Stockbroker Paul Bonello: ‘Unlikely APS has firepower for HSBC buy’

The announcement this week of a strategic review inside HSBC Malta by its shareholder HSBC Holdings plc was less surprising than news that the small, Church-owned bank APS was actually angling at buying the bank. Your Facebook posts on the matter elicited scepticism – what intrigues you so much on this purported move?

HSBC Malta’s first company announcement last Wednesday could not be taken other than with more than a pinch of salt. Everyone with a pulse on the local economy knew that HSBC has long been feeling uncomfortable, if not altogether embarrassed, with its presence in Malta, and I would say understandably so. For a first-tier bank to be so actively engrained in the local economy at a time when political scandals, greylisting, fraudulent ID Cards, nepotism, political bribery and other scandals are the order of the day, it is not actually a presence you would gloat upon in your promotional brochure. Even if there have been repeated denials by local CEOs –Geoffrey Fichte only a couple of months ago assured us HSBC is in Malta for the long haul – everyone was expecting this to happen, sooner or later.

My impression was that there was much more to this announcement than meets the eye. Its diplomatic language was evidently an exercise in pulling wool on the public’s eyes. The bank had found a buyer.

I expected the buyer not to be in HSBC’s top-tier league, but some secondary bank or equity fund taking advantage of HSBC’s anxiousness to get out of this legacy problem. But as if by magic, a process that would have taken months had in three hours turned out to be a definitive decision to sell to APS. The resulting furore took hold of the market; heavy trading in the otherwise sleepy trade in shares saw HSBC’s shares plummetting by 22% and a reduced market capitalisation of €100 million, whilst APS shares increased by 12%. Quite a nice and convenient – and naturally purely coincidental – manner of reducing the purchase price for a buyer in a quick sale, I thought.

READ ALSO: Bishops wash their hands from APS Bank's talks to buy HSBC's Malta subsidiary

Why would a deal that sees APS buying HSBC Malta be so troubling in your eyes?

Evidently once more, rule of law in Malta is a façade, where an upper level of political, economic and social life gives the impression that all is done by the book, but at a secondary level, the real business decisions are being taken.

Where was the transparency, I thought to myself, intended by anti-market abuse legislation that was meant to ensure the integrity of financial markets and enhance investor confidence? I found it hard to believe this was some sham.

On Facebook, I posted my request that both HSBC and APS make further announcements to confirm or dispel the rumours mills. The press was however speaking of a backroom deal between the two banks. I asked HSBC to reassure its thousands of small shareholders – many of them pensioners who had entrusted their life savings in shares of HSBC – that their London office was not so desperate to sell the bank at such a give-away price, causing so much financial distress and justified distrust in the market.

HSBC Holdings, the main shareholder of HSBC Malta, will be conducting a strategic review of its Malta subsidiary

HSBC Malta then issued a company announcement saying it was unaware of the negotiations, that it was seeking clarification from HSBC Holdings, and later another announcement that the review process was at an early stage and no decisions had been taken. Had HSBC been wrong-footed by a studied and intentional release of rumours?

APS, meanwhile, only issued an announcement by end of market business on Thursday 12 September which neither denied nor confirmed the rumours, emphasising the regard for confidentiality.

The crux of the matter however, is that anti-market abuse legislation is based on the pillar of the timely publication of precise, clear and truthful price-sensitive, inside information that is neither ambiguous, irrelevant or confusing to the public, to avoid the establishment of a false market in its securities or of other linked listed securities.

And in my opinion, APS’s company announcement was everything other than what the EU Market Abuse Regulation and the Malta Stock Exchange Listing Rules dictate should happen.

Are issuers not free to express themselves when and as they see fit on such matters?

Issuers have no such latitude on company announcements. The law does require timely, precise, clear and truthful information that is not ambiguous, irrelevant, misleading or confusing to the general public.

