying amount at the reporting date.
Fair values referred to above are estimated using discounted cash flows, applying market rates. These estimates are considered Level 3 fair value estimates.
The majority of the ‘Amounts owed to financial institutions’ of the Group and the Bank as at 31 December 2022 amounting to €545.1 million (2021: €273.3 million) and €279.7 million (2021: €264.8 million), respectively, and ‘Amounts owed to customers’ of the Group and the Bank amounting to €2.6 billion (2021: €2.7 billion) and €660.1 million (2021: €545.7 million) respectively, sourced from the Maltese and Belgian markets, re-price or mature in less than one year. Hence their fair value is not deemed to differ materially from their carrying amount at the reporting date. Fair values of these liabilities are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. These are considered Level 3 fair value estimates. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount payable is required to be paid.
2.8.5 Non-current assets held for sale
Non-current assets classified as held for sale with a carrying amount of €1.8 million (2021: €1.8 million) comprise commercial properties that had been acquired in satisfaction of debt. The fair value of such properties is estimated by the directors to approximate its carrying amount.
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Annual Report and Financial Statements 2022
Notes to the financial statements
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 are, 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.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Information about assumptions, estimations and uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2023 is set out below in relation to estimated cash flows for the purposes of applying the effective interest method and the impairment of financial instruments.
3.2 Expected credit losses on loans and advances to customers
Financial assets measured at amortised cost are evaluated for impairment on the basis described in Accounting Policy Note 1.5. Expected credit losses (“ECL”) on loans and advances represent management’s best estimate of expected credit losses on the loan portfolios subject to IFRS 9 impairment requirements at the end of the reporting period. In this respect, management is required to exercise judgement in defining what is considered to be a significant increase in credit risk or an unlikeliness-to-pay event, in determining the expected lifetime and point of initial recognition of financial instruments, and in making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions when calculating expected credit losses.
The measurement of credit loss allowances in respect of loans and advances to customers in line with IFRS 9 principles requires complex statistical analyses and modelling assumptions, with ECL models built and calibrated principally by reference to historical information in respect of default levels and loss severities. However, due to the inherent level of estimation uncertainty in modelling such aspects of the ECL calculation, a significant element of expert judgement is required to ensure that model parameters produce an ECL output which is reasonable and appropriate in light of existing conditions.
For loans within the Group’s International Corporate Lending and Maltese Business Lending portfolios, judgement is firstly required in determining whether there is objective evidence that an exposure is credit-impaired. In performing this assessment, management applies a significant level of judgement in evaluating all relevant information on indicators of unlikeliness-to-pay, including the consideration of factors that immediately indicate deterioration in the financial condition of borrowers, but also in respect of factors that impact the outlook of borrowers affecting their ability to pay, as described in Note 1.5. A higher level of judgement is required for loans to borrowers showing continued signs of financial difficulty similar to those experienced during the preceding financial year, and for borrowers that are performing better compared to the prior year to understand whether the improvements are sustainable going forward. These judgements are reflected within forecasted cash flow forecasts under different scenarios for Stage 2 borrowers particularly when assessing their unlikeliness to pay.
The measurement of credit loss allowances in respect of defaulted exposures is performed through an internally developed model based upon management’s best estimate of the present value of the cash flows that are expected to be received under multiple forward looking scenarios. As described in note 2.2.1 the Group utilises a DCF approach. In estimating cash flows for defaulted exposures within the International Corporate Lending portfolio, management makes judgements about a debtor’s financial situation and future repayment prospects, taking into consideration management plans for growth within the current environment. In this regard, judgement is applied in estimating the expected future cash flows from each borrower under the different scenarios, assigning probabilities to those scenarios, and determining appropriate discount rates reflecting borrower-specific characteristics. The determination of operating cash flows under multiple scenarios requires a significant level of judgement in order to adequately capture the current economic conditions.
193
Annual Report and Financial Statements 2022
Notes to the financial statements
During 2022 and 2021, the Group extended loan forbearance measures to borrowers experiencing financial difficulties by agreeing to modify the contractual payment terms of loans in order to improve collection opportunities or to avoid default. Where forbearance activities are present, higher levels of judgement and estimation uncertainty are involved in determining their effects on credit loss allowances. In the aftermath of the outbreak of the COVID-19 pandemic, a number of borrowers classified within the International Corporate Lending portfolio experienced financial difficulties, leading to debt restructuring. In this respect, significant judgement was required in determining whether substantial modifications were made to contractual terms, thereby requiring derecognition of the extinguished financial instrument(s) and the recognition of the new financial instrument(s). In addition, whether such restructuring lead to the recognition of new financial instruments or the continuing recognition of the pre-restructured debt, the determination of the relative staging of the post-restructured debt and the measurement of the associated credit loss allowances are also deemed to be highly judgemental.
For exposures classified as Stage 1 and Stage 2 within the International Corporate and Maltese Business Lending portfolios, and all exposures within the Dutch, Belgian and Maltese Mortgage portfolios, the Group measures credit loss allowances on the basis of complex models with a number of underlying assumptions. Particularly, in respect of the International Corporate portfolio, the level of estimation uncertainty is exacerbated in respect of:
(i) modelling PiT PDs and LGDs;
(ii) forecasting macroeconomic scenarios for the purposes of estimating probability-weighted credit loss allowances;
(iii) the determination of expected maturities of facilities, particularly in the case of International Corporates classified as Stage 2; and
(iv) assessing if there has been a significant increase in credit risk, which comprise a combination of qualitative and quantitative criteria, as described in Note 1.5;
The PD, LGD and EAD models used for the measurement of credit loss allowances for the International Corporate Lending, Maltese Business Lending and Dutch Mortgage portolio are developed by an external vendor, enabling the estimation of these three key risk parameters at a facility level using statistical models, mainly by benchmarking exposure-specific characteristics against an underlying dataset. Specifically, PDs and LGDs are developed on a name-by-name basis by reference to the default and loss history of comparable borrowers with similar characteristics in terms of size, industry and country of operations.
In this regard, the methodology together with the assumptions and parameterisation used in the calibration of the model are reviewed on a regular basis by management in order to ensure that the model output remains appropriate in view of the Group’s observed default and credit loss history. A significant level of judgement is required in order to assess the continuing appropriateness and reasonableness of the PiT PDs and LGDs being determined by the statistical models. In this respect, it is noteworthy to mention that the Group’s IFRS 9 model for determining PiT PDs is particularly sensitive to equity market data. As a result, given that equity prices are driven by factors unrelated to creditworthiness, a significant level of expert judgement is required to determine the reasonableness of ECL model outputs. As described in more detail in Note 2.2.7 of the financial statements, as at 31 December 2022 the Group did not resort to the application of overlays.
Similarly, significant judgement was also required in the modelling and selection of macroeconomic forecasts as well as in calibration of the severities and respective probability weights of macroeconomic scenarios used in the determination of ECLs. Judgement in this respect has been amplified by the heightened level of uncertainty triggered by the unprecedented economic and socio-political conditions being currently experienced across countries and industries. In this respect, a number of modelling assumptions are required, based on expert judgement, in order to form a view on the expected time horizon for the global economy to return to pre-COVID-19 levels and the impact of the conflict between Russia and Ukraine on macroeconomic variables in specific countries and industries.
194
Annual Report and Financial Statements 2022
Notes to the financial statements
In view of the high subjectivity involved in forecasting scenarios and the sensitivity of the ECL to the key changes in the number, selection and probability weightings applicable to the different scenarios, the Group has recalculated the ECL under the different scenarios both by applying a 100% weight to each scenario, as well as by re-calibrating the probability weights to scenario severities determined by the external vendor as in the preceding year, i.e. prior to any post-model adjustments. The effect of this uncertainty on the ECL outcome is disclosed in the sensitivity analysis of the measured credit loss allowances as at 31 December 2022 and 2021 presented in Note 2.2.7 of the financial statements.
The determination of expected maturities, which is particularly relevant for Stage 2 exposures within the International Corporate Lending portfolio, is based on behavioural maturity, reflecting management expectations on the exercise of prepayment options, based on borrowers’ ability to refinance their debt in the open market. The level of subjectivity in determining expected maturities increases significantly when increased credit risk is experienced by such borrowers as it diminishes their refinancing abilities over the shorter term. In this context, management continues to monitor the expected maturities of borrowers in Stage 2 by reference to borrower specific information as well as by benchmarking the expected timing of future recoveries against actual outcomes to ensure that they remain appropriate.
The identification of SICR events, particularly in respect of the International Corporate Lending portfolio, requires significant judgement in order to assess the severity of the impact of the pandemic and the military conflict between Russia and Ukraine on the financial performance and financial condition of such borrowers. In this respect, during 2022 and 2021, increased reliance has continued to be made by the Group on its qualitative staging criteria, particularly through the introduction of caps on implied ratings and notch downgrades to ensure that borrower specific risks as at the end of the financial reporting period are captured in as timely a manner as possible.
3.3 Valuation of derivatives and hedge accounting
The level of management judgment required in establishing fair value of derivative financial instruments is limited for those instruments valued using valuation models which are standard across the industry and where all parameter inputs are quoted in active markets.
The level of subjectivity and degree of management judgment required is more significant for those derivative financial instruments valued using specialised and sophisticated models and where some or all of the parameter inputs are less liquid or less observable. Management judgment is required in the selection and application of appropriate parameters, assumptions and modelling techniques. Where no market data are available for a particular instrument then pricing inputs are determined by assessing other relevant sources of information such as historical data and making appropriate adjustment to reflect the actual instrument being valued and current market conditions. Further, some valuation adjustments may require the exercise of management judgment to achieve fair value.
Moreover, the accounting treatment of the hedging relationship and the effectiveness test is based on a number of assumptions that include amongst others the expected future early redemptions and renegotiations of the International Mortgage portfolios.
Financial assets and liabilities carried at fair value are required to be disclosed according to the inputs to the valuation method that are used to determine their fair value. Specifically, segmentation is required between those valued using valuation techniques based on observable parameters (level 2) and valuation techniques using significant unobservable parameters (level 3). Management judgment is required in determining the category to which certain instruments should be allocated. This specifically arises when the valuation is determined by a number of parameters, some of which are observable and others are not.
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Annual Report and Financial Statements 2022
Notes to the financial statements
4. Balances with central banks and cash
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
At amortised cost:
Balances with central banks 149,925 328,625 42,442 141,620
Cash 4 1 4 1
149,929 328,626 42,446 141,621
As at 31 December 2022, balances held with central banks include reserve deposits of the Group amounting to €26.5 million (2021: €25.9 million) relating to the Minimum Reserve Requirement in terms of Regulation (EC) No 1745/2003 of the ECB, of which €6.5 million (2021: €6.3 million) relates to MeDirect Malta, bearing interest at 0% per annum. Other balances with central banks held by the Group with the National Bank of Belgium amounting to €104.3 million (2021: €187.0 million) are subject to a positive interest rate of 2% (2021: negative interest rate of 0.5%) per annum. The remaining balances that are held with Central Bank of Malta are subject to a positive interest rate of 2% per annum (2021: 0% per annum).
Balances with central banks in the preceding table are shown net of credit loss allowances amounting to €2 thousand (2021: €2 thousand) and €1 thousand (2021: €1 thousand) as at 31 December 2022 for the Group and the Bank respectively.
5. Derivative financial instruments
The Group, through MeDirect Malta, established derivative lines with counterparties to purchase foreign exchange swaps interest rate swaps and other appropriate instruments approved for hedging risks.
The Group uses over-the-counter foreign exchange swaps to hedge its exposure to changes in foreign exchange rates. All foreign exchange swaps mature within 2 months (2021: 2 months) from the reporting date.
The Group and the Bank use over-the-counter interest rate swaps to hedge their exposure to changes in the fair values of specific fixed rate securities attributable to changes in market interest rates (micro fair value hedging). Interest rate swaps are matched to fixed rate securities in designated fair value hedging transactions. The net gains on the hedged items arising during the year attributable to the hedged risk were €1.5 million (2021: net losses of €1.2 million). The net gains on the related hedging instruments for the Group and the Bank during the year ended 31 December 2022 were €6.1 million (2021: net gains of €1.2 million).
The Group also uses over-the-counter interest rate swaps to hedge its exposure to interest rate risk emanating from a portfolio of fixed-rate mortgages (see Note below – macro fair value hedging under the EU carve-out version of IAS 39). The net gains on the related hedging instruments during the year ended 31 December 2022 were €238.2 million (2021: net gains of €48.3 million). The net losses on the hedged items arising during the year attributable to the hedged risk were €235.5 million (2021: net losses of €47.7 million).
Foreign exchange and interest rate swaps are commitments to exchange one set of cash flows for another, resulting in an economic exchange of currencies or interest rates (for example, fixed rate for floating rate).
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Derivative financial assets - fair value 363,382 42,688 8,045 1,240
196
Annual Report and Financial Statements 2022
Notes to the financial statements
The Group applies fair value hedge accounting on micro level in which one hedged item is hedged with one or multiple hedging instruments as well as on macro level whereby a portfolio of items is hedged with multiple hedging instruments. For macro hedges of interest rate risk, the Group applies the EU ‘carve-out’ version of IAS 39. The EU ‘carve-out’ rules for macro hedging enable a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and remove some of the limitations in fair value hedge accounting relating to hedging net positions of loans and core deposits and under-hedging strategies. Thus, interest rate exposures on retail funding (savings and current accounts) and Dutch mortgages are initially offset. The remaining exposure is hedged in a portfolio hedge, using the EU ‘carve-out’ version of IAS 39, in which a portion of the retail mortgage lending portfolio is designated as a hedged item for hedge accounting purposes. The Group applies the following types of hedge accounting:
Fair value hedges
Hedging the interest rate risk in respect of loans and advances to customers (macro hedge)
The hedged portfolio comprises fixed-rate mortgages of MeDirect Belgium (refer to Note 7). These are mortgages that have a fixed-rate interest period of more than 240 months. The hedging instruments are interest rate swaps entered into as part of interest rate risk management in the Asset and Liability Management (‘ALM’) process. The risk being hedged is the risk of change in fair value of the portfolio attributable to movements in market interest rates. Effectiveness assessments are performed on a retrospective and a prospective basis, using the dollar offset method.
