Careful planning to avoid stress

Foregone conclusions are easy to make. Fulfilment is something else. Nothing is concluded before careful consideration of the strategy and tactics required is embarked upon, followed by closely monitored implementation. In brief, nothing is really a foregone conclusion.

Many felt it was a foregone conclusion that Bank of Valletta p.l.c. would pass the stress test by the EU regulatory authorities of which it was part along with another 90 banks in the eurozone. As it turned out, the bank did pass the test with flying colours. Bar around 11 per cent, the other banks passed the stress test as well. Nothing came easy to any of them.

It certainly did not come easy to the Bank of Valletta. The local bank met the rigours of the test because it tests itself on an on-going basis. The stress test was based on the strength of the tested banks’ capitalisation, to determine whether they could withstand further severe downturn in the economy, and the prevailing threat of sovereign bonds falling off the risk cliff to which they have been pushed, notionally by the drama in Greece but essentially because the underlying governments were not prudent enough with their borrowing.

Like the rest of the Maltese banking system, the BoV had sailed through the financial crisis triggered by subprime lending in the USA without shipping water. It did so because, although it lends generously to a large number of Malta’s main economic operators, including the construction sector, it does so subject to critical due diligence and with strict safeguards.

It was aware that lending to the construction industry could become precarious if a property bubble built up. And, it certainly did. By the time that happened the bank had cleaned and restructured most of its property loan portfolio, making provisions for doubtful debts and writing off bad ones which stood no hope of being recovered.

That, one might say rather cavalierly, is normal banking and what you would expect from a well run commercial institution. True, but over exposure to the construction trade and inadequate appraisal of requests for more financing was what ultimately brought down the National Bank Group at the turn of the 1970s. The origin of such lending goes back to the late 1970s. As the public sector grew, so did its need for bank financing and guarantees. Both the major banks were involved but I would say the Bank of Valletta had more of it than the Mid-Med Bank, as HSBC Malta was then called.

Cleaning up that particular portfolio without at the same time putting the public sector – for which read jobs – under severe threat was one of the major challenges of the bank. I should think that there is still some exposure to the sector, but it is nowhere as big, or risky, as it used to be.

Through the years the BoV restructured itself also in terms of its human resources. At the time of the National Bank Group drama there were bankers with substantial local experience in the group. But there was practically no related training. There was only one person who had acquired a formal qualification in banking – becoming an Associate of the Institute of Bankers. Whereas Barclays Bank, following the iconic example of the late Louis Galea, was replete with personnel who took up similar studies.

In time the Bank of Valletta made it a fundamental policy to encourage its staff to further their studies, with suitable reward. Nowadays the bank’s staff are highly qualified at all levels, with qualifications going up to MBAs from colleges and universities of repute.

All of that is part of the weave which makes the BoV what it is today. The focus on capital adequacy became sharper in recent years, as liquidity ratios and reserves requirements were combined with a much keener eye on capital ratios. Serious banks did not wait for crises to develop before they ensured that they fully met increasingly tighter regulatory requirements, in our case imposed by the Central Bank of Malta and the Malta Financial Services Authority.

Serious banks – with the Bank of Valletta a major trail blazer – went well beyond the stipulated minimum requirements. Which is why, for instance, BoV enhanced its capitalisation with judicious forays into the capital market to raise subordinated loans.

That held it in good stead when the financial crisis broke and its portfolio of investment in suitable financial products was hit for six, notwithstanding its carefully diversified and risk averse structure.

Because of that structure the bank could clean the weaker parts of the portfolio and hold on to benefit from the turnaround.

All that is common knowledge, which is why many people thought that for the Bank of Valletta to pass the EU regulatory stress test was a foregone conclusion. Yes, but – it was a conclusion carefully structured by the bank’s team and its succession of able and focused chairmen, with the inspirational Roderick Chalmers the most recent of them. Banks deal in money, but they are made by the people who man them.