The coming rally of Malta financial shares

Investors should ask themselves: "Are there signs of a coming vigorous rally of the massively undervalued financial sector of the Maltese economy as represented in our stock exchange?" If this country's stock exchange is so obviously on the brink of a major breakthrough, why has it been allowed to fall into such misery?

An example is the share price of Middlesea Insurance which most of our analysts have stopped analysing. Official policy moves have had the effect of reducing that company's share price every time they were made. If in Malta shareholders cared to exercise their power, there would be less of such an unfortunate share collapse. Management of companies has been known to react vigorously and positively, to the pressure by activist shareholders.

It cannot be said that the objections against the HSBC operation in the US by New York-based activist investor Knight Vinke Asset Management LLC, did any harm. Stephen Green, HSBC's top man at the time, said that such a move would be "irresponsible and unthinkable" and his views that HSBC had a strategically significant mission in the US have been amply vindicated. HSBC has become Europe's top bank, taking in more customer deposits than it loans out. It has a loan-to-deposit ratio of 90 per cent, lending 90 per cent for every dollar of deposits received.

Sticking to 'O' Level textbook economics has done wonders for HSBC. Royal Bank of Scotland has a loan-to-deposit ratio of 129 per cent. So RBS had to borrow money from other banks to keep its high lending rate. This financial source came to be denied with the present financial crunch. Interbanking lending collapsed because no bank could trust the other's balance sheet because of extravagant balance sheet risks.

It is no wonder the share price of RBS fell 50 per cent less last week. The catastrophic bank share price falls on Friday morning were obviously an over-reaction, which an investor like Warren Buffett will know how to exploit. What Buffett can do, others can do as well if they work equally hard.

During the past year, HSBC shares have performed better than gold. They have been up to 10 per cent this year in London, and they were the only to gain among Europe's 69 different banks. These have been down an astounding 35 per cent. HSBC is the big wheel. HSBC (Malta) is the little wheel, which will obviously not fail to spin as the big one turns rapidly.

A bank that would have a booming share price, if it were to care to list on the stock exchange is APS, which is widely known to have accumulated a massive deposit base. This bank is a most important pillar of this country's educational system and is reaping the benefits of the Church's beneficial social leadership over many centuries. Its recent activity has met with universal approval.

The privitisation goal continues to dodge Bank of Valletta, and keep its share price down. I found out two years ago while I was discussing the issue of its privitisation with Unicredit Bank of Milan, that Italian bankers were extremely knowledgeable about BoV. I was informed that they hoped to see it free from any legal entanglements before considering its acquisition. BoV has been able to hold its own with a formidable competitor of the global stature of HSBC. There seems to be some weakness in its investment portfolio, according to its chairman's statements, but with government insuring deposits, there is practically no danger of depositors losing any money.

The overall bank structure of Malta can hardly be said to be suffering the same stress being experienced in other European Union countries.

It is obvious that there exists conditions for a rally of financial stocks on the Malta Stock Exchange, in which there can be international participation.

Malta has had great luck in its HSBC connection. Luck comes to those governments (and people) who work hard. The time has come for Maltese entrepreneurs to set up their own bank.

The trouble in European banking is not going to be over soon this time. This has been demonstrated by columnists Daniel Gross and Stefano Micossi in September 24's Financial Times in an article entitled 'European banking lives on borrowed time'. They wrote: "The crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved.

"For example, the total liabilities of Deutsche Bank (leverage ratio over 50) amount to about €2,000 billion (more than Fannie Mae) or more than 80 per cent of the gross domestic product of Germany. This is simply too much for the Bundesbank or even the German state, given that the German budget is bound by the rules of the EU's stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency.

"Similarly, the total liabilities of Barclays of around £1,300 billion (leverage ratio 60) are roughly equivalent to the GDP of the UK. Fortis Bank has a leverage ratio of 'only' 33, but its liabilities are three times the GDP of its home country of Belgium."

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S&P.

johnazzopardivella@hotmail.com