Hedging the interest rate risk on investments (micro hedge)
The interest rate risk on specific fixed-income investments (refer to Note 8), on an individual asset basis, is hedged by swapping the coupon to a floating interest rate using interest rate swaps. The country or credit spread is not hedged. The hedges provide protection for changes in fair value of the relevant fixed-income investments attributable to movements in market interest rates. Effectiveness assessments are performed on a retrospective and a prospective basis, using the dollar offset method.
Hedge ineffectiveness can arise from:
- Differences in timing of cash flows of hedged items and hedging instruments;
- Different interest rate curves and the intra period movement of these curves applied to forecast and discount of the cash flows of the hedged item and hedging instruments; and
- Disparity between expected and actual prepayments (prepayment risk).
The fair values of the held for trading derivatives and derivatives designated as hedging instruments in fair value hedges together with the related notional amounts, distinguishing between micro hedges and macro hedges for the purposes of hedge accounting, are as follows:
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Annual Report and Financial Statements 2022
Notes to the financial statements
Group Bank
Notional Fair value Notional Fair value Notional Fair value Notional Fair value
2022 2022 2021 2021 2022 2022 2021 2021
€000 €000 €000 €000 €000 €000 €000 €000
Derivatives held for trading – Assets
Instrument type:
- Foreign exchange swaps 85,809 1,503 3,997 2 48,613 746 3,896 1
- Other derivative financial instruments 511 511 511 511
2,014 513 1,257 512
Derivatives held for trading – Liabilities
Instrument type:
- Foreign exchange swaps 4,565 - 105,054 (963) 4,518 - 20,366 (132)
- Interest rate swaps - - 200,000 (57) - - - -
- (1,020) - (132)
Net derivatives held for trading 2,014 (507) 1,257 380
Derivatives designated as hedging instruments
in fair value hedges – Assets
Instrument type:
- Interest rate swaps maturing in
More than one year and less than five years
- Micro hedges 120,300 6,788 71,300 728 120,300 6,788 71,300 728
- Macro hedges 304,233 108,607 372,859 7,974 - - - -
More than five years
- Macro hedges 1,075,017 245,973 844,317 33,473 - - - -
361,368 42,175 6,788 728
Derivatives designated as hedging instruments
in fair value hedges – Liabilities
Instrument type:
- Interest rate swaps maturing in
More than one year and less than five years
- Micro hedges - - 49,000 (11) - - 49,000 (11)
- Macro hedges 200,000 (5,306) 79,360 (63) - - - -
More than five years
- Micro hedges - - - - - - - -
- Macro hedges - - 8,900 (37) - - - -
(5,306) (111) - (11)
Net derivatives designated as hedging
instruments in fair value hedges 356,062 42,064 6,788 717
MeDirect has entered into back-to-back structured interest rate swaps that reinternalise interest rate risk of the securitised mortgage loan receivables. The derivative asset side included above within the Group’s derivative assets designated as hedging instruments in fair value hedges amounts to €80.6 million (2021: €5.1 million). As described in Note 2.2.9, the respective derivative financial liabilities are offset against loans and advances to financial institutions as a netting agreement is in place with the counterparty.
The carrying amounts and the accumulated basis adjustment for fixed-rate mortgages and fixed-income investments are respectively included in the statement of financial position within Loans and advances to customers and within Investments – Securities portfolio, and accordingly disclosed in note 7 and note 8.
The accumulated basis adjustment within loans and advances to customers amounting to €271.3 milllion (2021: €37.1 million) also includes the accumulated unamortised fair value hedge adjustments of €3.7 million (2021: nil) related to hedges that have been discontinued and are now amortised.
198
Annual Report and Financial Statements 2022
Notes to the financial statements
6. Loans and advances to financial institutions
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
At amortised cost:
Repayable on call and at short notice 227,707 136,392 77,972 103,361
Term loans and advances 175,280 57,332 11,865 8,009
402,987 193,724 89,837 111,370
As at 31 December 2022, €47.3 million (2021: €8.2 million) of the Group’s loans and advances to financial institutions were pledged as collateral, most of which were in relation to the funding of the purchase of Dutch mortgages amounting to €9.9 million (2021: €6.1 million) and in relation to the funding of the purchase of Belgium mortgages amounting to €36.5 million.
Besides the above, the Group has amounts of €161.6 million (2021: €52.6 million) that are held for the purposes of margin requirements on hedging instruments attributable to the Dutch Mortgage lending business, and are hence considered encumbered.
As at 31 December 2022, other loans and advances to financial institutions of the Group and Bank amounting to €77.3 million (2021: €5.5 million) and €4.5 million (2021: €4.7 million) respectively were encumbered, most of which were pledged in favour of Eurex Clearing AG in relation to clearing of derivative financial instruments. In addition, these encumbered assets of the Group and Bank also include €8.4 million (2021: €8.4 million) and €7.4 million (2021: €7.4 million) respectively in the form of cash that has been contributed by the Group and Bank respectively to a derivatives clearing fund held by Eurex Clearing AG, of which the Group is a member. The clearing fund protects members against losses until they leave the clearing fund.
As at 31 December 2022, €11.7 million (2021: €2.0 million) of the Bank’s loans and advances to financial institutions were pledged as collateral, most of which were to MeDirect Belgium in relation to a Revolving Credit Facility granted by MeDirect Belgium.
199
Annual Report and Financial Statements 2022
Notes to the financial statements
7. Loans and advances to customers
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
International Corporate Lending portfolio
- Term loans and advances: corporate 526,813 614,814 331,409 396,527
Dutch Mortgage portfolio
- Term loans and advances: retail 1,818,186 1,643,163 - -
Belgian Mortgage portfolio
- Term loans and advances: retail 132,130 - - -
IFRS basis adjustment - International mortgage portfolio (271,273) (37,149) - -
Maltese Business Lending portfolio
- Repayable on call and short notice: corporate 4,731 4,090 4,731 4,090
- Term loans and advances: corporate 126,334 102,270 126,334 102,270
Maltese Mortgage portfolio
- Term loans and advances: retail 67,793 19,030 67,793 19,030
Gross loans and advances to customers 2,404,714 2,346,218 530,267 521,917
Less: Credit loss allowances (15,421) (21,915) (12,161) (19,224)
2,389,293 2,324,303 518,106 502,693
Group Allowance booked under
Stage 1 Stage 2 Stage 3 POCI Total
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
Credit loss allowances:
- International corporate lending (5,165) (2,130) (2,942) (3,855) (6,368) (15,470) (224) - (14,699) (21,455)
- Dutch mortgage portfolio (106) (71) (71) (62) (7) (16) - - (184) (149)
- Belgian mortgage portfolio (114) - (16) - - - - - (130) -
- Maltese business lending portfolio (208) (106) (4) (15) (1) (113) - - (213) (234)
- Malta mortgage portfolio (195) (77) - - - - - - (195) (77)
(5,788) (2,384) (3,033) (3,932) (6,376) (15,599) (224) - (15,421) (21,915)
Bank Allowance booked under
Stage 1 Stage 2 Stage 3 POCI Total
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000 €000 €000 €000 €000
Credit loss allowances:
- International corporate lending (2,985) (1,235) (2,176) (2,438) (6,368) (15,240) (224) - (11,753) (18,913)
- Maltese business
lending portfolio (208) (106) (4) (15) (1) (113) - - (213) (234)
- Malta mortgage portfolio (195) (77) - - - - - - (195) (77)
(3,388) (1,418) (2,180) (2,453) (6,369) (15,353) (224) - (12,161) (19,224)
200
Annual Report and Financial Statements 2022
Notes to the financial statements
As disclosed in further detail in Note 19, as at 31 December 2022 Dutch retail mortgages amounting to €1,219.7 million (2021: €734.6 million) have been securitised through three (2021: two) Residential Mortgage-Backed Security (“RMBS”) transactions. As risks and rewards were deemed to have been retained by MeDirect Belgium, as at 31 December 2022 and 2021, these were recognised on the Group’s statement of financial position.
The Group’s Dutch Mortgage portfolio in the preceding table mainly consist of Dutch retail residential mortgages with the exception of buy-to-let mortgages amounting to €15.9 million as at 31 December 2022. This business was launched in October 2022.
Loans and advances relating to exposures within the Group’s and Bank’s International Corporate Lending portfolio amounting to €12.7 million and €12.7 million respectively (2021: €38.1 million and €29.9 million respectively) have been written off during the financial year. Consequently, during the financial year ended 31 December 2022, credit loss allowances amounting to €12.7 million and €12.7 million (2021: €11.2 million and €11.2 million) of the Group and Bank, respectively relating to such write-offs have been released to profit or loss.
201
Annual Report and Financial Statements 2022
Notes to the financial statements
8. Securities and Securitisation Investment portfolios
Securities Investment portfolio
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Investments measured at amortised cost including basis adjustment attributable to the hedged risk
- Debt and other fixed income securities 688,942 119,831 299,406 64,141
- Less: Credit loss allowances (196) (131) (139) (110)
Investments measured at fair value through other comprehensive income
- Debt and other fixed income securities - 650,217 - 213,693
Investments measured at fair value through profit and loss
- Equity instruments 5,292 - 4,473 -
694,038 769,917 303,740 277,724
Credit loss allowances:
- On investments measured at amortised cost (196) (131) (139) (110)
- On debt and other fixed income securities measured
at fair value through other comprehensive income - (27) - (13)
(196) (158) (139) (123)
amortised cost value through other value through
Group comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Debt securities and other fixed income securities
Issued by public bodies
- foreign national and regional governments 135,590 25,194 - 150,439 - -
- supranational 154,067 60,974 - 99,799 - -
Issued by other bodies
- foreign banks 302,253 11,185 - 329,641 - -
- corporations 96,836 22,347 - 70,338 - -
688,746 119,700 - 650,217 - -
Equity instruments
Issued by public issuers
- corporations 5,292 -
5,292 -
Listing status
- listed on foreign recognised exchanges 676,711 107,373 - 650,217 - -
- not listed 12,035 12,327 - - 5,292 -
202
Annual Report and Financial Statements 2022
Notes to the financial statements
Measured at Measured at fair Measured at fair
amortised cost value through other value through
Bank comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Debt securities and other fixed income securities
Issued by public bodies
- foreign national and regional governments 61,524 - - 84,356 - -
- supranational 123,939 30,499 - 95,779 - -
Issued by other bodies
- foreign banks 80,312 11,185 - 33,558 - -
- corporations 33,492 22,347 - - - -
299,267 64,031 - 213,693 - -
Equity instruments
Issued by public issuers
- corporations 4,473 -
4,473 -
Listing status
- listed on foreign recognised exchanges 287,232 51,704 - 213,693 - -
- not listed 12,035 12,327 - - 4,473 -
299,267 64,031 - 213,693 4,473 -
amortised cost value through other value through
Group comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 119,700 198,049 650,217 659,670 - -
Additions 204,819 - - 121,247 -
Redemptions (35,000) (77,295) (240,653) (122,297) - -
(Losses)/gains on hedged items attributable to the hedged risk (5,897) (110) 362 (1,046) - -
Amortisation of premium/discount 2,642 (1,051) (8,618) (5,738) - -
Changes in fair value - - 1,239 (1,619) 5,292 -
Movement in credit loss allowances (65) 107 - - - -
Reclassification to amortised cost category 402,547 - (402,547) - - -
Measured at Measured at fair Measured at fair
amortised cost value through other value through
Bank comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 64,031 122,103 213,693 222,546 - -
Additions 57,600 - - 1,432 - -
Redemptions (10,000) (57,000) (20,000) (8,207) - -
(Losses)/gains on hedged items attributable to the hedged risk (5,897) (110) 362 (1,046) - -
Amortisation of premium/discount 1,612 (1,055) (2,462) (1,008) - -
Changes in fair value - - 344 (24) 4,473 -
Movement in credit loss allowances (16) 93 - - - -
Reclassification to amortised cost category 191,937 - (191,937) - - -
At end of year 299,267 64,031 - 213,693 4,473 -
203
Annual Report and Financial Statements 2022
Notes to the financial statements
Investment securities with a nominal value of €588.8 million and €311.5 million for the Group and the Bank respectively are pledged as collateral with Eurex against the provision of borrowing facilities (2021: €694.8 million and €304.1 million respectively). These include investment securities that are held on balance sheet with a carrying amount of €557.5 million and €280.0 million for the Group and Bank respectively (2021: €649.7 million and €255.8 million respectively). In addition, investment securities of the Group and Bank with a nominal value of €34.7 million (2021: €56.8 million) are subject to a bilateral repo with a global bank.
The cash value of unutilised borrowing facilities (headroom) of the Group and the Bank as at 31 December 2022 which are secured by the investment securities referred to above amounted to €387.1 million (2021: €498.6 million) and €133.0 million (2021: €108.2 million) respectively.
As at 31 December 2022, an amount of €3.9 million (2021: €3.9 million) in the form of High Quality Liquid Assets have been contributed by the Group and Bank to a derivatives clearing fund held by Eurex Clearing AG, of which the Bank is a member. The clearing fund protects members against losses until they leave the clearing fund.
A further €2.0 million in the form of High-Quality Liquid Assets as at 31 December 2022 (2021: €2.0 million) were also contributed by the Group and Bank to Eurex Clearing AG to cover for daily margining.
