Malta has one of the soundest banking systems in the world, a testament to the reliable, old-fashioned principles adhered to by its leading 'credit institutions licence holders': Bank of Valletta and HSBC Bank Malta. Writer Michael Imeson

Although Malta's economy went into recession last year, in common with most of the rest of Europe, its banking system was virtually untouched by the financial crisis. The reason? It sticks to good, old-fashioned banking principles. Its banks take a largely traditional approach to banking, preferring to act as intermediaries between retail depositors and borrowers, with wholesale funding playing a minor role, and following prudent lending policies. The result: substantial liquidity, adequate capital, no toxic assets, few bad debts... and no bailed out or failed banks.

It came as no surprise to the Maltese, then, when the World Economic Forum's Global Competitiveness Report 2009/10 ranked the soundness of Malta's banking system in 13th place.

In the mid-1990s there were only four retail banks serving the local population. Now there are 24 banks, or 'credit institutions licence holders' in official parlance, from several countries, serving local and international customers. The total value of the banks' assets at the end of 2009 stood at €41.2bn.

In addition, there are 15 'financial institution licence holders' which are not licensed to take customer deposits, but fund their operations from shareholder capital or other funding sources, such as the inter-bank market. They provide lending, money transmission, foreign exchange, invoice discounting and other services.

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The two biggest banks, Bank of Valletta and HSBC Bank Malta, account for about 90% of the local market, a share they are fighting hard to hold on to, especially since the arrival of Portugal's Banif Bank in 2008, which is setting up a full branch network. Two other significant local banks are APS and Lombard, which have small branch networks.

Foreign banks such as Volksbank, Sparkasse Bank and Mediterranean Bank have carved out local niches for themselves but also rely heavily on international business. FIMBank, a trade finance specialist largely owned by Kuwaiti interests but in which the International Finance Corporation, an arm of the World Bank, has a 5.82% shareholding, is wholly focused on international markets. It uses Malta as a base from which to direct operations in eight other countries, including the US, Brazil, Russia, Singapore, Egypt and the United Arab Emirates.

Interestingly, Deutsche Bank, which has been on the island for some years as a 'financial institution' trading as Deutsche Financial Services (Malta), last month upgraded its status to 'credit institution' and changed its name to Deutsche Bank (Malta). The bank plans to increase is operations on the island, but not necessarily in local retail banking.

 

 

Bank of Valletta

Bank of Valletta Group (BoV) provides a full range of financial services, including retail, private and investment banking, fund management, fund administration and insurance. At the end of September 2009, it had €370m in Tier 1 capital and €6.2bn in total assets. It completed its largest ever bond issue last month - €50m of subordinated bonds at 4.8%. It was so oversubscribed it was able to offer a further £20m (€22.4m), and yet still had to close the subscription before lunchtime.

Tonio Depasquale, BoV's chief executive officer, attributes the success of the issue to the bank's deep roots in the community. "It has earned that community's trust through its long and untarnished track record of stability, profitable performance and social consciousness," he says.

"The bond issue has two main aims. The first is to lengthen the average duration of funding. The group funds all its retail business by a large customer deposit base, which has a relatively short duration but is extremely stable. The group now intends to stabilise its funding in the longer term by assuming liabilities with a longer duration.

"The second aim is to diversify sources of funding. The group wishes to supplement its funding sources, which are currently customer deposits, repo markets and the European Central Bank, by tapping the local credit market."

Another objective is to strengthen the group's Tier 2 capital, even though it is comfortably capitalised by any standard, with a Tier 1 ratio of 11.2% and a capital adequacy ratio of 14% at the end of September 2009. While it wants to avoid over-capitalisation, its strategy tends more towards capital conservation in anticipation of more stringent regulatory requirements coming up.

Malta was in recession last year, along with most of the rest of Europe, yet BoV's 2009 pre-tax profit was €81.8m, more than double its 2008 profit - though that has to be put in the context of a €101.8m profit in 2007. "The first priority for BoV during the financial crisis was to come through without major damage to the balance sheet," says Mr Depasquale. "The group managed this by using a three-pronged strategy: firstly, the maintenance of a strong capital base, which I have mentioned. The second factor was its conservative funding model, reflected in high holdings of liquid assets and low loan-deposit ratio.

"Thirdly, BoV lacked any exposure to toxic assets, or to asset-backed securities or other structured products which precipitated the crisis. Although we had to book substantial fair value markdowns when credit spreads widened and bond prices fell, actual impairment was minimal. Those markdowns are now coming back as price gains, and have played no small part in the recovery of our profitability.

"After the financial crisis came the economic downturn. During 2009, margin management was a key area of focus, as we had to respond to the long series of monetary policy actions by the European Central Bank, as it lowered its central intervention rate from 4.25% in October 2008 to 1% in May 2009. This rapid and sharp reduction in interest rates over a very short period had an adverse effect on our interest margin as most of the bank's assets reprice immediately while the underlying deposits take longer to adjust to the lower rates.

