After the abrupt departure of Fimbank’s founder at the end of the year, Simon Lay was appointed as ad interim CEO with a tough mandate to turn the bank’s dismal fortunes around. He told Vanessa Macdonald that the turnaround has already started.

Fitch has downgraded the bank to BB- from BB for both your Issuer Default Rating and your viability rating. It cited your “high risk appetite”, “significant deterioration in asset quality” and “unstable and weak earnings”. And that was before this year’s results reported pre-tax losses of $53.4 million. How did the group allow things to get so bad?

Adverse market conditions in regions in which we operate impacted our bottom line in 2014 as did certain deficiencies within some of our international factoring businesses, particularly in India and Russia. These issues have now been addressed and going forward, I expect to see a consolidation of our investments.

We will focus our energies on strengthening further our governance, risk structures and internal control capabilities, which should result in an improved business model, which will then yield greater profitability and returns for our shareholders.

Will the shareholders need to make a further capital injection and, if so, of how much? How much more are they willing to put into Fimbank?

During our annual general meeting on May 8, 2014, shareholders approved two rights issues over a period of two years in order to raise a minimum of $100 million by issuing ordinary shares. The first rights issue generated $48 million in new equity, and the board of directors may decide to proceed with the second rights issue in the coming months as originally planned. However, no decision in this regard has as yet been taken.

Having said that, we are encouraged by the support of our shareholders, in particular Burgan Bank and United Gulf Bank. Our controlling shareholders believe in Fimbank’s business model, and are committed to supporting the group in overcoming the difficulties experienced in 2014, and a return to better times.

Have they given you a deadline for turning things around?

Although no formal deadline has been set, my brief is to lead this organisation through a period of readjustment, prioritising sustainable profitable growth in the shortest possible time. The bank’s turnaround strategy implies a period of consolidation where the focus will be on a rapid improvement in financial performance, the implementation of measures that aim at reversing the current causes of distress, and overcoming internal constraints, all the while retaining our customers at the centre of our strategic considerations.

We shall also be strengthening further our business model. I can assure you that the turnaround has started; we are working seriously and hard and are anxious to see results.

Is there a restructuring on the cards? Will there be consequences for staff numbers?

The restructuring of non-core activities has already started. We are performing a comprehensive cost-risk-benefit review to establish an effective structure which will also serve to avoid duplication of resources across the group. We need to cut costs, and part of the cost-savings exercise will require some modest job cuts across all group entities, but this will not be a significant part of the process.

We will be focused on deploying our resources more efficiently to key business sectors which offer profit potential, while exiting from other businesses.

Impairments stood at $50.7 million. Is there any chance that Fimbank will be able to recover some of this amount, given that recovery efforts so far have failed?

The recovery of impaired assets tends to be a long processes as various legal and other remedies are pursued. As you can imagine, we are taking this issue very seriously and we will be setting up a dedicated recoveries team to focus specifically upon the recovery of impairments across the group, to complement steps already being taken by our regional offices. We are optimistic of some recoveries but this will be a long-drawn process which may span across future financial years – one that requires patience.

Hoping for quick turnaround in 2015

Your operating income actually increased, from $33 million to $49 million. And your loan book also grew from over $740 million in 2013 to $980 million. Now that the impairments have been taken on board, does this mean that the bank could actually start to show a profit next year?

The bank is hoping for a quick turnaround in our 2015 results, although market conditions always play a part in this process. At Fimbank, we have a robust global trade finance platform which places us in a strong position to capture a good share of a large global trade finance market. Our ambition still remains that of maintaining our position as a leading provider of trade finance services worldwide.

The business is there and it is profitable; we have been regularly profitable in the past and remain confident of our underlying model and strengths.

In 2014, you pulled out of Slovenia and you have now announced that you are ‘discontinuing investments’ in Russia. But other overseas associations like Egypt and Brazil and your subsidiary in India are also not performing well. Wouldn’t it be wiser to cut your losses there too and focus on the areas where the bank is doing well?

Apart from suspending the Slovenian acquisition, we will also be closing units that are underperforming. We recently announced that we would be pulling out of Russia, and the board took a decision in this regard to discontinue the FactorRus operation, which will no longer form part of the Group’s investment strategy.

Although we do not anticipate similar scenarios in our other international operations, every business unit is under review. The overall expectation is to make a positive contribution to the bottom line by all constituent parts.

