Resilient through adversity

Locally owned, Bank of Valletta appreciates that having a conservative risk factor has helped strengthen Malta’s domestic banking sector during economic uncertainty, explains Charles Borg, the bank’s CEO


According to the European Commission’s Spring Economic Forecast, Malta will have real GDP growth of 1.4 percent in 2013 and of 1.8 percent in 2014, which compares very favourably with the corresponding euro area figures of -0.4 percent and 1.2 percent.

While inflation is hovering slightly above the euro area, unemployment in Malta is among the lowest in the EU, at 6.3 percent in 2013, which is well below the euro area average of 12.2 percent. Is there actually any real correlation between Malta’s resilience and the strength of the Maltese banking sector?

Outsourcing to bring back wealth
Malta’s resilience is all the more remarkable in a country which has few natural resources and a GDP based increasingly on services, which have considerably less inertia than the manufacturing sector on which its economy was based until less than two decades ago.

The country has managed to focus on new sectors like financial services, IT, e-gaming, maritime services and aviation, where its proactive legislation and accessible regulatory regimes give it a competitive advantage.

The island did not escape unscathed, of course. Domestic demand remained weak as household consumption growth turned negative and gross fixed capital formation contracted further. To a large extent, the economy was kept rolling by the significant increase in government consumption expenditure.

Fuelled by the increased momentum in EU-funded infrastructure projects and the run-up to the general election in March 2013 – which increased the pressure to complete various projects – the traditional slowdown in private investment was off set in associated with the uncertainty created by the possibility of a change in administration.

Structural challenges
While Maltese banks have negligible exposure to euro peripherals, the Maltese government debt-to-GDP ratio of 71 percent is below the euro-area average, and is also largely sustained by local institutional and retail investors.

In fact, the European Commission, in its in-depth review of Malta in April 2013, concluded, “risks to domestic financial stability appear small”. The IMF, in its assessment published in May 2013 also noted that: “Near-term risks related to the core domestic banks appear to be contained.”

The actual structure of the banking sector in Malta is also pertinent. Maltese banking assets amount to 800 percent of GDP, but this figure covers the core domestic banks, non-core domestic banks, and international banks. The latter funnel external, mostly non-resident funds through the jurisdiction, but apart from the added value that they offer, have minimal impact on the island’s economy, in spite of the 65 percent share of assets that they represent.

Non-core domestic banks, a fairly recent phenomenon offering investment products, only represent 8 percent of the assets. Core domestic banks have 27 percent of the banking assets, and have all consistently reported profits in recent years in spite of the global financial meltdown.However, this alone would not explain why the country has continued to outpace its euro area peers. One important factor is that the domestic banks kept lending throughout the crisis. Why was this possible when so many other banks across the world were suffering from liquidity problems and tightening their credit lines rather than face the risk of impairments?

To be fair, the situation in the euro area seems to be improving, albeit haltingly. The ECB survey published in April 2013 for the period October 2012 to March 2013 reported that nearly a quarter of euro area SMEs applied for a bank loan, of which two-thirds received the full amount of their loan application (compared with 60 percent in the previous survey period).

How does Bank of Valletta fit into this picture? It has a very conservative risk appetite – for which it makes no apologies. Its largest shareholder is the Maltese government (25.2 percent), with Unicredit holding 14.6 percent and the public holding the remaining 60.2 percent. Investors in Malta as a whole tend to appreciate long-term sustainability of their equity shareholding rather than short-term returns.

Its operations are also based on a brand promise that epitomises the value of long-term supportiveness based on mutual benefits. This is not a glib statement. In line with its strong sense of corporate social responsibility, it has set up a “rehab unit”.

This works intensively with business clients under pressure to nurse them back to financial health, a process that involves months of intervention. The pilot project has proved more successful than anticipated, and it is now being given more resources. The Bank has for years pursued a dividend policy of splitting its profits three ways, more or less equally: tax, dividends and retained profits. Apart from that, most of its assets come from deposits in the domestic market (with nearly half the market share) and its investment portfolio is also risk-averse, reducing its vulnerability to the turbulence of international financial markets and sovereign debt.

BOV has given strategic importance to strengthening its capital levels and, with a Core Equity Tier one ratio of over 11 percent, BOV ranks as a well-capitalised bank by all international standards. In addition, its liquidity ratio can be gauged by its loans-to-deposit ratio that is below 70 percent, among the most sustainable globally. Earlier this year, BOV repaid all its LTRO borrowings from the ECB.

Creating investment opportunities
In the days when shareholders of foreign banks were clamouring for higher returns, BOV’s prudent business model appeared overly cautious. Yet just five years after the global financial meltdown, the Bank reported record pre-tax profits and its advances increased from €3.01bn in 2008 to  €3.89bn in 2012. Its return-on-equity for the  2012 financial year was a very respectable 24.2 percent.

The Bank has a proven track-record with SMEs and apart from supporting various constituted bodies through strategic alliances, it regularly organises surveys and seminars in order to highlight many of the issues and pre-empt legislation and regulation.

Its success as the chosen partner in Malta for the EIF’s JEREMIE programme for SMEs has established it as a role model for other countries. With a strong sense of its corporate social responsibility, it chose to commit 5.8 times the €8.8m guarantee to create an investment portfolio worth over €51m, assisting 500 SMEs to invest, diversify and expand.

This investment has enabled these companies – many of which are family-owned – to retain their employees as well as to create jobs in many cases. The Bank’s model for JEREMIE has been touted by the European Commission as “best practice” in numerous other member states.

The Bank is already working on the next financial instrument and in 2012 opened a representative office in Brussels to keep abreast of developments within the EU institutions.

It is remarkable that Malta has not had to bail out any of its domestic banks; the fact that Bank of Valletta has put €144m back into the economy through its taxes in the past five years and a further €141.5m into its shareholders’ pockets through dividends implies that there is a correlation between the country’s resilience and the Bank’s business model.

Bank of Valletta has always positioned itself as the Maltese bank. Its ownership is predominantly local, as are its sources of funding. In this it is differentiated from its main competitor, which is a subsidiary of a global institution. BOV draws its competitive strength from its ability to understand the Maltese community and the local business ethos, precisely because of its Maltese identity.

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