Furthermore, as at 31 December 2022, the Group and Bank also held €5.5 million (2021: €5.3 million) in the form of High Quality Liquid Assets with Saxo Bank as collateral for trading purposes.
Investment securities with a nominal value of €110.5 million (2021: €95.6 million) and a carrying amount of €112.0 million (2021: €98.6 million) are also pledged as part of the cooperation with the Blauwtrust Groep to access their multi-investor platform to purchase newly originated Dutch mortgages.
As at 31 December 2022, investment securities held by the Group and the Bank with a nominal value of €2.3 million (2021: €4.3 million) and a fair value of €2.1 million (2021: €4.3 million) were pledged as a “payment commitment” in favour of the Maltese Depositor Compensation Scheme (DCS).
The interest rate risk on specific fixed-income investments (refer to Note 5), on an individual asset basis, is hedged by swapping the coupon to a floating interest rate using interest rate swaps. The country or credit spread is not hedged. The hedges provide protection for changes in fair value of the relevant fixed-income investments attributable to movements in market interest rates. Effectiveness assessments are performed on a retrospective and a prospective basis, using the dollar offset method. The interest rate risk on specific fixed-income investments held by the Group and Bank with a carrying amount of €108.0 million (2021: €103.7 million) is hedged by swapping the coupon to a floating interest rate using interest rate swaps. This includes a negative fair value/basis adjustment amounting to €5.0 million (2021: positive fair value/basis adjustment amounting to €0.3 million).
As at 31 December 2022 and 2021, the Group and the Bank had no commitment to purchase further investment securities.
As referred to in note 2.8.3, throughout the financial year ended 31 December 2022, the Group and Bank recognised equity investments of €5.3 million and €4.5 million respectively on previously held equity instruments, acquired as part of a restructure of a European corporation that occurred in 2021, which were previously held at nil value.
Securitisation Investment portfolio
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Investments measured at amortised cost
- Debt and other fixed income securities 573,608 179,236 158,530 88,488
- Less: Credit loss allowances (179) (140) (137) (130)
Investments measured at fair value through other comprehensive income
- Debt and other fixed income securities - 327,110 - 69,918
Investments mandatorily measured at fair value through profit or loss
- Debt and other fixed income securities 572 1,145 572 1,145
574,001 507,351 158,965 159,421
204
Annual Report and Financial Statements 2022
Notes to the financial statements
amortised cost value through other value through
Group comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 179,096 292,063 327,110 - 1,145 1,143
Additions 67,000 65,000 - 327,322 - -
Redemptions - (178,000) - - - -
Amortisation of premium/discount 51 22 (1) 2 - -
Changes in fair value - - 212 (214) (573) 2
Movement in credit loss allowances (39) 11 - - - -
Reclassification to amortised cost category 327,321 - (327,321) - - -
At end of year 573,429 179,096 - 327,110 572 1,145
Measured at Measured at fair Measured at fair
amortised cost value through other value through
Bank comprehensive income profit and loss
2022 2021 2022 2021 2022 2021
€000 €000 €000 €000 €000 €000
Year ended 31 December
At beginning of year 88,358 166,326 69,918 - 1,145 1,143
Additions - 30,000 - 70,000 - -
Redemptions - (108,000) - - - -
Amortisation of premium/discount 42 24 (2) 1 - -
Changes in fair value - - 84 (83) (573) 2
Movement in credit loss allowances (7) 8 - - - -
Reclassification to amortised cost category 70,000 - (70,000) - - -
At end of year 158,393 88,358 - 69,918 572 1,145
As at 31 December 2022 the Group and Bank had pledged €176.8 million and €140.0 million respectively of the securitisation investment portfolio in favour of third parties against the provision of borrowing facilities (2021: €94.9 million and €94.9 million respectively).
In July 2019, MeDirect Malta acquired a 5% vertical slice in each of the GH1-2019 structured note tranches for risk retention purposes, for the amount of €20.2 million. As at 31 December 2022, with the exception of the equity tranche amounting to €0.6 million (2021: €1.1 million) and mandatorily measured at FVTPL, MeDirect Malta’s investment in the remaining tranches amounting to €18.5 million (2021: €18.5 million) is measured at amortised cost.
During the financial year ended 31 December 2022, the Group and Bank also acquired portions in CLO transactions amounting to €67.0 million (2021: €392.3 million) corresponding to tranches with the highest credit rating in such CLO structures which are managed by third party entities. These acquired portions in CLO transactions are listed on recognised exchanges but not centrally traded. The underlying assets for these CLO transactions are leveraged loans, predominantly senior secured leveraged loans, and high yield corporate bonds. As at 31 December 2022, positions with a nominal value of €555.1 million (2021: €160.8 million) and €140.0 million (2021: €70 million) in total for the Group and the Bank, respectively, as at 31 December 2022, are held in a ‘hold to collect’ business model and measured at amortised cost. As at 31 December 2021, positions with a nominal amount of €327.3 million were held in a ‘hold to collect and sell’ business model and measured at fair value through other comprehensive income.
Reclassification of investments
In June 2022, the Group and Bank changed the business model for managing those investments within the securities and securitisation investments portfolios that were originally deemed to be “Hold to collect and sell” and therefore were measured at fair value through other comprehensive income.
205
Annual Report and Financial Statements 2022
Notes to the financial statements
The Group’s diversification strategy that kicked off in 2019 was mainly based on the reduction of the International Lending portfolio and the launch of the Dutch mortgage business line. The successful launch of the Dutch mortgage business also allowed MeDirect Belgium to successfully issue two RMBS from the Dutch mortgage business during the height of the COVID-19 pandemic. Furthermore, in 2021 MeDirect Malta launched the Malta home loans business using a customer-centric approach with a digitalised experience.
In December 2021 the Group ceased the intragroup funding arrangements between MeDirect Belgium and MeDirect Malta through Grand Harbour I. This resulted in significantly better management of the liquidity of both banks.
The Group has also increased and diversified the sources of funding as it increased the channels for both deposit taking and repurchase agreements and is financing its International Mortgage portfolio through its Bastion mortgage securitisation programme. Thus through such sources of funding the Group is able to satisfy its liquidity needs and will hold these investments till maturity.
The above developments resulted in a change in the business model of the securities and securitisation investments portfolios. These investments are now categorised as hold to collect and as a result on 1 July 2022 these investments were reclassified out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category.
Group Bank
Carrying Carrying Carrying Carrying
amount amount amount amount
prior to subsequent to prior to subsequent to
reclassification reclassification reclassification reclassification
€000 €000 €000 €000
Assets
Investments – Securities portfolio:
- measured at amortised cost 312,729 869,331 111,043 321,860
- measured at fair value through other comprehensive income 541,807 - 205,092 -
Investments – Securitisation portfolio:
- measured at amortised cost 179,108 573,400 88,368 158,361
- measured at fair value through other comprehensive income 377,666 - 67,297 -
Deferred tax assets 26,857 18,179 12,865 9,918
Total assets 4,412,147 4,434,890 1,481,943 1,487,417
Equity
Other reserves (23,731) (1,050) (2,548) 2,915
Retained earnings 28,478 28,540 8,179 8,190
Total equity 214,339 237,082 272,967 278,441
As at 31 December 2022, the Investments - Securities portfolio and the Investments - Securitisation portfolio included investments with a carrying amount of €402.3 million and €394.3 million respectively for the Group and €189.2 million and €70.1 million respectively for the Bank that were part of this reclassification that took place on 1 July 2022. The fair value of these investments as at 31 December 2022 in the Investments - Securities portfolio and the Investments - Securitisation portfolio as at 31 December 2022 was equivalent to €382.1 million and €378.6 million respectively for the Group and €182.2 million and €67.3 million respectively for the Bank. If these investments had not been reclassified out of the fair value through other comprehensive income category so that they are measured at amortised cost, between 1 July 2022 and 31 December 2022 fair value losses of €5.3 million and fair value losses of €2.3 million would have been recognised on the Securities portfolio within the other comprehensive income of the Group and Bank respectively whereas fair value gains of €0.9 million and fair value losses of €14 thousand would have been recognised on the Securitisation portfolio within other comprehensive income of the Group and Bank respectively.
As part of its monthly risk management report, the Risk function provides an overview of all its investments portfolio (both Securities Investments portfolio and Securitisation Investments portfolio) where the credit quality of all investments is monitored and the deterioration of the asset base, if any, is reported.
206
Annual Report and Financial Statements 2022
Notes to the financial statements
9. Investment in subsidiaries
Name of subsidiary Country of
incorporation/
formation Nature of business Equity interest
% %
MeDirect Bank SA Belgium Banking 100 100
Medifin Leasing Limited Malta Leases of software and equipment 100 100
Medifin Estates (partnership) Malta Operating lease of branches 100 100
2022 2021
€000 €000
Year ended 31 December
At beginning of year – As previously stated 225,490 225,001
Change in accounting policy – Accounting of investment in subsidiary using the equity method (35,971) (13,026)
At beginning of year – As restated 189,519 211,975
Additions - 489
Share of results and reserves (4,920) (22,945)
At end of year 184,599 189,519
2022 2021
€000 €000
Cost 225,490 225,490
Share of results and reserves (40,891) (35,971)
Net book amount 184,599 189,519
MeDirect Belgium was incorporated on 16 June 2014 and was authorised as a Belgian credit institution on 1 June 2015. MeDirect Belgium’s principal activities comprise those of offering competitive and cost-effective savings and wealth management products to the Belgian retail market, the provision of senior secured loans to foreign companies and the financing of Dutch and Belgian mortgages, including RMBS transactions. MeDirect Belgium’s subsidiary MeHomeLoans B.V., a company registered in the Netherlands, is in the process of liquidation.
Medifin Estates is a partnership set up on 5 June 2012. This partnership enters into certain operating leases for property to be used as offices and branches which are then leased to the Bank.
Medifin Leasing Limited was incorporated on 20 July 2011 and was acquired by MeDirect Malta on 4 January 2021 from Medifin Investments Limited. Medifin Leasing’s principal activities comprise those of leasing out property, equipment and intangible assets (predominantly software) and providing related support services to MeDirect Malta and MeDirect Belgium.
On 4 January 2021, MeDirect Malta acquired all the share capital of Medifin Leasing from the ultimate parent company Medifin Investments Limited, representing 99.9% of the voting rights in Medifin Leasing. Medifin Leasing’s principal activities comprise those of leasing out property, equipment and intangible assets (predominantly software) and providing related support services to MeDirect Malta and MeDirect Belgium.
207
Annual Report and Financial Statements 2022
Notes to the financial statements
Property and equipment 1,406
Intangible assets 6,574
Trade and other receivables 2,873
Cash and cash equivalents 9
Deferred tax liability (299)
Borrowings (9,835)
Trade and other payables (198)
Fair value of identifiable net assets acquired 530
The fair value of the acquired assets and liabilities assumed as at the date of acquisition have been determined to approximate the carrying amounts as recognised by Medifin Leasing.
In this respect, the Group elected to apply the predecessor method of accounting prospectively, i.e. with effect from the date of gaining control, without restating comparatives, and as a result, Medifin Leasing’s balances were incorporated within the Group’s consolidated financial statements at acquisition date. Accordingly, the assets and liabilities of Medifin Leasing were stated at carrying values, with no recognition of goodwill. The difference between the consideration and the aggregate carrying value of the assets and liabilities of Medifin Leasing at the date of the transaction, has been reflected in equity within retained earnings.
Similarly, as disclosed in the table below, the difference between the carrying value of the assets and liabilities of Medifin Leasing and of the net carrying value of the Right-of-Use (ROU) assets and corresponding lease liabilities previously recognised within the Group’s consolidated financial statements from its lease arrangements with Medifin Leasing, amounting to €3.3 million, has also been reflected as the adjustment to equity within retained earnings.