Fimbank has been building up shareholding in most of its overseas joint ventures. Will having a majority shareholding make a difference in turning things around?

Securing a controlling interest permits us to adopt a centralised control model. Going forward, the different risk-management framework for all our international operations will be co-ordinated through a centralised location. The rapid deployment of a common risk, controls and compliance framework will permit us to build a platform that enables decisions through understanding the inherent risks, improved clarity of risk gaps, as well as more effective monitoring capabilities. Therefore, in answer to your question, yes, taking control and performing these changes will make a difference in turning things around.

The overseas activities focus mostly on factoring – reflecting your predecessor’s background – but this seems to be where your impairments are coming from. Which activities are making money for the bank and why don’t you put more resources into these?

We are currently in the process of allocating our available resources more efficiently. We cannot afford to invest for the future in non-profitable entities on an indefinite basis or to carry insufficiently profitable products, services or lines of business. Therefore each business unit is under review and a decision on where to allocate capital and resources will then be taken based upon that entity’s ability to contribute profitability to Fimbank’s bottom line within a reasonable timeframe.

The fact that Fimbank has a European ‘passport’ is a definite advantage for us

Given the current economic crisis in Greece, was 2014 the right time to open an office there?

Greece presented us with an opportunity in a very specific segment of business. The team running our branch in Greece are local specialists who have first-hand experience of the Greek trade finance sector. They are focusing on export business, and the exposure to a Grexit is largely mitigated by focussing on this business line. The branch is overseen by the group head office functions in Malta and local decisions require central approval in accordance with Group policies.

What would happen if Fimbank were to face a stress test or the ECB’s asset quality review? How would it fare?

We can in fact compare the 2014 conditions to a real-life stress test for the Fimbank Group. Despite last year’s developments, group liquidity remains strong, while at the end of 2014, capital adequacy, measured in terms of Basle III/CRD 4 requirements, stood at 13.8 per cent for Total Capital, of which 13.3 per cent is Tier 1. These figures are significantly above the minimum regulatory requirements and prove the resilience of the Fimbank Group’s business model. That said, we have not modelled a stress test based on the ECB’s comprehensive assessment criteria although we are looking into that also in anticipation of the process if we were to come to it.

My guess is that impairments would not be much higher. We have been conservative in the impairment provisions taken, following prudent accounting and regulatory standards.

Fimbank has a very different business model to retail banks. How do you benchmark against other trade finance banks with regards to return on equity and cost/income ratios?

We usually tend to look at other trade finance banks such as British Arab Commercial Bank, UBAF and Banca UBAE. Excluding the 2014 performance, the return on equity would be well within peer-group average or even better.

Fimbank’s cost/income ratio is higher than the peer-group average. This underlines one of the chronic difficulties which any bank of our size faces, that is, limitations of scale and scope which put pressure on cost-efficiency. This is one of the areas we are addressing as a matter of priority and one way of doing that is to grow and scale up without necessarily increasing the global footprint and increasing resources disproportionately.

It was always assumed that United Gulf bank and Burgan Bank bought shares in Fimbank (61.2% and 19.72% respectively as at 2014) to get a foothold into Europe via Malta’s EU membership. Apart from opening an office in Greece and your existing entity in London (LFC), has this opportunity been leveraged at all?

The principal interest of United Gulf Bank and Burgan Bank has always been to invest in Fimbank’s trade finance model and global footprint, not solely our presence in Europe. Our focus at this stage will remain on consolidation, and there are therefore no definite plans to increase our footprint in Europe, or anywhere else for that matter. That said, the fact that Fimbank has a European ‘passport’ is a definite advantage for us and our shareholders and enhances the scope and value of our franchise.

You were appointed ad interim but it was not specified for how long. What happens next?

I was appointed Acting CEO of Fimbank plc ad interim with effect from January 1, 2015. Our controlling shareholders believe in Fimbank’s business model and are committed to supporting the group in overcoming the difficulties experienced in 2014 and I agreed to oversee this transition.

My job is to direct an effective turnaround strategy, which focuses on consolidation and implementation of measures that will effectively address the issues which impacted negatively upon our financial performance in 2014.

I do not have a specific timeframe for this but I believe this initial process will take at least a year to complete, after which we will review the strategy and resources required.

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