Besides, the European Securities and Markets Authority has been clear that if and when a publication, for example the WhosWho.com press report, or even internet posts or market rumours publishes inside information, an issuer is expected to react and respond to that rumour if that piece of information is sufficiently accurate to indicate the confidentiality of this inside information is no longer ensured.

ESMA makes clear that a reaction of staying silent or “no comment” by the issuer in these circumstances is not acceptable.

And APS’s company announcement had nil substantive informational value, adding no further objective detail other than indirectly – albeit intentionally – confirming that APS had been brewing the coffee for some time already.

And in all this, the MFSA, as the national competent authority entrusted with the administration and supervision of the anti-market abuse legislation, was of course conspicuous by its complete absence throughout.

What do you see are the main implications of an HSBC exit from Malta?

An HSBC exit from Malta would further isolate the island in the capitals of finance.

Inevitably it is a further blow to Malta’s not-so-exquisite reputation, especially after the FATF greylisting and the daily deluge of political scandals.

A Malta government spokesmen expressed the view they would rather have an international buyer take over HSBC Malta. This must be one of the otherwise rare occasions where I would have to agree with the government.

The fly in the ointment is that it is most unlikely that top-tier banks have any appetite for a presence in a market like Malta, which apart from being small is a high-risk jurisdiction that can be a source of embarrassment for their image.

HSBC’s exit would leave Maltese banking consisting of virtually entirely local players: less diversified and therefore less resilient in times of crisis.

There is also the anti-trust aspect: more concentration of banking in the same hands and less competition which is obviously not good for financial consumers. Malta will no longer have an international player of repute, however gained, as an ambassador for potential overseas investors.

As an economic analyst, do you believe a transaction in which APS acquires HSBC Holdings’ 70% shareholding in HSBC Malta is actually possible?

I find it unlikely that APS has the firepower for such a bold acquisition.

HSBC has had maintainable average net profits of circa €100 million, with a potential for much more that had it not been so conservative, and an expected price-earnings multiple which I cannot imagine to be anything less than 6 to 8.

APS is a small bank, currently with the lowest CET ratio, requiring it to make a rights issue in the short term maintain its current operations and adhere to the capital adequacy rules.

Analysts doubt APS Bank's ability to acquire HSBC Malta (Photos: James Bianchi/MaltaToday)

To purchase the 70% shareholdering from HSBC Holdings, it would have to make an offer on similar terms to the remaining shareholders, the 30% held by the general public.

An acquisition financed by bail-in-able bonds or subordinated bonds does not go down well with regulators: such unsecured bonds of high value cannot be raised in Malta, both because of its size as well as because of the complexity of the securities. Witness how Bank of Valletta had to list its rather large bail-in-able bond issue on the Irish regulated market.

Regulators expect buyers to have adequate risk capital as a specific percentage of the bank’s risk-weighted assets on their balance sheet, rather than additional leverage to finance their acquisitions.

Finally, the regulator in this case is not the docile and pliable MFSA, but the European Central Bank.

You quoted some Bible verse for the Archbishop of Malta in your Facebook posts: since APS is 55% owned by the Catholic archdiocese, what has faith got to do with it?

I am a practicising Catholic, although undoubtedly I leave much to be desired. I won’t invoke passages from the Gospel as to how money and religion do not mix... even the devil quotes the Gospel.

But at the Nazzarene parish church in Sliema where I hear mass, our priest – Fr Charles Tabonea, a pastoral theologian and sociologist – often laments that 70% of the population no longer hears Sunday mass.

So I’d rather not have the Maltese Church owning and controlling what would be the largest bank in Malta (even one of the repeated episodes of scandal at Vatican bank IOR, incidentally, has a strong Maltese ingredient). May it should devote its attention to recover just a small part of the large mass that abandoned it, rather than have its financial instution, historically perceived as a means for its social mission, contrive ways of acquiring 70% of HSBC Malta’s shares to satisfy someone’s delusions of grandeur.

Paul Bonello is Managing Director of Finco Treasury Management Ltd. His views are made in his personal capacity and any opinion expressed is his and his alone