Last week HSBC Bank Malta reported pre-tax profits of €36 million for the first half of the year, down €4 million on the same period last year. CEO Mark Watkinson explained the context of these results to Vanessa Macdonald

Admittedly, €36 million is quite a respectable pre-tax interim profit. But it is down from a high of €53 million in 2012 and 2013. This is being blamed on regulatory costs, lower interest rates and loan impairments. Is it the case?

As far as the business is concerned, I think I would agree with you that €36 million in this challenging environment is a positive result. As I mentioned during the presentation (to stockbrokers and the media last week), all three of our business lines – retail banking and wealth management, commercial banking, and global banking and markets – continued to be profitable.

I feel that over the medium term there are good opportunities for sustainable growth, both on the domestic front as well as on an international level, especially in the areas of trade and tourism.

You are satisfied but Bank of Valletta’s pre-tax profits went up from €45m to €58.5 million between 2011 and 2015. What is the difference between what you are doing and what they are doing?

We have a different business and risk appetite model. You understand that we cannot comment on the performance and strategy of other companies, but we do compare our metrics with industry and HSBC Group standards. As far as our activities and the business that we are directly involved in is concerned, we are pleased with the return that we are generating. One has to understand that over the past two to three years, HSBC Malta – as part of the HSBC Group – has been implementing changes to its operating and regulatory standards and has significantly de-risked its business. Hence the considerable investments in the risk and compliance function over the last years which, coupled with the increasing regulatory costs, have had an impact on our levels of profitability. We believe that we are ahead of the sector in this respect.

Your cost to efficiency ratio has gone from 43.8 per cent in 2011 to 55.6 per cent this year – while BOV’s remained stable ­ from 42.5 per cent to 42.9 per cent. So it can’t all be down to regulatory changes and compliance costs as they are facing the same challenges...

Once again, we do not comment on the metrics and performance of other companies. As far as our 55 per cent is concerned, when you compare that with our peer group banks across the European market, while we would obviously all love it to be lower, there are challenges that remain such as the low interest rate environment and the increasing regulatory, risk and compliance costs, as mentioned earlier. The key is to achieve levels of profitability which are sustainable and within our risk-appetite model.

You wound up security and custody services in 2014. Why? Are any other business lines being reviewed?

There has been a significant change in regulation and law across the European markets. As a result of that, the HSBC Group decided that it will operate its security and custody business in specific centres of excellence, where the scale is larger. As a result, such part of our business, namely security and custody, has been transferred to these centres.

HSBC Bank Malta was found to be under-provisioned by €30 million during the recent asset quality review carried out by the European Central Bank. In which part of your portfolio were they? Were there any overprovisions in other parts of your portfolio? What has HSBC done about this – your net impairments in the interims were only €3.6 million.

HSBC adopts a conservative approach to provisioning and was delighted with the bank’s strong performance in the 2014 ECB Comprehensive Assessment (AQR and stress test).

But the AQR used different metrics.

As far as the presentation of our numbers for the first half, I remain positive.

HSBC Malta’s interim capital ratio stood at 13.3 per cent. That means a lot of the group’s capital is being tied up for a country giving a return on equity of only 10.5 per cent, down from 18.5 per cent in 2011, perilously close to group’s revised target of over 10 per cent. At what point will the group decide that it would be better to move out of Malta and use that money elsewhere?

As far as our return on equity is concerned, our benchmark is above the group benchmark and I am delighted with that performance. To generate a return on equity in this environment with the additional costs that we have to bear is, I think, a remarkable achievement in this business. As stated earlier it is paramount to be well capitalised and liquid and this was confirmed by the ECB’s Comprehensive Assessment.

Again, I hate to go back to your competitors, but their return on equity (post-tax) was 12.92 per cent. Why are you doing so much worse than BOV?

We do not comment on other companies. As stated earlier, from our perspective, we have a different business model and risk appetite.

HSBC Group announced that it would shed 50,000 jobs to save $5 billion annually by 2017. What will happen in Malta?

That announcement was part of a group strategy update made in the last few months with a view to deploy group resources where there is growth. Each business and geography is reviewed regularly by the group using the six filters, which cover financial metrics as well as filters such as risk, connectivity and scale. Malta performs well in terms of most filters and we are working hard to make sure Malta becomes more globally connected – hence our Malta Trade for Growth proposition and the €50 million and more recent €75 million trade funds. We continue to invest in Malta especially in the digital channels such as Mobile Banking App and the GetRate facility on HSBC Net, the modernisation of our ATMs and self-service machines, and the more recent opening of our International Banking Centre in Sliema.

Your collective agreement expired in 2013 but is still being negotiated. Communication with the union cannot be that good – they weren’t even invited to the announcement of the results...

We have an open dialogue with both unions and look forward to come to an agreement around the table on the collective agreement.

I am optimistic that we can continue generating positive and sustainable returns from the business

The group’s focus is moving very clearly towards Asia, which now accounts for 78.3 per cent of profits. There is even talk of moving the headquarters back there, a decision to be taken by year end. How important is Europe – which contributes just 3.2 per cent to the global strategy – and that was before the sale of your Turkish operations?

Europe is still a key region for the group and, while significant investments are being made in the AsiaPac region, Europe, North Africa and the Middle East also continue to receive considerable investment.

The group is one of dozens of banks slammed for wrongdoing, from dealing in US Treasury auctions to Swiss banks helping clients avoid tax. US authorities called it “the preferred financial institution for drug traffickers and money launderers between 2006 and 2010”. Some €180.6 billion passed through Geneva. And yet you describe yourselves as “one of the industry’s most valuable brands”... Really?

I refer you to the various group communications and reports issued in the past months on these matters.

Your chairman Douglas Flint said at the last AGM that the bank’s job was to demonstrate that “the business model can accommodate the revised cost structure public policy (that) now demands while still producing attractive returns to shareholders”. That just about sums it up, no? Mission impossible!

Our strategy is to be the leading international bank and connect our customers to opportunities using our platform in 72 countries. Over the past years, unprecedented changes have taken place in the industry as well as within the group. Clearly the operating and market environment remains challenging. From our perspective in Malta, I am optimistic that we can continue generating positive and sustainable returns from the business.

At a glance: Financial highlights

• Profit before tax €36m (2014: €40m)

• Operating expenses €50 million (2014: €46m)

• Net loans and advances to customers €3.2 billion (2014: €3.2 bn)

• Return on equity 10.5% (2014: 11.6%).

• Earnings per share of 6.6 cents (2014: 7.1 cents).

• Common equity tier 1 capital ratio of 11.5 per cent (2014: 10.6%).

• Cost efficiency ratio of 55.6% (2014: 53.2%)

• Total assets €7.6 billion, up 7%.

• Net impairment charges €3.6 million (2014: €1.6 million)