11 September 2009
Sir David Tweedie
Chairman
IASB
30 Cannon Street
London EC4M 6XH
UK
Dear Sir,
Re: Exposure Draft – Financial Instruments: Classification and Measurement
Bank of Valletta plc is pleased to respond to the captioned exposure draft (ED).
We support the objective of the ED to improve the ability of users of financial
statements to assess the amounts, timing and uncertainty of future cash flows by
replacing the classification categories.
As one of the leading retail banks in Malta with a material proportion of our assets
in financial instruments, we have been impacted by the requirements of IAS39,
and welcome the opportunity to carry financial instruments with basic loan
features at amortised cost.
We do have two areas wherein we wish to submit our comments for your further
consideration.
1. Classifying at Amortised Cost a fixed interest instrument hedged by a
designated Interest Rate Swap
Our company, Bank of Valletta plc (BOV) is one of the largest local retail banks
and a supporter of the local economy in which it operates. As such the Bank is a
major player in the Malta Government Stocks (MGS) market. Malta forms part of
the eurozone.
Following the adoption of the euro by Malta in 2008, the Maltese Government
issues fixed coupon, varying duration MGS'. Swaps are readily available, and as
a cautious, risk averse bank, BOV covers the interest rate exposure on holdings
which exceed 5 years duration through swapping the fixed coupon for a floating
rate based on Euribor. The IRS serves to match our liability profile given that our
investment book is largely funded by variable rate deposits. Over the same
period, given the volatility of the financial sector and corporate bond market, we
have stepped up our holdings of sovereign issuance, including MGS'.
Both our (existing) HTM and AFS classifications include outright Floating Rate
bond holdings (FRN). It is our intention and indeed our practice to hold these
FRN's to maturity, and under the floating rate mechanism the coupon thereon is
reset on a quarterly basis (also by reference to Euribor for euro denominated
bonds). Therefore, there is a variable in the income that is to be received over the
life of the holding, and to all intents and purposes, the floating rate feature of the
instrument represents an in-built or embedded IRS.
On the other hand, our MGS' holdings have had to be classified as FVTPL, since
they are hedged by IRS’s to minimise the interest rate risk. They have not been
classified as HTM since, under IAS 39, we were not permitted to do so because
"derivatives" cannot be classified as HTM, and, we understand that IRS'
constituted a derivative that must be fair valued. This seems to contradict what
we aim to achieve, which is as follows:
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we wish to reduce risk and volatility, so we have increased our exposure to
sovereigns (MGS')
we intend to hold these instruments through to maturity - and can
demonstrate both an ability to do so and a track record of having done so
with past MGS purchases
because of the duration of the holding, we wish to hedge against our interest
rate exposure, as our balance sheet is funded from customer deposits which
respond quickly to changes in interest rates
we therefore enter into a matching IRS with reputable names via which we
switch the fixed MGS coupon for a floating one
As is the case with the MGS, the IRS will likewise be held through to the
maturity of the bond, and will therefore expire with zero value
through the IRS mechanism we have "locked in" the spread over our cost of
funds over the duration of the holding
In short, through the IRS, in our view, we have done no more than effectively
convert the fixed coupon MGS into a FRN - with the coupon being reset
periodically, as is the case with all FRN's. Therefore, the question is, and we
understand that it remains equally relevant under the current Exposure Draft, if a
FRN (which is no more than a fixed coupon instrument with an embedded
derivative) can qualify to be classified as HTM and/or at amortised cost under the
new ED, can this be applied to an MGS with an IRS attached? Under the current
rules, our cautious, risk averse approach of buying sovereigns and neutralising
any interest rate risk is being rewarded with greater volatility, which contradicts
what we aim to achieve. We perfectly understand that both the bond and the IRS
will need to be tested for impairment, and an adjustment made if there is any
doubt on the standing of the bond or of the IRS counter-party.
2. Investment in equities for which there is no active market
The ED requires all investments in equities to be carried at fair value even if they
have no quoted market price, whereas the existing IAS39 allows such
instruments to be carried at cost. While agreeing that the proposal to carry such
instruments at fair value results in more decision-useful information, guidance is
needed on how to arrive at the fair value of unquoted equity investments,
particularly those “trade investments” that are held on a long term basis.
We would appreciate your consideration of our submissions. If you have any
questions or need further clarification, our contact details are given below:
Name:
Office:
Mobile:
email:
Elvia George
+356 2275 3212
+356 9942 9857
elvia.george@bov.com
Sincerely,
Elvia George
Chief Officer Finance
Bank of Valletta plc
Name:
Office:
Mobile:
email:
Moira Falzon
+356 2275 3175
+356 9923 5516
moira.falzon@bov.com