€000
Fair value of identifiable net assets acquired (refer to previous table) 530
Net carrying value of the right-of-use assets and corresponding liabilities:
- Derecognition of right-of-use assets included in Property, plant and equipment (Note 10) (2,129)
- Derecognition of right-of-use assets included in Intangible assets (Note 11) (7,835)
- Derecognition of lease liabilities previously recognised (Note 23) 6,955
- Other 244
(2,765)
Adjustment to equity 3,295
208
Annual Report and Financial Statements 2022
Notes to the financial statements
10. Property and equipment
Group Improvements Right-of-
to Computer Other Fixtures Motor use Total
premises equipment equipment and fittings vehicles assets
€000 €000 €000 €000 €000 €000 €000
As at 1 January 2021
Cost 562 1,645 120 846 - 12,864 16,037
Accumulated depreciation (170) (736) (55) (316) - (3,049) (4,326)
Net book amount 392 909 65 530 - 9,815 11,711
Year ended 31 December 2021
At beginning of year 392 909 65 530 - 9,815 11,711
Impact of acquisition of subsidiary (Note 9) 27 1,333 - 46 - (2,129) (723)
Additions - 699 12 12 80 - 803
Disposals - (203) - - - - (203)
Depreciation for the year (70) (1,112) (27) (98) (5) (1,266) (2,578)
Depreciation released on disposals - 176 - - - - 176
At end of year 349 1,802 50 490 75 6,420 9,186
As at 31 December 2021
Cost 589 3,474 132 904 80 10,735 15,914
Accumulated depreciation (240) (1,672) (82) (414) (5) (4,315) (6,728)
Net book amount 349 1,802 50 490 75 6,420 9,186
Year ended 31 December 2022
At beginning of year 349 1,802 50 490 75 6,420 9,186
Additions 21 962 35 437 - 355 1,810
Modification of lease - - - - - (1,075) (1,075)
Disposals (152) (96) (5) (123) - - (376)
Depreciation for the year (69) (849) (29) (122) (15) (1,058) (2,142)
Depreciation released on disposals 76 31 3 61 - - 171
At end of year 225 1,850 54 743 60 4,642 7,574
As at 31 December 2022
Cost 458 4,340 162 1,218 80 10,015 16,273
Accumulated depreciation (233) (2,490) (108) (475) (20) (5,373) (8,699)
Net book amount 225 1,850 54 743 60 4,642 7,574
209
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank Improvements Right-of-
to Computer Other Fixtures Motor use Total
premises equipment equipment and fittings vehicles assets
€000 €000 €000 €000 €000 €000 €000
As at 1 January 2021
Cost 508 1,440 70 575 - 10,123 12,716
Accumulated depreciation (160) (634) (37) (203) - (2,416) (3,450)
Net book amount 348 806 33 372 - 7,707 9,266
Year ended 31 December 2021
At beginning of year 348 806 33 372 - 7,707 9,266
Additions - 107 2 12 - 346 467
Disposals - (42) - - - - (42)
Depreciation for the year (51) (367) (14) (52) - (1,445) (1,929)
Depreciation released on disposals - 30 - - - - 30
At end of year 297 534 21 332 - 6,608 7,792
As at 31 December 2021
Cost 508 1,505 72 587 - 10,469 13,141
Accumulated depreciation (211) (971) (51) (255) - (3,861) (5,349)
Net book amount 297 534 21 332 - 6,608 7,792
Year ended 31 December 2022
At beginning of year 297 534 21 332 - 6,608 7,792
Additions 21 394 28 437 - 498 1,378
Modification of lease - - - - - (1,075) (1,075)
Disposals (152) (95) (5) (123) - - (375)
Depreciation for the year (49) (265) (12) (72) - (1,293) (1,691)
Depreciation released on disposals 76 31 3 61 - - 171
At end of year 193 599 35 635 - 4,738 6,200
As at 31 December 2022
Cost 377 1,804 95 901 - 9,892 13,069
Accumulated depreciation (184) (1,205) (60) (266) - (5,154) (6,869)
Net book amount 193 599 35 635 - 4,738 6,200
As at 31 December 2022, the Group and Bank operated from five and four immovable properties respectively (2021: four and three respectively) which are held under lease agreements.
The right-of-use assets disclosed in the preceding table reflect the following assets relating to leases:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Premises 4,642 6,420 3,765 5,377
Computer equipment - - 760 989
Other equipment - - 213 242
4,642 6,420 4,738 6,608
210
Annual Report and Financial Statements 2022
Notes to the financial statements
As referred to in Note 9, on 4 January 2021, MeDirect Malta acquired all the share capital of Medifin Leasing, which was set up with the object of acquiring immovable or movable property, rights and licences, in particular software solutions and hardware, and to lease these assets to MeDirect Malta and MeDirect Belgium. As a result of the acquisition, the assets of Medifin Leasing were reflected within the consolidated financial statements of the Group at their carrying values. Simultaneously, the Right-of-Use (ROU) assets and corresponding lease liabilities previously recognised within the Group’s consolidated financial statements, arising from its lease arrangements with Medifin Leasing in respect of the same assets, have been derecognised.
The movement in the carrying amount of right-of-use assets is analysed in the following table:
Group
Computer Other
Premises equipment equipment Total
€000 €000 €000 €000
As at 1 January 2021
Cost 9,869 2,714 281 12,864
Accumulated depreciation (2,183) (796) (70) (3,049)
Net book amount 7,686 1,918 211 9,815
Year ended 31 December 2021
At beginning of year 7,686 1,918 211 9,815
Impact of acquisition of subsidiary (Note 9) - (1,918) (211) (2,129)
Depreciation for the year (1,266) - - (1,266)
At end of the year 6,420 - - 6,420
As at 31 December 2021
Cost 9,869 796 70 10,735
Accumulated depreciation (3,449) (796) (70) (4,315)
Net book amount 6,420 - - 6,420
Year ended 31 December 2022
At beginning of year 6,420 - - 6,420
Additions 355 - - 355
Modification of lease (1,075) - - (1,075)
Depreciation for the year (1,058) - - (1,058)
At end of the year 4,642 - - 4,642
As at 31 December 2022
Cost 9,149 796 70 10,015
Accumulated depreciation (4,507) (796) (70) (5,373)
Net book amount 4,642 - - 4,642
211
Annual Report and Financial Statements 2022
Notes to the financial statements
Bank
Computer Other
Premises equipment equipment Total
€000 €000 €000 €000
As at 1 January 2021
Cost 8,404 1,457 262 10,123
Accumulated depreciation (1,929) (431) (56) (2,416)
Net book amount 6,475 1,026 206 7,707
Year ended 31 December 2021
At beginning of year 6,475 1,026 206 7,707
Additions - 272 74 346
Depreciation for the year (1,098) (309) (38) (1,445)
At end of the year 5,377 989 242 6,608
As at 31 December 2021
Cost 8,404 1,729 336 10,469
Accumulated depreciation (3,027) (740) (94) (3,861)
Net book amount 5,377 989 242 6,608
Year ended 31 December 2022
At beginning of year 5,377 989 242 6,608
Additions 355 119 24 498
Modification of lease (1,075) - - (1,075)
Depreciation for the year (892) (348) (53) (1,293)
At end of the year 3,765 760 213 4,738
As at 31 December 2022
Cost 7,684 1,848 360 9,892
Accumulated depreciation (3,919) (1,088) (147) (5,154)
Net book amount 3,765 760 213 4,738
The relevant lease liabilities are disclosed and analysed in Note 23 to these financial statements.
212
Annual Report and Financial Statements 2022
Notes to the financial statements
11. Intangible assets
Group Bank
Computer Right-of-use Total Computer Right-of-use Total
software assets software assets
€000 €000 €000 €000 €000 €000
As at 1 January 2021
Cost 10,562 11,942 22,504 8,446 5,421 13,867
Accumulated amortisation (3,016) (4,108) (7,124) (2,532) (1,731) (4,263)
Net book amount 7,546 7,834 15,380 5,914 3,690 9,604
Year ended 31 December 2021
At beginning of year 7,546 7,834 15,380 5,914 3,690 9,604
Impact of acquisition of subsidiary 6,574 (7,834) (1,260) - - -
Additions 3,650 - 3,650 2,817 86 2,903
Disposals (1,281) - (1,281) (657) - (657)
Amortisation and impairment charges for the year (4,298) - (4,298) (1,996) (977) (2,973)
Amortisation released on disposals 840 - 840 364 - 364
At end of year 13,031 - 13,031 6,442 2,799 9,241
As at 31 December 2021
Cost 19,505 4,108 23,613 10,606 5,507 16,113
Accumulated amortisation (6,474) (4,108) (10,582) (4,164) (2,708) (6,872)
Net book amount 13,031 - 13,031 6,442 2,799 9,241
Year ended 31 December 2022
At beginning of year 13,031 - 13,031 6,442 2,799 9,241
Additions 4,304 - 4,304 2,764 397 3,161
Write-off (52) - (52) (13) - (13)
Amortisation and impairment charges for the year (4,014) - (4,014) (1,860) (1,004) (2,864)
Amortisation released on write-off 37 - 37 9 - 9
At end of year 13,306 - 13,306 7,342 2,192 9,534
As at 31 December 2022
Cost 23,757 4,108 27,865 13,357 5,904 19,261
Accumulated amortisation (10,451) (4,108) (14,559) (6,015) (3,712) (9,727)
Net book amount 13,306 - 13,306 7,342 2,192 9,534
The right-of-use assets reflected in the preceding table related to leased computer software. The relevant lease liabilities are disclosed and analysed in Note 23 to these financial statements.
As at 31 December 2022, internally generated software included within Computer software in the table above amounted to €5.6 million (2021: €5.0 million) and €5.5 million (2021: €4.9 million) for the Group and Bank respectively. Capitalised staff costs in respect of the financial year ended 31 December 2022, included within the Group’s and Bank’s “Additions” to Computer software in the table above amounted to €2.1 million (2021: €1.8 million). Meanwhile, amortisation recognised during the year in respect of internally generated software amounts to €1.6 million (2021: €1.1 million).
213
Annual Report and Financial Statements 2022
Notes to the financial statements
The carrying amount of the assets written off during the current financial year, and the impairment charges recognised during the year in respect of such assets, reflected in the tables above, are deemed insignificant and accordingly no further disclosures were presented in this respect.
12. Non-current assets held for sale
As at 31 December 2022, the property that had been acquired in satisfaction of debt had a carrying amount of €1.8 million (2021: €1.8 million).
Group and Bank
2022 2021
€000 €000
Year ended 31 December
At beginning and end of year 1,785 1,785
214
Annual Report and Financial Statements 2022
Notes to the financial statements
13. Deferred tax assets and liabilities
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Deferred tax assets 17,524 18,377 9,923 10,041
Deferred tax liabilities (358) (803) - -
Deferred tax assets and liabilities are attributable to the following:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Property and equipment (1,163) (721) (600) (256)
Investments measured at fair value through other comprehensive income - 393 - 118
Investments measured at fair value through profit or loss (1,770) - (1,566) -
Derivative financial instruments (95) (95) (95) (95)
Unutilised wear and tear allowances 131 60 - -
Unutilised tax losses 16,248 8,172 6,815 1,278
Unutilised notional interest deduction 73 62 - -
Credit loss allowances 6,251 9,703 5,369 8,996
Taxation in overseas jurisdictions (2,509) - - -
17,166 17,574 9,923 10,041
Deferred tax assets and liabilities of the Group and Bank amounting to €5.2 million (2021: nil) and €2.3 million (2021: €0.4 million) respectively were offset as there is a legally enforceable right to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same fiscal authority.
Deferred taxes are calculated on all temporary differences under the liability method and are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates (and tax laws) that have been substantively enacted by the end of the reporting period. The principal tax rates used are 35% (2021: 35%) in relation to the Maltese jurisdiction and 25% (2021: 25%) in respect of the Belgian fiscal authority.
Under notional interest deduction rules for Maltese corporate income tax purposes, Maltese entities may claim a deduction of notional interest computed by reference to risk capital and a benchmark interest rate.
Excess notional interest deduction in Malta which cannot be utilised against chargeable income for the respective financial year can be carried forward and added to the notional interest deduction for the following financial year. Unutilised notional interest deduction does not have an expiry date. A deferred tax asset is recognised in respect of unutilised notional interest deduction only to the extent that it is probable that sufficient future taxable profits will be available against which the unutilised deduction can be used.
Movements in deferred tax during the year:
Group At beginning Recognised Recognised At end of year
year profit or loss comprehensive
income
€000 €000 €000 €000
Year ended 31 December 2022
Property and equipment (721) (442) - (1,163)
Investments measured at fair value through other comprehensive income 393 - (393) -
Investments measured at fair value through profit or loss - (1,770) - (1,770)
Derivative financial instruments (95) - - (95)
Unutilised wear and tear allowances 60 71 - 131
Unutilised tax losses 8,172 8,076 - 16,248
Unutilised notional interest deduction 62 11 - 73
Credit loss allowances 9,703 (3,452) - 6,251
Taxation in overseas jurisdictions - (2,509) - (2,509)
17,574 (15) (393) 17,166
215
Annual Report and Financial Statements 2022
Notes to the financial statements
of year from in profit in other of year
Subsidiary or loss comprehensive
income
€000 €000 €000 €000 €000
Year ended 31 December 2021
Property and equipment (165) (348) (208) - (721)
Investments measured at fair value through other
comprehensive income (716) - - 1,109 393
Derivative financial instruments 28 - (123) - (95)
Unutilised wear and tear allowances - - 60 - 60
Unutilised tax losses 5,317 - 2,855 - 8,172
Unutilised notional interest deduction - 48 14 - 62
Credit loss allowances 13,205 - (3,502) - 9,703
17,669 (300) (904) 1,109 17,574
Bank At beginning Recognised Recognised At end of year
of year in profit or loss in other
comprehensive
income
€000 €000 €000 €000
Year ended 31 December 2022
Property and equipment (256) (344) - (600)
Investments measured at fair value through other comprehensive income 118 - (118) -
Investments measured at fair value through profit or loss - (1,566) - (1,566)
Derivative financial instruments (95) - - (95)
Unutilised tax losses 1,278 5,537 - 6,815
Credit loss allowances 8,996 (3,627) - 5,369
10,041 - (118) 9,923
At beginning Recognised Recognised At end of year
of year in profit or loss in other
comprehensive
income
€000 €000 €000 €000
Year ended 31 December 2021
Property and equipment (165) (91) - (256)
Investments measured at fair value through other comprehensive income (387) - 505 118
Derivative financial instruments 28 (123) - (95)
Unutilised tax losses - 1,278 - 1,278
Credit loss allowances 10,920 (1,924) - 8,996
10,396 (860) 505 10,041
As at 31 December 2022, deferred tax assets attributable to MeDirect Malta are equivalent to €9.9 million (2021: €10.0 million), while deferred tax assets attributable to MeDirect Belgium are equivalent to €7.2 million (2021: €7.9 million). These are expected to be recovered over a period of seven years.
In applying judgement in recognising deferred tax assets, the Group’s management has assessed all available information, in particular future business growth and profit projections. In this respect, the most recent financial forecasts approved by management cover a five-year period and the forecasts have been extrapolated beyond five years by assuming that performance remains constant after the fifth year. The most important management judgements underlying the projected financial results in the most recent financial forecasts approved by management related to (i) growth in the mortgages business and (ii) the evolution in net interest margin.
