A chess game played by two banks

It was in June of 1999 when flash news announced that John Dalli, the minister of finance, had negotiated a privatisation deal with HSBC Holdings for the latter to acquire 70.33% of MidMed Bank Plc at the princely sum of Lm80 million (inclusive of all its goodwill and prime property sites).

This was hailed as the breakthrough deal of the century – with PN apologists lauding the government that the presence of such a global bank would open the floodgates for endless foreign direct investment.

In fact many agree that the financial services industry as a whole benefited substantially from such a global bank. Over the past 15 years HSBC managed to champion a modern banking methodology and introduced many innovative concepts, including a paradigm shift in the banking mindset of staff at both clerical and managerial levels.

Immediately on taking over it carried out a manpower audit and offered retirement schemes to over 200 of its acquired staff (some in their early fifties) – in the process paying generous terminal benefits. Having cleared the stables HSBC started to refurbish its premises and introduce state-of-the-art ATMs at each branch to relieve queues and speed up service to customers, especially those cashing their monthly pay cheque deposited direct at the branches.

Good profits started to be registered as if it had a Midas touch even during years when the economy slowed down, as was the case when during 2009 it suffered a mild recession. As can be expected HSBC employed superior management techniques to improve efficiency at each branch and trained staff over the counters to sell bank assurances, pensions and investments.

Only last Monday HSBC announced an annual profit of €52 million before tax in 2014, a decrease of €38m (42%) when compared with 2013. Quoting chief executive Mark Watkinson, he told a gathering of distinguished guests at the Chamber of Commerce that in his opinion, the eurozone economy is still under considerable pressure and is only predicted to grow by 1% this year.

On a positive note he witnessed evidence of exemplary growth in Malta’s economy but alas significant loan growth evidence is still to be seen. At his presentation Watkinson remarked that the current low interest rate environment has witnessed a heightened tendency for customers, both commercial and retail, to use excess funds to replay loans early.

In his words “the mortgage book, the bank’s largest lending portfolio, continued to show positive net growth.” Reports show how deposits increased by 8% to €4,867m as of 31 December, 2014. Its return on equity for 2014 stood at 7.7%, which compares well with BOV, yet with gross new loans reported of  €710m – this does not look so bright, remembering that net loans and advances to customers reach €3,273 million.

Definitely both banks are over liquid. When asked about prospects for this year Watkinson admitted that 2015 is set to be another difficult and challenging year, largely due to the low interest environment and the European Central Bank’s new quantitative easing programme. He asserted that the Juncker stimulus fund will, once in place, provide the necessary stimulus to sluggish European markets and this, together with the Malta government idea to open up for many private-public partnerships, will improve the liquidity situation.

He was bullish that lower oil prices will facilitate growth and because of this the bank has recently started seeing genuine signs of a commitment towards private investment. He thinks Malta will become a very interesting market within the next three to five years, something which augurs well from a bank with the Midas touch.

While HSBC commands a high share of the local retail market its presence has left a mark on its arch rival, Bank of Valletta. The duopoly has coexisted for the past 15 years and competition has improved the performance of both banks in a chess game to excel in results.

It is an open secret that Bank of Valletta smelled the coffee and braced itself for competition such that it left no stone unturned to sharpen its own managerial tools and improve training of staff. Over the years it silently primed its pump to match HSBC profitability and set ambitious targets to offer exciting banking products. The government holds a minority interest in Bank of Valletta and because of this it controls the board by nominating a full time chairman and two political appointees of trust as directors.

BOV has progressed since it was partly privatised in 1974 and was always a match for HSBC in a race to register the best pre-tax result. It registered a pre-tax profit of €104.1 million for the financial year which ended on 30 September 2014, compared to €115.8 million last year.

Last November the European Central Bank took control over supervision of all banks and as precursor to its mandate it instituted ad hoc bank reviews by specialized independent auditors. These included a comprehensive assessment of compliance together with a AQR.

The AQR identified an under-provision for doubtful debts in BOV amounting to €16.4 million. Observers knew that such a detailed review by independent auditors will cut deeper into the fabric and inevitably it revealed a non-Performing Exposure ratio, which jumped to 18.3%, up from 11.8% as at December 2013. This pushed the bank to tighten risk policies, revise provisioning models, data governance framework and all valuation protocols.

Loans and Advances registered an aggregate net increase of €214 million equivalent to a year on year increase of 5%. These positive results were registered in both the business and retail arms with increases of around 3.3% and 8.5% respectively. Regrettably BOV shareholders had to foot the bill, seeing to their chagrin the 2014 dividend reduced because of an under-provision of €16.4 million revealed by the AQR methodology.

It is interesting to note that considering such sluggish economies in Europe and the high level of unemployment one may congratulate the management at BOV for their zeal to carve out a healthy dividend coupon rate of  €0.135 per share, which represents a gross yield of 6.05% at 30 September 2014 and a net dividend cover of 2.4 times.

At a stroke the board placed the cherry on the cake by recommending a bonus issue of 1 share for every 11 shares by capitalisation of reserves amounting to €30 million thus increasing the permanent capital to €360 million. By sheer contrast we read in the Guardian about an apology issued by HSBC Group on alleged opening of tax dodging accounts running into billions in its Swiss branches.

It reported a pretax profit of $18.7 billion for 2014, down from $22.6 billion the year before, after costs rose more than expected and its investment bank had a grim fourth quarter. It confirmed that its chief executive officer, Stuart Gulliver, uses a Swiss bank account to hold his bonuses where he clandestinely held £5m in a Swiss bank account which he controls using a Panamanian company.

HSBC paid Gulliver 7.6 million pounds for 2014, slightly down from 8 million pounds in 2013 but still likely to be one of the highest pay packets for a European bank executive.

To conclude one hopes that the saga of two main banks in Malta will continue to flourish in the coming years and more international banks of repute are attracted to share the splendid results reaped by both banks. Armed with a resilient economy it is encouraging to note the government ‘s resolve to register the first development bank which will act as a provider of capital for longer term projects and in the process liberate the retail market to allow better access to finance to PPP projects, SME’s and other start-ups.