Bank of Valletta passed the European Central Bank’s Asset Quality Review but that is hardly the end of the story. Chairman John Cassar White told Vanessa Macdonald that the implications for the bank, its customers and its shareholders will be wide-ranging.

You said you were very happy with the outcome of the Asset Quality Review. But it was based on figures as at December 31, 2013. Ten months have passed, and you had an indication of how the AQR would work before December 2013. Have you changed any processes? Will the next AQR give different results?

Obviously when the AQR was carried out, it took a photo of the situation as it was then. This was done for consistency across all the banks being reviewed; there had to be a common starting point.

As with every other one of the 160 banks reviewed, the next six months will be dedicated to understanding exactly what needs to be changed in our processes to ensure they conform with the expectations of our regulators.

They have made it very clear that they are going to be tough, intrusive and fair. They will delve deeply and ask for regular information from us. As you rightly point out, this is going to have an effect on our processes.

The AQR concentrated mainly on lending but there are other aspects we have been made aware of, including non-financial supervision, which means they will be looking into our corporate governance.

It is important to look at all our internal processes, the way we deliver services to our clients. These need to be examined constantly, primarily to make them more efficient, but also to ensure that we identify the inherent risks, and to put in checks and balances to make sure that we manage these risks properly.

Over the next year, one of the strategic objectives is going to be a review of all the processes – not just loans, but deposit-taking and selling investments – not only because of the AQR but also because it makes business sense.

One of the shocks was that you underprovisioned by €16 million in your corporate lending. What are you going to do with those accounts, especially since they may not be in arrears but just companies whose turnover has dropped?

We were the first bank to report our results after the AQR and therefore the first to have to deal with this issue.

It is important to clarify that the AQR was a prudential review so we are not bound to take on board the €16 million underprovision from an accounting point of view. However, we will need to reconcile the two things at one stage, which is an issue for all the 160 banks.

First of all, we took these €16 million from distributable reserve to non-distributable reserves. So we cannot touch them, even if we wanted to.

Secondly, over the next six months, we will get more granular information from the ECB and will then go through our loan book to see where these €16 million are.

The results showed that we were overprovided in other sectors like mortgages. We cannot set them off but if we could have, we would have been overprovided by about €5 million.

Most are general provisions calculated through the use of a model developed by rating agency Moody’s, which basically gives us a regular update of the failure rates of particular sectors.

The ECB, very rightly, said that we now have to develop our own model based on our own experience to see what particular sectors are underperforming and then make provisions based on our own loan book.

These would not be prudential but accounting provisions?

Yes, at some stage the prudential recommendations will have to be reflected in the accounting standards. We have to discuss with our regulators when we feel that the accounting standards conflict with the prudential standards.

But, we take full cognisance of the fact that we need to provide more in a particular part of our loan book.

We will go through accounts on a case by case basis and, if need be, they will also becoming accounting provisions.

That issue need not worry us too much as we already provided for it in this year’s accounts.

But it will have quite an impact on future lending…

After the publication of the results, the MFSA and the ECB gave us a very long letter with recommendations of the areas they would like us to look into. One of the priorities will be the establishment of a robust data handling process within the bank, which means we will have reliable data which is easily available not only for the use of the regulator but more importantly for our customers.

The second priority will be a review of our credit lending processes.

Regulators are insisting that banks should be more inclined to judge a credit proposal on the basis of the proposal’s cash flows rather than the security being offered.

This was always the principle but we need better training so our officers understand the dynamics of the proposals being put to us.

There are other issues that we were made aware of and that we will be looking into.

What did the AQR cost the bank?

I cannot give you the exact figure because we are still receiving the bills but it will run into seven figures. Of course, that is only part of the expense, and over the coming year and beyond, we will have to strengthen our statutory reporting function. There will be big investments in IT but also in the personnel who will be dealing with this new regulatory regime.

What about the impact on the business culture? You have repeatedly said that companies are undercapitalised. If they are going to find it even harder to get loans, what will they do? Turn to bonds?

I think cultures are the most difficult thing to change in a country, an industry, a business.