216
Annual Report and Financial Statements 2022
Notes to the financial statements
Accordingly, while the directors are cognisant that the level of taxable profits is more difficult to predict for those years that are further into the future, they have assessed and concluded that the amount of forecast taxable profits for the forthcoming seven years is more likely to occur than not.
In view of the judgement involved in assessing the probability and sufficiency of future taxable profits and the sensitivity of the carrying amount of the deferred tax assets recognised by the Group in respect of the growth rate assumptions in respect of the mortgage lending as well as the evolution of the net interest margin, the Group has estimated the impact that changes to such assumptions would have on the carrying amount of the deferred tax assets recognised as at 31 December 2022.
The following table shows the effect on the Group’s deferred tax assets of reasonably possible changes in the most important assumptions supporting the recognition of both the Malta-based and Belgium-based deferred tax assets:
Sensitivity analysis of key assumptions Movement Deferred tax
asset impact
€million
Malta-related assumptions (applicable to the Bank and Group):
- Interest rates evolution +10bps 1.5
-10bps (1.5)
Belgium-related assumptions (applicable only to the Group):
- Growth in mortgage lending business volumes in Belgium +5% 0.5
-5% (0.5)
- Interest rates evolution +10bps 1
-10bps (1.5)
Although the Group has taken a prudent approach of not recognising certain deferred tax assets on unutilised tax losses and unutilised notional interest deduction, such unutilised tax losses and unutilised notional interest deduction have no expiry date both in Malta and Belgium and can be carried forward indefinitely even beyond the assessment period used in determining the deferred tax assets.
The following table provide an analysis of the deferred tax assets that were not recognised by the Group and the Bank as deferred income tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Property and equipment 2,937 1,816 2,937 1,816
Unutilised tax losses 16,510 20,759 5,385 11,634
Unutilised notional interest deduction 28,573 21,333 28,573 21,333
Net deferred tax assets 48,020 43,908 36,895 34,783
217
Annual Report and Financial Statements 2022
Notes to the financial statements
14. Prepayments and accrued income
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Prepayments 4,376 3,441 2,739 2,318
Accrued income 14,097 10,873 4,338 5,602
18,473 14,314 7,077 7,920
15. Other assets
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Amounts receivable from:
- immediate parent company 652 283 652 283
- subsidiary companies - - 7,966 23,312
Deferred customer contract costs 646 881 14 55
Other receivables 27,680 12,363 1,609 582
Other assets - - 1,945 723
28,978 13,527 12,186 24,955
Amounts receivable from subsidiaries as at 31 December 2022 were unsecured. These consisted of a loan amounting to €1.6 million (2021: €4.3 million) that was repayable through monthly instalments and subject to interest at the rate of three-month EURIBOR floored at 0% and a revolving loan amounting to €4.3 million (2021: €2.3 million) that was subject to interest at the rate of three-month EURIBOR floored at 0% and was repayable after one year from the date when repayment is demanded, unless an event of default occurs in which case the loan is repayable in full immediately.
Amounts receivable from immediate parent company and other amounts receivable from subsidiaries and other group companies were unsecured, interest free and repayable on demand.
As at 31 December 2022, the Group’s ‘other receivables’ comprises balances amounting to €16.2 million (2021: €1.9 million) held with a third-party mortgage originator in the Netherlands until the relevant NHG eligibility criteria for specific loan applications relating to the Dutch Mortgage portfolio are fulfilled in the future.
As at 31 December 2022, the Group’s ‘other receivables’ comprises balances amounting to €6.9 million held with a third-party mortgage originator in Belgium until the relevant criteria for specific loan applications relating to the Belgian Mortgage portfolio are fulfilled in the future.
None of these assets are deemed credit-impaired at 31 December 2022 and 2021 and expected credit losses in relation to such balances were deemed to be insignificant.
218
Annual Report and Financial Statements 2022
Notes to the financial statements
16. Capital and reserves
Group and Bank
2022 2021
No. No.
Share capital
Authorised:
Ordinary ‘A’ shares of €1 each 299,999,999 299,999,999
Ordinary ‘B’ shares of €1 each 1 1
300,000,000 300,000,000
2022 2021
€ €
Issued and fully paid up:
Ordinary ‘A’ shares of €1 each 117,450,106 117,450,106
Ordinary ‘B’ shares of €1 each 1 1
117,450,107 117,450,107
Rights and entitlements attached to ordinary shares
Share premium
Share premium as at the reporting date represents the issue of shares in prior periods as follows:
Group and Bank Number Premium Share
of shares per share premium
2022 2021
Issue date € €000 €000
10 August 2010 10,000,000 0.9155 9,155 9,155
29 September 2010 19,119,470 0.2254 4,309 4,309
13,464 13,464
Shareholders’ contributions
The terms and conditions of the contributions granted render these instruments equity in nature in accordance with the requirements of IAS 32: Financial Instruments - Presentation:
• The Bank has no obligation to bear any servicing cost or transfer any economic benefits of any kind to the Contributor or any other person in return; and
• The Bank has no obligation to repay the contributions.
The contributions are also eligible as own funds in terms of the Capital Requirements Regulation.
Reserve for general banking risks
219
Annual Report and Financial Statements 2022
Notes to the financial statements
Other reserves
Fair value reserve
The fair value reserve of the Group and the Bank is attributable to the cumulative net change in the fair value of investments measured at fair value through other comprehensive income, until the investment is derecognised, net of deferred taxation.
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Year ended 31 December
At the beginning of year (1,009) 1,038 (295) 51
Fair value adjustments (31,421) (1,833) (8,421) 472
Reclassification of investments (see note below and note 8) 32,823 - 8,834 -
Deferred tax on above items (393) 1,109 (118) 505
Transfer of gain on disposal of equity investments at fair value
through other comprehensive income to retained earnings - (1,323) - (1,323)
At the end of year - (1,009) - (295)
In June 2022, the Group changed the business model for managing those investments within the securities and securitisation investments portfolios that were originally deemed to be “Hold to collect and sell” and therefore were measured at fair value through other comprehensive income. These investments are now categorised as “Hold to collect” and as a result on 1 July 2022 these investments were reclassified out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category. Thus the cumulative net change in the fair value of these investments that was accounted for in this fair value reserve was derecognised. Refer to note 8 to these financial statements.
Other reserve
As at 31 December 2022, the other reserve of the Bank was equivalent to €2.7 million (2021: €2.9 million). The difference between the purchase consideration of €35.3 million upon acquisition of Mediterranean Corporate Bank Limited in 2015 and the fair value of the identifiable net assets acquired of €57.5 million, amounting to €22.4 million, had been reflected within other comprehensive income, as a fair value reserve, in the Bank’s stand-alone financial statements for preceding financial years in view of the Bank’s previous accounting policy whereby investments in subsidiaries were treated as available-for-sale investments within the stand-alone financial information. Upon the merger of Mediterranean Corporate Bank Limited into MeDirect Malta, this reserve was categorised as an other reserve comprising an adjustment to equity arising on merger, rather than a fair value reserve. A portion of this reserve has been treated as realised, and reclassified to retained earnings, reflecting the proportion of the difference arising on acquisition referred to above, which is linked to underlying net assets which would have been realised in the meantime.
As at 31 December 2022 and 2021, other reserve of the Group also comprises of a legal reserve amounting to €0.2 million that is required to be maintained by MeDirect Belgium in line with Article 7:211 of the Belgian Companies Code which requires MeDirect Belgium to assign at least 5% of MeDirect Belgium’s net profits to the legal reserve until such legal reserve amounts to 10% of MeDirect Belgium share capital.
Dividends
220
Annual Report and Financial Statements 2022
Notes to the financial statements
17. Amounts owed to financial institutions
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Term deposits 545,109 258,121 279,699 258,121
Other 26 15,228 26 6,709
545,135 273,349 279,725 264,830
As at 31 December 2022, amounts owed to financial institutions amounting to €545 million (2021: €258 million), consisting of repos, from the Group’s and Bank’s term deposits are secured by a pledge over MeDirect Malta’s investments (refer to Note 8). The other amounts owed to financial institutions in 2021 mainly consist of amounts payable to credit institutions in respect of unsettled amounts on loans purchased and accounted for on trade date but which are still unsettled as at the end of the reporting year.
18. Amounts owed to customers
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Repayable on call and at short notice 1,896,470 1,910,629 315,500 321,021
Term deposits 891,130 1,050,236 391,572 493,603
2,787,600 2,960,865 707,072 814,624
221
Annual Report and Financial Statements 2022
Notes to the financial statements
19. Debt securities in issue
Group
2022 2021
€000 €000
Year ended 31 December
At beginning of year 658,293 553,849
Original face value of notes issued 368,500 493,100
Premium on notes issued - 5,855
Issue costs incurred (2,063) (1,428)
Amortisation of premium recognised in profit or loss (1,303) (1,242)
Amortisation of issue costs recognised in profit or loss 1,303 1,241
Redemptions (55,161) (393,082)
At end of year 969,569 658,293
As at 31 December
Original face value of notes issued 969,454 656,115
Unamortised note premium 3,311 4,613
Unamortised note issue costs (3,196) (2,435)
Net carrying amount 969,569 658,293
As at 31 December
Bastion 2020-1 NHG B.V. 295,053 321,680
Bastion 2021-1 NHG B.V. 307,416 336,613
Bastion 2022-1 NHG B.V. 367,100 -
Net carrying amount 969,569 658,293
By virtue of a base prospectus dated May 2020, MeDirect Belgium successfully securitised part of its Dutch retail mortgage portfolio raising €350 million through a RMBS transaction, listed on Luxembourg Stock Exchange. As part of the transaction the mortgage portfolio was sold to Bastion 2020-1, a special purpose securitisation vehicle established in the Netherlands, which is controlled by MeDirect Belgium.
This RMBS is subject to interest of 0.60% per annum above 3-month Euribor (including floor at 0%) up to the first optional redemption date, and interest of 1.00% per annum above 3-month Euribor (including floor at 0%) from the first optional redemption date being April 2025, payable quarterly. All bonds are redeemable at par and shall become due for final redemption in April 2057, however, MeDirect Belgium reserves the right to redeem the bond in particular circumstances specified in the base prospectus.
An institutional investor acquired the Class A notes of the RMBS equivalent to €350 million, having a senior ranking vis-à-vis all the junior tranches retained by MeDirect Belgium. MeDirect retains substantially all risks and rewards of the underlying securitised Dutch government-backed mortgage portfolio and accordingly controls Bastion 2020-1. As a result, the mortgage portfolio, the senior notes of Bastion 2020-1 held by the institutional investor and related income and expenditure are reflected in the Group’s financial statements.
On each of the Notes Payment Dates of Bastion 2020-1, falling on 24 January 2022, 25 April 2022, 25 July 2022 and 24 October 2022, amounts of €7.3 million, €6.1 million, €7.8 million and €5.8 million of Class A notes, pertaining to the senior tranche were redeemed, whereas on each of the Notes Payment Dates on 25 January 2021, 23 April 2021, 23 July 2021 and 25 October 2021, amounts of €5.7 million, €4.5 million., €5.7 million and €6.2 of the said Class A notes were redeemed.
222
Annual Report and Financial Statements 2022
Notes to the financial statements
More specifically, in January 2021 MeDirect Belgium securitised a further part of its Dutch retail mortgages portfolio through a RMBS transaction whereby a principal amount of €414 million of the Dutch Mortgage portfolio was sold to a securitisation special purpose entity, Bastion 2021-1 NHG B.V., established in the Netherlands, which is controlled by MeDirect Belgium. On closing, the Dutch retail mortgages portfolio acquired by Bastion 2021-1 NHG B.V. included the €154 million portfolio of the Dutch Mortgages that was financed through the warehouse funding facility obtained through Cavalier 2020 B.V. This portfolio, that was originated by MeDirect Belgium and subsequently transferred to Cavalier 2020 B.V., was repurchased by MeDirect Belgium and together with a further portfolio of €260 million of Dutch Mortgages was transferred to Bastion 2021-1 NHG prior to closing.
An institutional investor acquired the Class A notes of the RMBS equivalent to €350 million, having a senior ranking vis-à-vis all the junior tranches retained by MeDirect Belgium. MeDirect retains substantially all risks and rewards of the underlying securitised Dutch government-backed mortgage portfolio and accordingly controls Bastion 2021-1. As a result, the mortgage portfolio, the senior notes of Bastion 2021-1 held by the institutional investor and related income and expenditure are reflected in the Group’s financial statements.
This RMBS is subject to interest of 0.70% per annum above 3-month Euribor (including floor at 0%) up to the first optional redemption date, and interest of 1.05% per annum above 3-month Euribor (including floor at 0%) from the first optional redemption date being August 2026, payable quarterly. All bonds are redeemable at par and shall become due for final redemption in August 2058, however, MeDirect Belgium reserves the right to redeem the bond in particular circumstances specified in the base prospectus.
On each of the Notes Payment Dates of Bastion 2021-1, falling on 24th January 2022, 25th April 2022, 25th July 2022 and 24th October 2022, amounts of €7.9 million, €9.2 million, €5.8 million and €7.3 million of Class A notes, pertaining to the senior tranche were redeemed whereas on each of the Notes Payment Dates on 20 May 2021, 20 August 2021 and 22 November 2021, amounts of €4.8 million, €5.7 million and €6.4 million of the said Class A notes were redeemed.
By virtue of a base prospectus dated 25 November 2022, MeDirect Belgium successfully securitised part of its Dutch retail mortgage portfolio raising €368.5 million through placement with external investors of A1 notes of the RMBS transaction, listed on Luxembourg Stock Exchange. As part of the transaction the mortgage portfolio was sold to Bastion 2022-1, a special purpose securitisation vehicle established in the Netherlands, which is controlled by MeDirect Belgium.
