Updated | After Swedish pensions headache, Bank of Valletta to stop custodian services

Updated at 12.35pm with BOV reaction

Malta’s financial services industry has to reckon with a momentous decision by Bank of Valletta to stop its custodian services for Malta-based funds which hold nothing less than four billion in assets.

The major bank has already sent out its prenotification letters to financial services companies which run so-called UCITS funds, that it will be eventually terminating its custodian services.

As a custodian, BOV offered a very specialised service – mandated by EU rules – which ensures that funds which invest customers’ savings in bonds or blue-chip stocks, are liquid enough to ensure the redemption of their investments.

This crucial surveillance role also ensures that investment and pensions funds are respecting their own rules when investing their clients’ cash in liquid investments.

But recent misadventures with its own La Valette funds, as well as a pension fund offered on the Swedish pension platform that was secretly channelling millions to an unscrupulous Swedish businessman, have led to momentous decisions for BOV.

BOV assumed its role as Malta’s first port of call for custodian services when Deutsche Bank closed down its services on the island, with most of its custodian business migrating to BOV.

UCITs funds with dollar investments are especially concerned, due to Malta’s own problems, with a shrinking network of US correspondent banks.

The industry knows that with only a few alternative custodian service providers, such as Sparkasse Bank or Swissquote, the search for a Maltese custodian – as required by EU law – is crucial ahead of BOV’s termination of services.

Bank of Valletta had already announced last year that it was reconsidering its risk appetite by taking all steps to close its trust business, and undertake a strategic review of the custody business and evaluate its client base. “The bank will be undergoing a de-risking exercise by cutting down on non-core business that delivers very little profit for the risk involved,” BOV chairman Deo Scerri has said.

Paring down its custodian services to optimise its risk profile is only a confirmation of Scerri’s announcement
last year.

BOV had already put aside €75 million from its profits in “litigation provisions” over three pending cases – namely the Deiulemar case in Italy, which is related to the bank’s trust business; the La Valette Property Fund, over which BOV is appealing a decision by the financial services arbiter; and the Falcon Funds pensions bust, that involves losses suffered by Swedish pensioners.

Only this week, BOV gave notice in court that it would hold some 158 individuals and entities responsible for any damages it might incur in the Falcon Funds saga. BOV was itself served with judicial letters from the Swedish Pensions Agency back in April, through which the agency said it is holding the bank responsible for any losses suffered with its investment in Falcon Funds. The bank denies any responsibility.

BOV chairman Deo Scerri had said the decision to set aside €75 million to cover these three cases meant the bank would not be giving its shareholders a dividend in 2018. “Conscious of the fact that we will be departing from a long-standing tradition, the board is proposing not to give a dividend for 2018 and instead reinvest all profits back into the bank to ensure financial sustainability, given the litigation provisions,” Scerri said in 2018.

The bank’s profit for the first six months before the litigation provision was €88 million, which dropped to €13 million as a result of the €75 million charge.

Bank officials said the bank’s balance sheet remained very strong and the litigation cases did not have an impact on profitability. BOV has deposits to the tune of €10 billion, issued loans to the tune of €4.5 billion and shareholder funds are approaching €1 billion.

In Italy, the bank is fighting a precautionary warrant for the seizure of the sum of €363 million, which bondholders from the failed shipping business Deiulemar case claim were lost in a trust underwritten by the bank.

BOV has refuted the claim, insisting the bank had only received three sets of shareholding in trust worth €2,000 each. “The bank never received €363 million through its trust business,” the bank’s lawyer said.

BOV reacts

In a reaction to this report, Bank of Valletta CEO Mario Mallia said the article may give the impression that BOV’s decision to exit the custody business is a knee-jerk reaction to the allegations in the Falcon Funds case.

"This is not the case at all. Bank of Valletta is not exiting the custody business (and other business lines) because of any 'misadventures'. In fact, the bank is strongly refuting any liability whatsoever in the matters to which you refer. This exit rather forms part of a holistic transformation programme, the aim of which is to lower the bank’s risk profile and thus ensure its long term sustainability, stability and profitability," Mallia said.

He added that the "transformation programme has its own multi-million euro budget" and is being executed with the help of two global consultancy firms. The changeover is being overseen by a transformation committee comprising BOV directors as well as local and international consultants.

"A crucial part of the programme is the exit from, or re-dimensioning of, business lines where the risk-reward ratio is out of balance - where potential losses are not adequately covered by return. Such business lines include international corporate and personal deposits, custody and trust services," Mallia said.

Other objectives of the transformation programme include the strengthening of the bank’s strategic planning, risk management, anti-financial crime and compliance frameworks.

Mallia said part of the programme includes the replacement of the bank’s legacy core IT systems with a state-of-the-art Oracle Flexcube platform.

"Bank of Valletta’s transformation strategy is therefore a disciplined, structured and proactive strategy. The ultimate aim is to make the bank the financial services provider of choice for people and businesses resident or working in Malta," he added.