It has been said for some time that local businesses are undercapitalised – and they rank third or fourth in Europe as the ones that borrow most from banks and the public. They rely on borrowing rather than providing their own money. Many business people prefer to buy property – and I do not want to comment on whether that is a good thing or a bad thing – but property in itself does not necessarily add value to a business, while capital does.

Local businesses will need to understand that the more capital they have when they make a proposal, the better chance they have of persuading the bank to lend them money.

It will be a gradual process, not something that will happen overnight. But that is the message that will emerge from the banking community the stronger your business is, the better chances you have of getting a good deal.

We will have to strengthen our statutory reporting function

Your dividend policy has been affected. You only paid out 27.7 per cent instead of the normal 33 per cent of pre-tax profits. Shareholders will not be pleased…

Of course, shareholders have an interest in maximising their dividends. But, first of all, we need a stronger and safer banking system in Europe, and secondly, those who invest in banks will know that they are putting their money in a safer industry, which, however, could be less profitable than it was in the past.

I think BOV is still giving a good return on investment. A dividend yield of over six per cent is not bad at all, but of course, if you compare it to previous years, there is a difference.

Another important consideration is that until last year we just went to shareholders and told them what dividend we were proposing. But now we first have to go the regulators who will tell us whether we are being prudent or not.

It is going to be even harder for the bank to lend, which means more and more liquidity. How will you make your money?

The amount of liquidity and the very low interest rates are a cause of concern. First of all, we do not think these low rates will be here forever, although they will be here for longer than intended.

Our financial markets division is looking very actively to find the best opportunities to invest this money, rather than refuse to take on deposits as some banks might be doing internationally. Hopefully, demand for borrowing will increase because at the moment it is not as high as it was, say 10 years ago. This will enable us to better utilise the money we collect as deposits.

But your treasury risk appetite is not going to change?

No. Of course, many of the deposits we are taking are short term so that tells us that wherever we invest this money will have to be short term too. We will not be taking any long-term risks or getting assets which are not safe as this is our depositors’ money.

You restructured the bank internally and now have a structure where you have the chief executive officer and one chief reporting to him. You have created a sort of ‘super-chief’ with the rest below him. How is that going to work?

It is the norm to have a CEO with a chief operating officer reporting to him, then a chief financial officer, a chief risk officer and a chief business officer.

New supervisory regulations make it amply clear that the board must ensure that the executive team in ‘functioning prudently and effectively’.

Last year, when I took over as chairman, I realised that strong corporate governance was one of the duties that the board of directors had to take on.

I wanted to take an independent view of the way the top executive team of the bank was functioning and commissioned an independent review by one of the main consultancy firms who interviewed all the 12 chief officers, and other top officials, and did a survey among them.

The great majority commented that the bank needed a stronger governance structure in order to avoid too much fragmentation at the top of the organisation.

The consultants also researched models used by other banks internationally and locally and came up with a much simpler organigram, with the CEO as the person who mainly promotes the bank’s business, the public face, so to speak, of the organisation. The COO will look at making sure that the bank is operating efficiently with all the support services in place.

All the other chief officers will continue to do the work they were doing.

I am sure it will come as no surprise to you to know that out there people are seeing this restructuring as vindictive…

There is nothing vindictive about it at all. The ‘jobs for life’ at top level of the organisation have finished. It used to be that once you were appointed a chief officer at the bank you practically had a guarantee that you would keep that role until you retired.

Now the top team of five people will have a definite contract of three years and they will not have an increase in salary or new grades. They will have responsibilities assigned to them and their compensation will be based on performance. We have a situation that is more accountable.

Before the remuneration committee and the board discussed these recommended changes, we discussed them at length with the MFSA, which also relayed these recommendations to the ECB. So they are fully aware of what we are doing.

In the coming weeks, we will be undergoing a corporate governance audit so we have all our cards on the table. I am quite confident that the regulators will delve deeply into what we have done and will give us a true and honest opinion of the changes and conclude that they are conducive to the good corporate governance of the bank.

I know that there are a few people, as in any other organisation, who will not like the changes that are being made but I can tell you that the internal feedback I got from the great majority of the chief officers is that this is the way to go.

Of course, the people that don’t like it will have the choice now to accept the changes and come on board or they can decide to not be part of the team…