This RMBS is subject to interest of 0.60% per annum above 3-month Euribor (including floor at 0%) up to the first optional redemption date, and interest of 1.20% per annum above 3-month Euribor (including floor at 0%) from the first optional redemption date being March 2028, payable quarterly. All bonds are redeemable at par and shall become due for final redemption in May 2060, however, MeDirect Belgium reserves the right to redeem the bond in particular circumstances specified in the base prospectus.
An institutional investor acquired Class A notes of this RMBS equivalent to €369 million, having a senior ranking vis-à-vis all the junior tranches retained by MeDirect Belgium. MeDirect retains substantially all risks and rewards of the underlying securitised Dutch government-backed mortgage portfolio and accordingly controls Bastion 2022-1. As a result, the mortgage portfolio, the senior notes of Bastion 2022-1 held by the institutional investor and related income and expenditure are reflected in the Group’s financial statements.
223
Annual Report and Financial Statements 2022
Notes to the financial statements
20. Subordinated liabilities
Group and Bank
2022 2021
€000 €000
Year ended 31 December
At beginning of year 54,994 54,650
Foreign exchange differences (226) 283
Transaction costs amortised to profit or loss 63 61
At end of year 54,831 54,994
Analysed as follows:
5% Subordinated Unsecured Bonds 2022 – 2027 19,997 20,053
4% Subordinated Unsecured Bonds 2024 – 2029 34,834 34,941
54,831 54,994
On 16 October 2017, MeDirect Malta announced the issue of euro equivalent of €20 million 5% Subordinated Unsecured Bonds 2027 maturing on 13 October 2027 with a 13 October 2023 early redemption option held by the Bank. The bonds were issued on the Malta Stock Exchange in euro and pound sterling. The interest payable is fixed at 5% (effective interest rate of 5.19%) and the bonds are redeemable at their nominal value. The amounts subscribed consisted of £1.2 million (euro equivalent to €1.3 million) bonds in pound sterling and €18.7 million bonds in euro.
On 8 October 2019 MeDirect Malta announced the issue and listing of €35 million 4% Subordinated Unsecured Bonds denominated in euro and pound sterling maturing on 5 November 2029 with an annual early redemption option starting 5 November 2024 held by MeDirect Malta. The bonds were issued on the Malta Stock Exchange in euro and pound sterling. The interest payable is fixed at 4% (effective interest rate of 4.2%) and the bonds are redeemable at their nominal value. The amounts subscribed consisted of £2.4 million (euro equivalent to €2.8 million) bonds in pound sterling and €32.2 million bonds in euro.
The above liabilities will, in the event of the winding up of MeDirect Malta, be subordinated to the claims of depositors and all other creditors of MeDirect Malta. MeDirect Malta has not had any defaults of interest or other breaches with respect to its subordinated debt securities during the years ended 31 December 2022 and 2021. As at 31 December 2022, the euro equivalent contractual amount due at maturity was €54.9 million (2021: €55.1 million). As at 31 December 2022, the carrying amount of the subordinated debt securities in issue was €0.1 million lower than the contractual amount (2021: €0.2 million).
224
Annual Report and Financial Statements 2022
Notes to the financial statements
21. Provisions for liabilities and other charges
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Credit loss allowances in respect of loan commitments
and financial guarantee contracts 1,263 1,158 1,111 1,105
Restructuring costs - 65 - 65
1,263 1,223 1,111 1,170
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Credit loss allowances in respect of loan commitments
and financial guarantee contracts
Year ended 31 December
At beginning of year 1,158 3,783 1,105 3,646
Change in expected credit losses 105 (2,625) 6 (2,541)
At end of year 1,263 1,158 1,111 1,105
Restructuring costs
Year ended 31 December
At beginning of year 65 133 65 133
Additional provisions – charged to profit or loss - - - -
Amounts utilised (65) (68) (65) (68)
At end of year - 65 - 65
22. Accruals and deferred income
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Accrued interest expense 10,772 6,857 1,544 2,017
Other accrued expenses 10,134 10,672 6,946 7,660
Deferred income 3,397 6,194 2,675 4,872
24,303 23,723 11,165 14,549
225
Annual Report and Financial Statements 2022
Notes to the financial statements
23. Other liabilities
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Amounts due to ultimate parent company 875 912 875 912
Amounts due to immediate parent company 11,748 11,313 11,748 11,313
Amounts due to subsidiary companies - - 31,789 33,454
Amounts due to other group companies 127 234 127 234
Indirect taxes payable 916 1,226 296 476
Lease liabilities 5,071 7,083 6,742 8,961
Other liabilities 12,161 10,051 2,665 5,399
30,898 30,819 54,242 60,749
As at 31 December 2022 and 2021, the amounts due to immediate parent company comprise a callable loan granted by MDB Group Limited to MeDirect Malta amounting to €10.3 million (2021: €10.1 million) which is due on 10 February 2031, the terms of which mirror those of the subordinated notes issued by MDB Group Limited on the Global Exchange Market of Euronext Dublin. As a result, the loan bears a fixed interest rate of 9.75% per annum until 10 February 2026 and thereafter will bear interest at a fixed rate which will be set by an Agent Bank on 10 February 2026.
As at 31 December 2022, amounts due to subsidiary company include a revolving credit facility amounting to €22.7 million (2021: €20.0 million), as part of an RCF facility of €78.0 million (2021: €119.0 million), subject to interest per annum equal to the aggregate of the three month Euribor and the margin of 2.80 % (2021: 2.75%) and secured by a pool of international corporate loans held by MeDirect Malta with a nominal value of €164.3 million (2021: €268.0 million).
Amounts due to ultimate parent company and other group companies and other amounts due to the immediate parent company and subsidiaries are unsecured, interest free and repayable on demand.
The lease liabilities associated with the recognised right-of-use assets are analysed below.
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Non-current
Premises 4,126 5,515 3,311 4,492
Computer equipment - - 300 312
Other equipment - - 128 83
Computer software - - 1,062 1,198
4,126 5,515 4,801 6,085
Current
Premises 945 1,568 755 1,371
Computer equipment - - 188 274
Other equipment - - 86 67
Computer software - - 912 1,164
945 1,568 1,941 2,876
Total 5,071 7,083 6,742 8,961
The extension options in leases relating to premises, with the last extension covering till April 2032, have been included in the lease liability as the lease term reflects the exercise of such options.
226
Annual Report and Financial Statements 2022
Notes to the financial statements
The Group has certain lease contracts that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control that affects its ability to exercise or not to exercise the option to renew or to terminate.
The total cash outflows for leases in 2022 was €1.5 million (2021: €1.2 million) and €3.1 million (2021: €2.3 million) for the Group and the Bank, respectively. The contractual undiscounted cash flows attributable to lease liabilities are analysed in Note 2.3.4.
The movement in the carrying amount of these liabilities is analysed in the following table:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Year ended 31 December
At beginning of year 7,083 14,884 8,961 10,420
Additions 355 - 895 432
Modification of lease (1,075) - (1,075) -
Payments (1,503) (1,167) (2,303) (2,290)
Interest charge 211 321 264 399
Effect of acquisition of subsidiary (Note 9) - (6,955) - -
At end of year 5,071 7,083 6,742 8,961
The income statement reflects the following amounts relating to leases:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Interest expense (Note 24) 211 321 264 399
227
Annual Report and Financial Statements 2022
Notes to the financial statements
24. Net Interest Income
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Interest income
Loans and advances to financial institutions 908 - 753 964
Loans and advances to customers
- interest on loans and advances to customers 75,015 75,718 31,799 48,001
- net losses representing ineffective portion of fair value hedges 2,700 673 - -
Investment securities
- interest on investment securities 7,934 4,545 3,376 1,686
- amortisation of net premiums on investment securities (5,926) (6,765) (798) (2,038)
- net losses representing ineffective portion of fair value hedges 56 (15) 56 (15)
Interest expense
Loans and advances to financial institutions - 2,313 - 1,696
Amounts owed to financial institutions 6,597 1,312 2,529 6,720
Amounts owed to customers 12,447 19,600 4,233 6,293
Lease liabilities 211 321 264 399
Subordinated liabilities 2,467 2,463 2,467 2,463
Other liabilities 1,227 1,099 1,227 1,099
Total interest expense 22,949 27,108 10,720 18,670
Net interest income 57,738 47,048 24,466 29,928
The Group’s negative interest income attributable to loans and advances to financial institutions is presented within interest expense rather than netted off within interest income.
An amount of €4.2 million and €4.1 million in respect of the Group and the Bank respectively (2021: €5.1 million and €5.0 million respectively) relating to credit-impaired financial assets is included within interest income from loans and advances to customers for the year ended 31 December 2022.
In the financial year ended 31 December 2022, fair value gains of the Group and the Bank amounting to €5.6 million (2021: gains of €1.1 million) arising on derivatives designated in micro fair value hedge relationships and €5.5 million (2021: €1.2 million) representing net decreases (2021: net decreases) in the fair value of the hedged items attributable to the hedged risk are included within the Group’s and the Bank’s net interest income. These hedging relationships comprise interest rate swaps hedging interest rate risk on specific fixed rate debt securities, on an individual asset basis. The Losses are reflected within interest arising from investment securities, where interest on the hedged items is presented.
On the other hand, for the macro hedging relationships comprising interest rate swaps hedging interest rate risk on a portfolio of the Group’s fixed rate mortgages, fair value gains of €238.2 million (2021: gains of €48.3 million) arising on derivatives designated in fair value hedge relationships and losses of €235.5 million (2021: losses of €47.7 million) representing net decrease (2021: decrease) in the fair value of the hedged items attributable to the hedged risk are included within the Group’s net interest income. The losses are reflected within interest arising from loans and advances to customers, where interest on the hedged items is presented.
Within interest income, the Group and Bank are netting-off amounts of €3.1 million (2021: €5.1 million) and €0.1million (2021: nil) respectively relating to interest expense on interest rate swaps used to hedge the International Mortgage portfolios.
228
Annual Report and Financial Statements 2022
Notes to the financial statements
2022 2021 2022 2021
€000 €000 €000 €000
Micro hedging:
Gains on hedging instruments 5,591 1,141 5,591 1,141
Losses on hedged items attributable to the hedged risk
– basis adjustment to Securities Investments measured at
amortised cost (see Note 8) (5,535) (1,156) (5,535) (1,156)
56 (15) 56 (15)
Macro hedging:
Gains on hedging instruments 238,200 48,339 - -
Losses on hedged items attributable to the hedged risk
– basis adjustment to International Mortgage portfolio (see Note 7) (235,500) (47,666) - -
2,700 673 - -
229
Annual Report and Financial Statements 2022
Notes to the financial statements
25. Net fee and commission income
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Fee and commission income
Corporate secured lending fee income 1,151 571 998 350
Banking transactions fee income 1,262 1,158 1,246 1,141
Investment services fees 6,803 6,591 2,606 2,688
Total fee and commission income 9,216 8,320 4,850 4,179
Fee and commission expense
Corporate secured lending fee expense 111 174 113 174
Banking transactions fee expense 850 553 588 436
Investment services transaction and custody fees 1,963 1,725 725 726
Other fee expense 163 184 98 114
Total fee and commission expense 3,087 2,636 1,524 1,450
Net fee and commission income 6,129 5,684 3,326 2,729
The Group’s and the Bank’s net fee and commission income excludes income and expenses that form an integral part of the effective interest rate on financial assets and financial liabilities that are not at fair value through profit or loss, but in the financial year ended 31 December 2022, includes income of €1.3 million (2021: €0.6 million) and expenses of €0.1 million (2021: €0.2 million) relating to such financial assets and liabilities.
230
Annual Report and Financial Statements 2022
Notes to the financial statements
26. Net trading income
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Net income from foreign exchange activities 1,671 2,575 1,513 2,327
Net income from held for trading financial instruments (263) 112 483 90
1,408 2,687 1,996 2,417
27. Personnel expenses
Personnel expenses incurred, including remuneration and emoluments paid to the directors of MeDirect Malta and MeDirect Belgium, are analysed as follows:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Directors’ emoluments
- salaries 2,888 3,180 1,568 2,081
- defined contribution social security costs 31 40 24 35
- fees 668 733 306 315
- other emoluments 66 18 66 18
Staff costs
- salaries 20,656 18,426 11,305 10,128
- defined contribution social security costs 2,005 1,849 929 956
Staff costs capitalised within Intangible Assets (Note 11) (2,018) (1,734) (2,018) (1,734)
24,296 22,512 12,180 11,799
The directors of Medifin Leasing Limited and MeHomeLoans B.V. do not receive any directors’ emoluments as they are employed within the MDB Group and their remuneration for 2022 and 2021 are presented above within ‘Staff costs’.
As per above in the financial year ended 31 December 2022, salary costs amounted to €23.5 million (2021: €21.6 million) and €12.9 million (2021: €12.2 million) for the Group and Bank respectively, with the Group’s and Bank’s variable remuneration accounting for 10.7% (2021: 11.9%) and 15.6% (2021: 17.0%) respectively of these amounts.
The weekly average number of persons employed during the year, including executive directors, was as follows:
Group Bank
2022 2021 2022 2021
No. No. No. No.
Executive and senior management 16 19 11 13
Other managerial, supervisory and clerical 326 293 263 246
Other 6 6 6 6
231
Annual Report and Financial Statements 2022
Notes to the financial statements
Share-based payments are granted to certain executive directors and other material risk takers under a performance and retention bonus plan. Under this plan, executive directors and other material risk takers are entitled to share-linked instruments the value of which is based on changes in the fair value of the ordinary shares of MDB Group Limited but which are settled in cash and hence do not entitle the employees to shares or any interest in or right over such shares. Therefore, share-linked instruments comprise a number of notional ordinary shares of MDB Group Limited determined at award date by reference to the related bonus amounts taking cognisance of the fair value of the shares at that date.