"The effect of a narrowing interest margin was mitigated by the increased volumes registered in our retail business, as we remained strong market players on both sides of the balance sheet."

Margin income was supplemented by a good performance on fee income, especially in the cards business, trade finance, and in the management of local initial public offerings. Towards the end of the financial year the bank experienced a strong recovery in the sale of life assurance, funds and other investment products. At the same time, it managed to reduce costs by 1%. And thanks to its hands-on credit risk management, deterioration in credit quality was limited and contained, with impairment charges only slightly higher than the previous year's.

So core performance, especially in the second half of the year, was satisfactory, and compared well with pre-crisis levels. The group's only disappointment came from the poor performance of an Italian subsidiary of its general insurance company, but fortunately the impact on overall group profitability was immaterial.

As the economy picks up this year, Mr Depasquale says BoV will continue to provide credit to sustain the recovery, in a "responsible manner" but at competitive prices to cope with increased competition. "Our risk-management structures will ensure that quantity in lending does not come at the cost of quality," he promises. "We will remain vigilant, prudent and focused on the sound management of our balance sheet. We will also continue to diversify our sources of income, tapping niche markets identified as offering good growth opportunities."

 

Responsible banking: Bank of Valletta's cautious approach to banking has seen it emerge from the crisis in good shape

Increased competition

With more banks entering the fray in Malta - most notably Portugal's Banif two years ago - how is BoV planning to compete in a small domestic market? "We have always thrived on competition," says Mr Depasquale. "Ever since HSBC set up shop in the local market, more than 10 years ago, we have managed to increase our market share on both deposits and lending. We offer competitive pricing, but in my opinion it is the quality of our service that gives us the edge over the competition.

He adds that BoV's "qualitative" competitive edge is based on its constant focus on the customer, which is central to its "brand promise". The bank has an intimate knowledge of the local market - "we pride ourselves on being the Maltese bank, and on the professionalism and dedication of our staff". Continuous professional education is taken seriously. The BoV Academy was recently inaugurated, and it offers courses ranging from highly technical subjects to personal development skills.

The bank has also been busy installing highly advanced ATMs in its branches, the latest at its Victoria branch in Gozo. "BoV has always been at the cutting edge of information technology and innovation, not least where customer interface is concerned," he says. "We have been the local pioneers in ATMs, internet banking and other alternative delivery channels. Today, it is estimated that only about 15% of transactions are carried out through the branch network. The 'super-ATMs' that we are now installing are just the latest link in our service network, through which we aim to offer our customers the most efficient and secure retail banking distribution system on the island."

The bank is very supportive of the government's strategy to promote the island as a regional financial services centre. "Thanks to state-of-the-art regulation, communication networks and a highly educated workforce, this strategy has already started to bear fruit," says Mr Depasquale. "We are seeing a steady inflow of international financial institutions, especially in the fields of fund administration, captive insurance, as well as banks.

"The financial industry will grow if the concept of Malta as an international centre develops further. To this end, the industry must ensure that it remains always at the cutting edge of regulation, technology and continuous investment in people. Quality human resources are the key to a successful services industry, and financial services are no exception."

 

Chris Bond, HSBC Malta's head of global banking and markets

HSBC Bank Malta

HSBC Bank Malta, with more than 50 branches and offices, serves domestic and international customers. It is one of the largest private employers on the island, with more than 1300 staff at the bank itself. It has also created a further 500 jobs in a call centre that it established to serve the needs of its UK customers.

HSBC Malta last month reported a €71m profit for 2009, but that was 26% down on 2008. "Like all banks around the world, we're not immune from margin compression," says Chris Bond, HSBC Malta's head of global banking and markets. "With interest rates at a low throughout the cycle, we've suffered the same degree of margin compression. But we haven't had any type of government support. We haven't needed it. We've remained profitable.

"If you look at our profitability for the two-year period during this financial crisis, we have made a total of €167m. That's significantly more than our nearest rival here on the island. We have been generating returns on equity in excess of 15%, which I think you'd agree is the envy of most banks around the world. And, most importantly, we've remained open for business throughout this period and continue to be open for business for new opportunities."

Mr Bond's responsibilities extend across a range of activities, including asset management, fund administration, custody, investment banking, treasury and capital markets. "We have been enjoying an increasing number of enquiries from funds domiciled overseas now looking at Malta or new start-ups looking at Malta as a potential domicile, ranging from insurance companies to fund managers to professional treasury investment functions," he says.

"We are using our international connectivity to bring these clients to Malta, in addition to which, we're also very closely linked with our operations around the world. [HSBC's] global banking and markets runs a hub-and-spoke organisational structure and we import best practice and expertise from the group to the benefit of our customers.

"For example, for our investors we have world selection, a suite of investment portfolios that are specifically tailored to their needs. And for our corporate customers, we help them manage their exposure to foreign exchange fluctuations and interest-rate fluctuations through a number of hedging products."

The country's top two banks could not be more different in overall profile, but they make a good double act - competing against each other to serve the needs of their local and international customers, yet working together to raise Malta's profile on the global stage.

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