Bank of Valletta looks to build on near-record 2010 result

Bank of Valletta is not an institution that encourages complacency or self-congratulation, but it is “quietly content” with the near-record pre-tax profits for the financial year ended September 30, and is looking to build on them, chairman Roderick Chalmers told The Times Business.

After 24 months of distressed economic conditions, the bank on Friday announced pre-tax profits of €98.9 million, 21 per cent up from the €81.8 million registered in 2009, and just €3 million short of the record operating profit for 2007.

Despite uncertainty hanging over the international markets from the lingering sovereign debt crisis, BoV has positioned its book so that it is conservative, with modest exposure to the troubled eurozone peripheral countries. With a strong core business in both the retail and corporate segments, and its insurance interests experiencing a €10 million swing back to break even, BoV has been able to bring in what the chairman described as “a good set of numbers” for the year.

“There are many banks around which would be happy to present results such as these,” Mr Chalmers said. “To be able to report improved profits in the current febrile environment, to be able to increase the dividend pay-out, and declare a bonus issue, and to demonstrate capital ratios in good shape to meet the more demanding Basel III requirements, are all positive features”.

The chairman said that the bank was in a “good place” to build on its results for 2010, especially when interest rates start to rise, although he did not see any rate rise for some time, given the fragility of the economic recovery.

“There is some negative news in that we are seeing a higher impairment charge,” Mr Chalmers commented, “but we have been able to absorb the hit.”

Internationally, now that the volatility in the banking sector has started to diminish, aftershocks are taking their toll, causing the US dollar to slide and protectionist pressures to emerge. Politics and electorate response to high unemployment and to austerity measures introduced by some governments will also leave their mark in the last quarter of this year and into 2011.

In Malta, Mr Chalmers said, the 2011 Budget revealed that the government had resisted the temptation to unnecessarily re-inflate the economy through excessive government spending, and had maintained fiscal discipline, which he saw as a responsible approach to adopt in the current circumstances.

The knock-on effect resulting from the austerity measures in the UK could discourage travel from Malta’s most important market, or the euro appreciating so as to impact the competitiveness of exports, could be challenges to be faced in 2011.

“Some of that can be mitigated,” Mr Chalmers pointed out. “The government and the MTA have done a good job with the tourism sector, despite the recent excitement over an increase in VAT on accommodation. There are not many tourist destinations which can show any increase in tourist numbers, never mind 12 per cent like Malta’s – and this is largely the result of strategic decisions taken three to four years ago. There is a lesson to be learned here, and that is that tough, important strategic decisions do not necessarily result in instantaneous payback, but can translate into a substantial reward down the line.

“Any government’s role is not just to deal with the here and now, but also to ensure the economy is well positioned in three to four years’ time, for when the dynamics of the market have changed. However, there are some short-term measures which would help stimulate economic activity, and one must be revisiting the current tender award system so that it is more streamlined and efficient. Major infrastructural projects are being repeatedly delayed by the current tortured process – and substantial capital spending projects would certainly provide a welcome boost to the economy.”

Mr Chalmers attributed the €419 million increase in BoV’s deposits over the year to an economy that is more resilient than it is given credit for. Deposits also saw growth from customers’ natural inclination to save in tough times and from the continuing repatriation of funds. Cash flows from international institutions, under Malta’s strengthening reputation as a financial services jurisdiction, also contributed to the figure, although these flows tended to be more volatile in nature.

After taking “a hit” of €9.9 million from its share of the losses incurred by Middlesea Insurance last year, BoV took a charge of just €0.5 million in 2010, as Malta’s largest insurance group “is back on track after a very difficult period”.

“Joe Zahra, as chairman of Middlesea, has used his considerable experience to stabilise, re-align and refocus the company,” Mr Chalmers added.

Middlesea Valletta Life, the life assurance joint venture the bank shares with Middlesea, has successfully and swiftly implemented a board-mandated strategy to become a standalone firm, and has consolidated its top management team by bringing on board experienced professionals to fill senior posts.