The plan contemplates upfront share-linked awards and deferred share-linked awards that are subject to a deferral period of not less than twelve months but not greater than five years. Deferred share-linked awards attributable to retention bonuses are subject to a vesting period during which period the specific officer or employee must remain in employment for vesting to occur. Meanwhile, performance bonuses vest immediately, but are also subject to a deferral period. Any tranche of a retention bonus which has not yet vested lapses if the executive director leaves employment before the end of the deferral period, unless the executive director leaves due to certain specific reasons as listed in the deferred bonus plan. Settlement amounts are determined on the basis of the fair value of the ordinary shares at settlement date, which is the end of the retention period.
An assessment of performance over the relevant period is used to determine the amount of the deferred performance bonus award to be granted. Unlike performance awards, retention awards generally require the respective executive directors to remain in employment over the vesting period and are not subject to performance conditions after the grant date. The share-based payment is classified as cash-settled since the share-based payment transactions with the employees are settled through a cash payment.
The following is an analysis of the deferred remuneration in the form of share linked instruments awarded to specific executive directors and other material risk takers during the financial year.
2022 2021
Vested Unvested Vested Unvested
€000 €000 €000 €000
Group
Total outstanding deferred remuneration – share-based payments
Year ended 31 December
At beginning of year 1,507 1,200 309 2,538
Awarded throughout the year - 197 - 438
Vested throughout the year 587 (587) 1,638 (1,638)
Paid throughout the year (553) - (306) -
Performance and other adjustments throughout the year (45) - (134) -
Forfeited throughout the year - - - (138)
At end of year 1,496 810 1,507 1,200
2022 2021
Vested Unvested Vested Unvested
€000 €000 €000 €000
Bank
Total outstanding deferred remuneration – share-based payments
Year ended 31 December
At beginning of year 1,465 1,200 309 2,538
Awarded throughout the year - 127 - 396
Vested throughout the year 517 (517) 1,596 (1,596)
Paid throughout the year (553) - (306) -
Performance and other adjustments throughout the year (45) - (134) -
Forfeited throughout the year - - - (138)
At end of year 1,384 810 1,465 1,200
232
Annual Report and Financial Statements 2022
Notes to the financial statements
28. Other administrative expenses
Other administrative expenses are analysed as follows:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
IT support and telecommunication costs 7,974 6,704 2,118 2,134
Legal and professional expenses 7,404 6,995 3,282 2,778
Regulatory expenses 6,059 7,389 1,069 2,800
Indirect taxation 4,664 4,868 1,573 1,743
Other expenses 11,030 12,434 3,022 3,332
Included in other administrative expenses are fees charged by the Group’s independent auditors for the year as follows:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Audit services 445 506 220 290
Other assurance services 20 29 13 24
Tax related services 10 5 - 5
Other non-audit services 38 51 - 51
233
Annual Report and Financial Statements 2022
Notes to the financial statements
29. Change in expected credit losses and other credit impairment charges
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Change in expected credit losses
Loans and advances to customers, including credit-related commitments
- International Corporate Lending portfolio (including accrued income) 6,388 35,206 6,843 29,005
- Dutch Mortgage portfolio (37) 13 - -
- Belgian Mortgage portfolio (164) - -
- Maltese Business Lending portfolio 3,691 307 3,691 307
- Maltese Mortgage portfolio (92) (77) (92) (77)
Investments measured at amortised cost
- Securities portfolio (65) 107 (16) 93
- Securitisation portfolio (7) 11 (7) 8
Investments measured at fair value through other comprehensive income
- Securities portfolio - 156 - 48
- Securitisation portfolio - (32) - (7)
Other credit impairment charges
Amounts written off on loans and advances to customers
- International Corporate Lending portfolio (7,673) (38,017) (7,673) (29,676)
30. Tax expense
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Current tax expense
- current year tax charge 445 420 275 282
Deferred tax (Note 13)
- current year tax 15 904 - 860
Income tax charge 460 1,324 275 1,142
The tax recognised in profit or loss on the Group’s and the Bank’s profit/(loss) before tax differs from the theoretical amount that would arise using the applicable tax rate in Malta, which is the Bank’s country of incorporation, as follows:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Profit/(loss) before tax 9,121 (14,001) 8,746 (14,723)
Tax at the applicable rate of 35% 3,192 (4,900) 3,061 (5,153)
Tax effect of:
Non-deductible expenses 56 47 8 10
Unrecognised deferred tax movements (Note 13) (3,128) 4,851 (5,128) (1,731)
Income not subject to tax (1,815) (1,235) - -
Share of results of subsidiary undertaking - 1,957 7,375
Effect of different tax rates 2,044 2,633 - -
Other 111 (72) 377 641
Income tax charge 460 1,324 275 1,142
234
Annual Report and Financial Statements 2022
Notes to the financial statements
31. Earnings per share
The calculation of the basic earnings per share has been based on the profit/(loss) attributable to ordinary shareholders and the weighted average number of ordinary shares in issue during the financial year.
Group
2022 2021
Profit/(loss) attributable to ordinary shareholders (€000) 8,661 (15,325)
Weighted average number of ordinary shares (‘000) 117,450 117,450
Earnings per share (€cents) 7 (13)
32. Cash and cash equivalents
Balances of cash and cash equivalents as shown in the statements of cash flows are analysed below:
Group Bank
2022 2021 2022 2021
€000 €000 €000 €000
Analysis of cash and cash equivalents:
Cash in hand 4 1 4 1
Call deposits 108,355 129,296 66,195 97,267
Target 2 overnight deposits 123,448 302,709 35,893 135,295
Amounts owed to financial institutions with original maturity of less than 3 months (395,135) (273,349) (129,725) (264,830)
Per Statement of cash flows (163,328) 158,657 (27,633) (32,267)
Adjustments to reflect:
Other balances with central banks 26,477 25,916 6,549 6,325
Deposits with original maturity of over 3 months and encumbered deposits 294,632 69,479 23,642 14,103
Amounts owed to financial institutions with original maturity of over 3 months (150,000) - (150,000) -
Per Statement of financial position 7,781 254,052 (147,442) (11,839)
Group Bank
2022 2021 2022 2021
Notes €000 €000 €000 €000
Analysed as follows:
Balances with central banks and cash 4 149,929 328,626 42,446 141,621
Loans and advances to financial institutions 6 402,987 198,775 89,837 111,370
Amounts owed to financial institutions 17 (545,135) (273,349) (279,725) (264,830)
33. Contingent liabilities
235
Annual Report and Financial Statements 2022
Notes to the financial statements
34. Commitments
Commitments to lend
Commitments to lend represent undrawn formal standby facilities, credit facilities and other similar commitments to lend. As at 31 December 2022, the Group and Bank had undrawn commitments of €125.1 million (2021: €208.4 million) and €110.1 million (2021: €188.4 million) respectively under international lending revolving credit facilities. In addition, lending commitments in relation to the Group’s Dutch Mortgage portfolio amounted to €98.4 million (2021: €72.1 million), Belgian Mortgage portfolio amounted to €63.8 million (2021: €nil) and Maltese mortgage portfolio amounted to €33.2 million (2021: €37.5 million).
As at 31 December 2022, undrawn facilities on corporate term loans of the Group and Bank in Malta amounted to €13.6 million (2021: €58.3 million).
Commitments to purchase
As at 31 December 2021, the Group and Bank also had commitments to purchase facilities on term loans amounting to €11.0 million and €1 million respectively.
35. Related parties
Immediate and ultimate parent company
The ultimate controlling party of the Bank is AnaCap Financial Partners II L.P.
The ultimate parent company of the Bank is Medifin Investments Limited, a non-cellular company incorporated and registered in Guernsey.
The intermediate parent company of the Bank is Medifin Finance Limited, a non-cellular company incorporated and registered in Guernsey.
The immediate parent company of MeDirect Malta is MDB Group Limited, which is a company incorporated and registered in Malta.
Related parties of the Group and the Bank include the subsidiaries, the ultimate controlling party, the ultimate parent company, the intermediate parent company, the immediate parent company, all entities controlled by the ultimate parent company, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members.
Transactions with Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group, being the directors of MeDirect Malta and MeDirect Belgium.
Key Management Personnel compensation consisting of directors’ remuneration is disclosed in Note 27. The Group also provides non-cash benefits to Key Management Personnel, including gross rent payable on accommodation based in Malta, presented within ‘Personnel expenses’, and health and life insurance premiums paid by the Group amounting to €0.1 million in the financial year ended 31 December 2022 (2021: €0.1 million), presented within ‘Other administrative expenses’.
Related party balances and transactions
236
Annual Report and Financial Statements 2022
Notes to the financial statements
The following table provides the total amount of Group transactions which have been entered into, and Group balances with, related parties of the Group for the relevant financial year:
Year ended 31 December 2022 As at 31 December 2022
Income Expenses Amounts Amounts
from charged by owed by owed to
Related party related parties related parties related parties related parties Transaction/ balance type
€000 €000 €000 €000
Ultimate parent company 5 - - - Service charge fees
- - - 875 Other liabilities
Immediate parent company 5 - - - Service charge fees
- 1,227 - - Interest expense
- - 652 - Other assets
- - - 11,748 Other liabilities
Other group companies 5 - - - Service charge fees
- - - 127 Other liabilities
Key management personnel 1 - - - Interest income
- - - 178 Amounts owed to customers
- - - 25 Subordinated liabilities
Year ended 31 December 2021 As at 31 December 2021
Income Expenses Amounts Amounts
from charged by owed by owed to
Related party related parties related parties related parties related parties Transaction/ balance type
€000 €000 €000 €000
Ultimate controlling party - 189 - - Monitoring fees
Ultimate parent company 5 - - - Service charge fees
- - - 912 Other liabilities
Immediate parent company 5 - - - Service charge fees
- 1,099 - - Interest expense
- - 283 - Other assets
- - - 11,313 Other liabilities
Other group companies 5 - - - Service charge fees
- - - 234 Other liabilities
Key management personnel 1 - - - Interest income
- - - 235 Amounts owed to customers
- - - 25 Subordinated liabilities
Throughout the financial year MeDirect Malta recharged employee compensation and benefits to MeDirect Belgium amounting to €4.5 million (2021: €4.1 million) and received €1.0 million from MeDirect Belgium in relation to IT support and security services (2021: €0.9 million). In the financial year ended 31 December 2022, MeDirect Malta charged interest of €4 thousand on its loans and advances to Medifin Leasing Limited and paid interest amounting to €1.8 million in the financial year ended 31 December 2022 (2021: €0.8 million) on a revolving credit facility provided by MeDirect Belgium. MeDirect Belgium paid interest to MeDirect Malta throughout the financial year 2022 of €0.3 million (2021: €0.1 million) on a revolving credit facility provided by MeDirect Malta. Throughout the financial year ended 31 December 2021, MeDirect Malta paid interest amounting to €6.5 million on the senior loan facility provided by MeDirect Belgium.
237
Annual Report and Financial Statements 2022
Notes to the financial statements
36. Segmental information
The Group engages primarily in the business of lending conducted from Malta and Belgium through Dutch, Belgian and Maltese mortgage lending together with the investment in high credit quality collateralised instruments such as covered bonds, guaranteed senior bank debt, sovereign related debt and investment in AAA tranches of securitisation special purpose entities. The Group also has a lending portfolio consisting of international corporate lending and Malta corporate lending. Revenues secured through the above-mentioned assets are complemented by the revenues generated by the Group on its wealth management business.
The Group’s internal management reporting to the Board of Directors and Senior Management, is mainly analysed by jurisdiction. For each jurisdiction, the Senior Management, reviews internal management reports in order to make decisions about allocating resources and assessing performance. Where applicable, such as in the case of international corporate lending, these internal management reports are also supplemented by reports in respect of the Group’s revenue streams on a consolidated basis.
Further information about the products and services and geographical areas is set out in Notes 2, 7, 8, 24 and 25 to the financial statements which provide information about the financial risks, credit concentrations by sector and location, together with revenues from the single reportable segment. The investment portfolio is spread across a large number of exposures diversified in government, financial institutions and other corporates.
Year ended 31 December 2022 Year ended 31 December 2021
Malta Belgium Total Malta Belgium Total
€000 €000 €000 €000 €000 €000
Turnover * 48,441 52,258 100,699 49,300 36,547 85,847
Interest expense (8,892) (14,057) (22,949) (10,929) (16,179) (27,108)
Fee expense and other losses (1,543) (1,544) (3,087) (2,509) (127) (2,636)
Change in expected losses and
other credit impairment charges
- International corporate lending (833) (453) (1,286) (669) (2,142) (2,811)
- Dutch mortgages - (37) (37) - 13 13
- Belgian mortgages - (164) (164) - - -
- Maltese business lending 3,712 - 3,712 307 - 307
- Maltese mortgages (112) - (112) (77) - (77)
- Other (21) (51) (72) 140 102 242
Total change in expected losses and other
credit impairment charges 2,746 (705) 2,041 (299) (2,027) (2,326)
Depreciation and amortisation (3,975) (2,181) (6,156) (4,827) (2,049) (6,876)
Other operating expenses (22,211) (39,216) (61,427) (23,680) (37,222) (60,902)
Profit/(loss) before tax 14,566 (5,445) 9,121 7,056 (21,057) (14,001)
Taxation (291) (169) (460) (1,186) (138) (1,324)
Profit/(loss) after tax 14,275 (5,614) 8,661 5,870 (21,195) (15,325)
Capital expenditure 5,126 988 6,114 3,104 602 3,706
As at 31 December 2022 As at 31 December 2021
Total assets (€million) 1,131 3,531 4,662 1,234 3,004 4,238
Total liabilities (€million) 1,072 3,347 4,419 1,161 2,844 4,005
Full time equivalent staff (No) 276 59 335 278 59 337
* Turnover is defined as interest income, fee and commission income and other operating income. The turnover allocated to Belgium in the financial year ended 31 December 2022 includes interest charged to MeDirect Malta amounting to €1.2 million (2021: €7.3 million).
