When will the National Bank of Malta saga come to an end?
With the intention of putting together an independent evaluation of the National Bank of Malta affair, information was gathered solely from what was published at the time, mainly parliamentary reports and reports published by the NBM and Bank of Valletta plc.
The Central Bank Act was passed in 1970; the banking system was previously more self-regulatory. L-Orizzont of December 11, 1973 said:”Il-gvern kellu informazzjoni mill-Bank Centrali li l-qagħda tan-National Bank of Malta mhux talli ma kienitx ħażina, iżda kienet aħjar minn dik tas-sena l’oħra.” (The government had information from the Central Bank that the National Bank of Malta’s health was better than that of the previous year.)
It is true that the NBM had certain issues still open with the Central Bank, but it seems these related to the lending made to B. Tagliaferro & Sons when the group had joined up with NBM. These issues were being tackled. An explicit note to this effect appeared in the 1972 NBM accounts.
The asset base of the National Bank of Malta:
Other statistics are available which show the healthy position of the NBM.
A run on any bank is always a very difficult and stressful situation. “Il-PM appella ukoll biex ma jibqax ikun hemm dan ‘ir-run on bank’ għaliex b’saħħtu kemm hu b’saħħtu bank jekk ikun hemm ‘run’ fuqu jitkisser. (PM Parliamentary debate, In-Nazzjon Tagħna, December 11, 1973).
The run on the NBM could not have been any different when at least Lm2.5 million was withdrawn rapidly over a period of a few days with Lm1.5 million on the last day before intervention. I assume that had no intervention by the government taken place, the run would have continued with inevitable results.
But what prevented the CBM – that lender of the last resort, that banker of banks – from intervening to shore up the NBM, quieten down the cows running towards a precipice and save the situation?
Would the strength of the CBM alone, without the backing of the government, have been sufficient?
The strength of our Central Bank would have left nothing to be desired, and if at all necessary it was for our government to back its Central Bank.
However, even after the run, the liquid assets of the NBM would have been sufficient even to satisfy the liquidity ratios demanded by the CBM.
So what really went wrong? What really allowed the bank’s position to go so radically wrong that the new auditors at the time engaged by MG, ie. Deloitte & Co, a very reputable firm, felt it fit and proper to report a deficit of Lm253,000 between assets and liabilities, and thus bankruptcy?
A property index was compiled by the Council of Administration to show the value of property fall between 1969 and 1973. This index was compiled by two bank officials – both fortunately still alive and who both pursued a successful career in the financial world – and was based on a sample of 163 properties taken from 1969 sales, while another sample of 198 items of actual property sales taken for 1973. This index was intended to serve only as a guide for the council but it seems to have been used as the main guideline to re-evaluate certain properties used as security for advances. Certain weightings were given to these property segments: thus, villas (39.3 per cent), terraced houses (12.2 per cent) and flats (48.5 per cent).
For some reason, no weighting was included for hotels which formed part of at least one major debtor whose debt was classified as doubtful. The basis on which this security was revalued down is unknown. Between 1971 and the time of the run, the values of properties had reduced somewhat. With the pending departure of the British forces, many residents decided to leave the island, selling their properties at cheaper than market prices but still being able to take advantage of what was called ‘the dollar premium’ when repatriating their funds to the UK – sometimes making gains of as much as 40 per cent when converting to sterling.
We have not seen any lists of properties owned by the NBM.
However, we understand from the balance sheet that these properties were shown at cost less depreciation. Had the same property index been used perhaps these properties – most in prime areas – could have been revalued, and maybe the deficit could have been reversed, even in this way.
It seems that the new auditors Deloitte & Co. did not agree with the provisions for bad debts which the previous auditors, Turquand Youngs & Co., had approved.
The Central Bank does not seem to have had any objections to the provisions over the previous years.
Therefore, the new auditors increased this provision from Lm2.38 million in 1972 to Lm5.97 million for 1973 an increase of 150 per cent or Lm3.59 million.
The annual report, issued by the Council of Administration, for the year ending December 31, 1973, sets out the policy followed to arrive to the Lm5.97 million provided for bad and doubtful debts.
As a result of this index, the provision for bad debts was radically increased.
As a result of these provisions, of course the NBM group was shown to have a deficit of assets/liabilities of Lm0.25 million. These figures can be obtained from reports and balance sheets published firstly by the NBM group and later on by the council of administration and Bank of Valletta.
When the government issued shares to the public to buy into BoV a short while later, these shares were issued at a premium of 25 per cent. Also this new bank made a profit of over Lm1 million in its first eight months of trading.
Was this profit achieved only because of the guidance of new management (the council of administration)? Because of the secure backing of the government only?
What about the NBM’s premises and equipment? What about the team?
What about the core of the international bank connections which NBM already had?
Surely these assets must have played a critical role in achieving not only the profits made in those first eight months, but also the many years of profit that followed.
The balance sheet and accounts information published by BoV Group show that over the next five years a total of Lm4.32 million was recovered from what was thought to be bad debts and these figures would, of course, once written back here been transferred immediately to distributed profits with the government as major shareholder becoming prime beneficiary of these funds.
It can be argued, and there is an element of sensible calculation, that the provision was increased by that much to cover any contingencies and to cover the worst position.
The time during which the run took place was a difficult period and the council of administration wanted to be ultra-cautious and possibly err on the side of caution.
But even so, there is something which does not make sense. When I gave a copy of this report to Prime Minister Eddie Fenech Adami in 1994, I was told that the case was sub judice and there was nothing he could do. So the case remains today, 19 years later.
Is it not high time that we come to some conclusion through a settlement out of court? With good will all things are possible. How much is, of course, the problem. Before the last election, Dr Austin Gatt had offered a one-off payment of Lm8 million which is not acceptable based on cost of money alone, let alone other starting considerations.
If we had to arrive at some acceptable amount, then people must remember to reason with their minds, not their hearts. One can never go back to being the owner of the National Bank of Malta then, and now become the owner of the Bank of Valletta. That is absolutely impossible to my mind as now the owners of BoV have changed and so have the times. The NBM is no more. It stopped functioning in 1973. Its licence was withdrawn then, whether rightly or wrongly, those are the facts. The government also knows the facts.
The government has received from BoV so much from dividends, so much from tax and so much from sales of part of its shareholding made on two occasions. All can be calculated. The government must understand that it has done extremely well in the venture. Yet it still holds 25 per cent of BoV valued at over €140 million.
This article continues on the first part which appeared in The Times Business last Thursday.
Mr Curmi is a director at Curmi & Partners Ltd.