After the one-for-four bonus issue last year, BoV’s board has this year recommended a one-for-five bonus issue in January, to be funded by a capitalisation of reserves of €40 million.

The chairman listed the reasons behind the decision.

“We are keen to continue building the bank’s permanent capital base, particularly as Basel III demands more real core capital,” Mr Chalmers explained. “With this bonus issue we will have €240 million in locked-in, permanent capital. And our shareholders tell us that they like a bonus issue; for some very small shareholders it could be marginally tax beneficial.”

Mr Chalmers said the bank was considering revisiting its visual identity and the possibility of “tidying up” its branding. On the international business side, it was continuing with its efforts to win clients through the quality of its service delivery, which had resulted in “positive customer referrals” to new businesses locating in Malta.

Bank of Valletta continued to invest substantially in its high net worth customer base, particularly through technology. The bank has just approved a multi-million euro capital expenditure project that will allow customers enhanced real-time access to their portfolios and on-line trading capabilities.

The bank’s otherwise positive year has been marred somewhat by a series of judicial protests instituted by a number of investors in the La Valette Multi-Manager Property Fund, administered by BoV subsidiary Valletta Fund Management.

Consistent with the bank’s stance over recent months to avoid a ‘trial by newspaper’ over some serious allegations concerning redemptions from the fund levelled against it by Finco Treasury Management, Mr Chalmers declined to react to a new statement the company issued on Friday.

Referring instead to the company announcement issued by the bank last week, Mr Chalmers once again reiterated the bank “greatly regretted” the losses incurred by the property fund, and that it respected anybody’s right to take issue with the bank, categorically rejecting suggestions that investors had in any way been misled.

The chairman did, however, have some strong words about the approach adopted by some of the complainants.

“Reasonable people can differ on issues,” Mr Chalmers said. “Which is why we have law courts and arbitration tribunals; it is not the law of the jungle or of press headlines that should prevail. If there is a commercial dispute, there are well trodden ways of dealing with it to work to a resolution. It is, for instance, quite wrong to deliver counter protests to the press before serving the respondent. It is absolutely not the way commercial disputes are dealt with in professional environments.”

He pointed out that following the sharp market falls of 2008 and 2009, in many jurisdictions around the world, banks and investment companies had unhappy clients trying to apportion some element of responsibility for losses onto them. He said that what was unique in this case in Malta was the “megaphone manner” in which some parties were trying to conduct the issue.

“We also do not think it is right to float the idea that the bank has been involved in some kind of conspiracy to favour staff or particular clients with access to privileged information. We do not do that sort of thing – and it is scandalous that anybody should even suggest it. We clearly demonstrated last week that the level of redemptions experienced by the fund was on a par with that experienced by other funds in Malta during the same period.

“If, and I stress if, there is anybody in the bank who has been involved in even an isolated breach of trust concerning the use of privileged information, then they will be out of the door quicker than you can say ‘Times of Malta’. I give you that categorical assurance.”

Asked about the effect of the eventual outcome of the regulator’s inquiry on bank procedures, Mr Chalmers stressed: “If there are lessons to be learnt from it, we will of course look at our own procedures. We will be the first to do that. We implement change in the bank all the time. We do not for one moment believe that we have a monopoly on all the right answers or ideas. We are human beings and we will make mistakes from time to time. However, what we don’t do – because it goes against the very essence of the bank – is breach of trust, and it is grossly irresponsible for anybody to suggest that the bank has been involved in breach of trust as an institution. As I said last week, this is dangerous cargo.”

Mr Chalmers recognised a particular and delicate client base was made up of investors who have been affected by the losses in the property fund. The bank had open lines of communication with them to explain the issues, and how the bank was working to mitigate losses.

“They are certainly not ecstatic about the issue, but they are appreciative of the explanations we are giving them,” Mr Chalmers added. “We are recognised in Malta as a caring bank, and we do reach out to customers. We have tens of thousands of investors and customers, and generally speaking, the level of customer satisfaction in terms of interaction with the bank is very high indeed.”