The Group carried out its activities in the countries listed above under the name of MeDirect Malta in Malta and MeDirect Belgium in Belgium. Activities in Malta and Belgium include banking and wealth management.
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Notes to the financial statements
37. Investor compensation scheme
In accordance with the provisions of the Investor Compensation Scheme Regulations, 2003, issued under the Maltese Investment Services Act (Cap. 370), 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. Throughout the financial years ended 31 December 2022 and 2021, MeDirect Malta was not required to pay any variable contribution to the Scheme.
38. Assets held on a nominee basis
As part of its Wealth Management proposition, the Group acts as a nominee holder of financial instruments on behalf of customers under its Category 2 Investment Services licence. Assets held on a nominee basis are not assets of the Group and are not recognised in the statements of financial position. Accordingly, the Group is not exposed to any credit risk relating to such placements, as it does not guarantee these investments.
At 31 December 2022, the total assets held by the Group and the Bank on behalf of customers amounted to €1,435.8 million (2021: €1,546.4 million) and €621.0 million (2021: €682.2 million) respectively.
39. Events after the reporting date
40. Comparative financial information
With effect from the current financial period the Bank effected a change in accounting policy whereby in the separate financial statements of the Bank, the investment in subsidiaries are being accounted for using the equity method. Refer to note 1.2.
In this respect, comparative figures disclosed in the main components of these financial statements and the notes have been reclassified to conform with the current period’s presentation for the purposes of fairer representation.
41. Statutory information
MeDirect Bank (Malta) plc is a limited liability company and is incorporated in Malta.
The ultimate controlling party of MeDirect Malta is AnaCap Financial Partners II L.P., a limited partnership, registered in Guernsey with its registered address at 2nd Floor, Windsor House, Lower Pollet, St Peter Port, Guernsey, GY1 1WF.
The ultimate parent company of MeDirect Malta is
The immediate parent company of MeDirect Malta is
MDB Group Limited prepares consolidated financial statements of the group of which MeDirect Malta together with its subsidiaries form part. These consolidated financial statements will be filed and available for public inspection at the Malta Business Registry in Malta and on the Group’s website https://www.medirect.com.mt/about-us/investor-relations.
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Notes to the financial statements
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Five-year comparison
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Five-year comparison: Statements of comprehensive income
Group
Period from
Year ended Year ended Year ended 1 April to Year ended
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
€000 €000 €000 €000 €000
Interest income 80,687 74,156 77,849 67,924 96,183
Interest expense (22,949) (27,108) (28,797) (23,897) (28,581)
Net interest income 57,738 47,048 49,052 44,027 67,602
Net fee and commission income 6,129 5,684 5,501 4,218 5,558
Net trading income 1,408 2,687 1,703 3,001 3,128
Net income from financial instruments
at fair value through profit or loss 4,728 353 (288) 187 3,448
Other operating income/(expense) 4,660 331 (4,660) 3,496 539
Total operating income 74,663 56,103 51,308 54,929 80,275
Personnel expenses (24,296) (22,512) (23,318) (22,824) (21,411)
Depreciation and amortisation (6,156) (6,876) (7,283) (3,817) (779)
Other administrative expenses (37,131) (38,390) (30,745) (21,103) (30,820)
Change in expected credit losses and
other credit impairment charges 2,041 (2,326) (65,253) (136) (5,795)
Profit/(loss) before tax 9,121 (14,001) (75,291) 7,049 21,470
Taxation (460) (1,324) (2,894) (1,029) 1,398
Profit/(loss) for the year/period 8,661 (15,325) (78,185) 6,020 22,868
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive
income/available-for-sale financial assets
- Net change in fair value, before tax (31,421) (3,823) 6,186 (28) 1,651
- Net amount reclassified to profit or loss, before tax 32,823 - (368) (5,098) -
Income tax relating to above items (393) 1,109 (1,826) 1,379 (475)
1,009 (2,714) 3,992 (3,747) 1,176
Items that will not be reclassified subsequently to profit or loss
Fair valuation of financial investments measured at fair value
through other comprehensive income
- Net change in fair value - 1,991 (668) - -
Other comprehensive income, net of tax 1,009 (723) 3,324 (3,747) 1,176
Total comprehensive income, net of tax 9,670 (16,048) (74,861) 2,273 24,044
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Five-year comparison: Statements of financial position
Group
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
€000 €000 €000 €000 €000
Assets
Balances with central banks and cash 149,929 328,626 490,680 241,726 146,988
Derivative financial instruments 363,382 42,688 1,841 2,020 716
Loans and advances to financial institutions 402,987 193,724 263,129 223,287 118,439
Loans and advances to customers 2,389,293 2,324,303 2,020,760 1,359,377 1,842,555
Investments 1,268,039 1,277,268 1,150,925 1,184,117 690,581
Property and equipment 7,574 9,186 11,711 12,443 2,071
Intangible assets 13,306 13,031 15,380 16,455 5,815
Non-current assets classified as held for sale 1,785 1,785 1,785 1,785 1,785
Current tax assets 589 1,297 1,576 3,089 10,797
Deferred tax assets 17,524 18,377 18,550 22,279 21,338
Prepayments and accrued income 18,473 14,314 16,524 15,979 18,383
Other assets 28,978 13,527 47,365 48,511 23,323
Total assets 4,661,859 4,238,126 4,040,226 3,131,068 2,882,791
Equity
Called up issued share capital 117,450 117,450 117,450 117,450 117,450
Share premium 13,464 13,464 13,464 13,464 13,464
Shareholders’ contribution 133,196 133,196 133,196 133,196 143,196
Reserve for general banking risks 3,798 3,798 3,357 3,357 3,081
Other reserves 224 (785) 1,261 (2,731) 870
Retained earnings (25,538) (34,199) (16,461) 61,724 56,126
Total equity 242,594 232,924 252,267 326,460 334,187
Liabilities
Derivative financial instruments 5,306 1,131 14,344 4,182 11,327
Amounts owed to financial institutions 545,135 273,349 352,067 224,012 198,887
Amounts owed to customers 2,787,600 2,960,865 2,749,929 2,439,126 2,202,091
Debt securities in issue 969,569 658,293 553,849 - -
Subordinated liabilities 54,831 54,994 54,650 54,820 67,138
Current tax liabilities 2 2 89 276 158
Deferred tax liabilities 358 803 881 199 491
Provisions for liabilities and charges 1,263 1,223 3,916 4,528 1,633
Accruals and deferred income 24,303 23,723 32,931 40,906 39,450
Other liabilities 30,898 30,819 25,303 36,559 27,429
Total liabilities 4,419,265 4,005,202 3,787,959 2,804,608 2,548,604
Total equity and liabilities 4,661,859 4,238,126 4,040,226 3,131,068 2,882,791
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Group
Period from
Year ended Year ended Year ended 1 April to Year ended
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
€000 €000 €000 €000 €000
Cash flows from operating activities
Interest and commissions receipts 93,798 78,072 84,393 78,617 118,351
Interest and commission payments (21,797) (32,070) (28,101) (22,724) (30,186)
Payments to employees and suppliers (65,642) (65,748) (58,545) (33,458) (58,863)
Operating cash flows before changes in operating assets/liabilities 6,359 (19,746) (2,253) 22,435 29,302
(Increase)/decrease in operating assets:
Reserve deposit with central banks (561) (2,390) 218,028 (117,930) (108,313)
Loans and advances to financial institutions and customers (621,510) (307,382) (749,644) 472,553 (182,119)
(Decrease)/increase in operating liabilities:
Amounts owed to financial institutions and customers (16,079) 197,927 326,448 33,616 312,344
Other payables 1,423 4,278 (14,247) (14,629) 16,658
Derivative financial instruments - - - - (2,234)
Tax refunded/(paid) 258 (228) 990 6,942 (1,878)
Net cash (used in)/from operating activities (630,110) (127,541) (220,678) 402,987 63,760
Cash flows from investing activities
Acquisition of property and equipment (1,455) (803) (490) (325) (884)
Acquisition/development of intangible assets (4,304) (3,650) (1,685) (3,419) (3,301)
Acquisition of investments measured at amortised cost (271,819) (65,000) (49,991) (264,593) (31,107)
Acquisition of investments measured at fair value
through other comprehensive income - (448,569) (365,554) (654,640) (164,713)
Acquisition of investments measured at fair value
through profit or loss - - - (1,750) -
Disposal/redemption of investments
measured at amortised cost 35,000 255,295 236,606 - -
Disposal/redemption of investments measured at
fair value through other comprehensive income 240,653 122,297 206,237 417,842 58,903
Disposal/redemption of investments measured
at fair value through profit or loss - - - - 3,368
Net cash (used in)/from investing activities (1,925) (140,430) 25,123 (506,885) (137,734)
Cash flows from financing activities
Shareholders’ contributions - - - (10,000) (6,186)
Issuance of debt securities 366,437 498,955 558,295 - -
Redemption of debt securities (55,161) (393,082) (5,003) - -
Issuance of subordinated loans - - - 35,044 -
Redemption of subordinated loans - - - (47,229) -
Principal element of lease liabilities (1,148) (1,166) (3,543) (1,892) -
Net advances (to)/from ultimate parent company (37) 318 3,116 - -
Net advances from immediate parent company 66 11,667 963 33 162
Net advances (to)/from group companies (107) 8,400 (2,547) 4,669 (2,207)
Net cash from/(used in) financing activities 310,050 125,092 551,281 (19,375) (8,231)
Net (decrease)/increase in cash and cash equivalents (321,985) (142,879) 355,726 (123,273) (82,205)
Cash and cash equivalents at beginning of year/period 158,657 301,536 (54,190) 69,083 151,288
Cash and cash equivalents at end of year/period (163,328) 158,657 301,536 (54,190) 69,083
Five-year comparison: Statements of cash flows
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Five-year comparison: Accounting ratios
Group
Period from
Year ended Year ended Year ended 1 April to Year ended
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
€000 €000 €000 €000 €000
Net interest income and other
operating income to total assets 1.7% 1.3% 1.4% 1.8% 3.0%
Operating expenses to total assets 1.5% 1.6% 1.7% 1.6% 2.0%
Cost to income ratio 90.5% 120.8% 119.6% 86.9% 66.0%
Profit/(loss) before tax to total assets 0.2% (0.3%) (2.0%) 0.2% 0.8%
Profit/(loss) after tax to total assets 0.2% (0.4%) (2.1%) 0.2% 0.9%
Profit/(loss) before tax to equity 3.9% (5.6%) (25.6%) 2.1% 6.6%
Profit/(loss) after tax to equity 3.7% (6.2%) (26.6%) 1.8% 7.0%
The equity and total assets figure for the accounting ratios listed above are based on the simple average value for the financial year.
Group
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
No No No No No
Shares in issue 117,450,107 117,450,107 117,450,107 117,450,107 117,450,107
Group
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
€ € € € €
Net assets per share 1.97 2.12 2.50 2.78 2.85
9-month
Year ended Year ended Year ended period ended Year ended
31 December 31 December 31 December 31 December 31 March
2022 2021 2020 2019 2019
Earnings/(losses) per share (cents) based on profit after tax 7c (13c) (67c) 5c 19c
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Company Information
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Annual Report and Financial Statements 2022
245
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Shareholder Register Information
Analysis of the share capital of MeDirect Bank (Malta) plc as at 31 December 2022:
MeDirect Bank (Malta) plc C34125
Type and class Issued % Nominal value
of shares shares Paid up per share in EUR
MDB Group Limited Ordinary A 117,450,106 100 1.000000
Number of shares Number of holders
Class A “ 117,450,106 1
Class B “ 1 1
Analysis of the share capital of the parent company of MeDirect Bank (Malta) plc,
MDB Group Limited, as at 31 December 2022:
MDB Group Limited C34111
Type and class Issued % Nominal value
of shares shares Paid up per share in EUR
MDB Group Limited Ordinary A 56,406,546 100 1.000000
Number of shares Number of holders
Class A “ 56,406,546 1
Class B “ 1 1
There were no changes in the holding reflected above up to 28 March 2023.
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Company Information
Group company secretary
Schmeltzer, Henry
Senior management and key officers
The senior management and key officers as at the end of the financial year and as at the date of approval of this annual report were:
Denis, Arnaud Director and Group Chief Executive Officer
Ksiezopolski, Radoslaw Director and Group Chief Financial Officer
Bonello Ghio, Lorraine Chief Administration Officer
Borg, Vincent Head – Financial Crime Compliance
Breemeersch, Chris Group Chief Internal Audit Officer
Crossley, Wayne Head – Operations and Retail Network
Farrugia, Francesca Chief People Officer
Fenech, Marija Chief Risk Officer
Fleury, Ramin Group Chief Growth Officer
Grech, Caroline Head – Regulatory Compliance
Malukiewicz, Pawel Group Head – Channels and Customer Experience
Mantz, Job Head – Dutch Retail Market
Portelli, Chris Chief Technology Officer
Reznev, Herman Head – Corporate Credit
Schmeltzer, Henry C. Head - Commercial Strategy and Legal
Rooney, Tim Chief Executive Officer – MeDirect Belgium
Berkhout, Marcel Chief Financial Officer – MeDirect Belgium
Registered address
MeDirect Bank (Malta) plc
The Centre, Tigne Point
Sliema TPO 0001
Telephone
+356 2557 4000
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Independent Auditor’s Report
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