Fimbank posted an interim after-tax loss of $8.64 million, compared with a profit of $1.45 million registered in the same period in 2014, after an unprecedented clean-up of legacy cases and run-offs, which saw net impairment losses reach $8.56 million. Newly-appointed CEO Murali Subramanian spoke to Vanessa Macdonald

In most other jurisdictions, if a board had approved purchases of factoring operations overseas which resulted in much of the $53 million loss reported last year, they would have been forced to resign. Why did this not happen?

The results were the outcome of a thorough and conservative review, which took into account the possible direction this was taking – as opposed to a realised, crystallised number.

I fully agree that, if it had been a crystallised number, that would have resulted in some very abrupt endings for a lot of people, including those responsible for governance.

This was a bit different, to the best of my understanding. The initial estimation of the loss for that period was significantly lower, but a drastic revision of the books of the various subsidiaries resulted in a conservative assessment which meant that it was prudent to take a much greater provision.

Was it necessary for Fimbank to embark on such an empire-building, spending spree over the last few years?

We will see whether that is proven. I would say the greatest issue was not the strategy but the execution.

If there is one thing that we have learned from these years of having invested, it is not that expanding or investing in subsidiaries, in and of its self, is to be avoided. Rather, any such investment must be preceded by a thorough assessment of our ability to govern it and to derive the results expected from it.

Fimbank will get another injection of $250 million from your majority shareholders. How is this going to be used? Which segments will you boost?

Some of it is a matter of internal commercial practice, which I am not at liberty to disclose. But I would start by clarifying the word ‘injection’ as that is used for capital. This $250 million is just liquidity from our majority shareholding group, which will come in two tranches. We will use it for various purposes, including repayment of the expensive funding sources that we currently have. We will also allocate amounts across diverse parts of the group – including across various subsidiaries.

Factoring activities overseas seem to be at best breaking even, but otherwise loss-making. Is this the best use of the bank’s capital?

Seeing the results as they are at this point in time, it would seem not. But, the reality is that these franchises have significant economic potential to perform far better. The reason that factoring continues to be interesting to us is that it offers a much better return on equity than more traditional businesses like trade finance and forfeiting.

It is a much riskier business, something which has been reflected in your Fitch ratings for years and years.

The Fitch credit ratings, to the best of my knowledge, reflect more how we have done it rather than the nature of the risk we incur in the businesses we are in.

Factoring as a business is riskier, for sure, but there are mitigants available, as with every business. Insurance and bank guarantees are two ways to do this – and working in industry sectors the technicality of which we understand, and where we recognise the relative stage in the business cycle. And then of course, there is operational practice. We have the necessary human capital and balance sheet capital to deal with all this.

It goes without saying that the level of expertise that Fimbank possesses in conducting factoring practice is quite professional. I have seen that for myself. But equally the market respects Fimbank for what it can do.

How it has delivered those results is another matter...

You had so many impairments in the factoring businesses, so many bad judgements. Is that something that we will no longer see going forward?

Hopefully, yes! And not entirely because I am here. We have evolved from simply acquiring geo­graphic spread to one where the present geography needs consolidation. As you know, an area that is no longer seen as being part of our core operation – namely Russia – is being divested.

The current business mix allows us to reduce the cost-to-income ratio by growing revenues, without the need to significantly slash costs

The current operations are seen as core to the bank’s identity and future. We are working on strengthening their governance and the CEOs of these firms come from backgrounds that we are comfortable with. The boards consist of people who are more interested – although on a non-executive basis – in observing and guiding on the courses of action, as opposed to relegating that responsibility to a small group of people who could take the company in a different direction.

With the best of intentions, there will still be occasional flare ups and surprises. But the systematic loss of value that we have seen in the past is, in my opinion, hopefully largely a thing of the past.

Are you going to keep Easi­save? If so, why?

Easisave has traditionally provided us with a supply of retail liquidity, at pricing that is comparable to what we can source it at right now. We do not have a retail bank and we are not likely to change strategy significantly and set up a retail bank in the very short-term.

Hopefully, as operations improve and we start showing better results, our credit rating will eventually improve and the cost of funding will go down. That will then lead to a different discussion on new lines of funding.

Easisave is a stable funding source which has earned its place. Our plan is to further enhance the platform by introducing new features going forward.

Then ad interim CEO Simon Lay had admitted when I interviewed him last April that your cost-to-income ratio was higher than that of your peers. What is it and what should it be?

Perhaps we should define who our peers might be because we operate in a unique space of our own. Our efficiency ratio – our cost-to-income ratio – is probably higher than where we want it to be.

I find it hard to determine who our ‘peers’ might be. And even with factoring, it depends where we are talking about. In a developed country, we are probably on par or slightly higher. If you look at factoring businesses in an emerging market, like India, Indonesia or Chile, then we are probably significantly higher than them, as they are single country operations where costs – in human capital, for instance – are much lower.

I would say we have room for improvement. I can’t pretend that there are any easy wins but if we look carefully at our business model, factoring would require a lot more investment, given the right governance. Trade finance and forfeiting would probably allow us to make those investments because they have the ability to scale up the balance sheet and therefore up the revenues.

Factoring, on the other hand, is a very slow build but a more sustained one. Once it starts building there is a tipping point at which the margins start to show the benefit of the business.

The current business mix allows us to reduce the cost-to-income ratio by growing revenues, without the need to significantly slash costs. It is important to resist the temptation to cut costs by doing away with control structures that we think are redundant – but which may come of use.

Will Fimbank be rebranded as either Burgan Bank or United Gulf?

I would find it hard to comment on that for proprietary and practical reasons.

Our shareholders are very strongly committed to supporting us. A very telling indication of that is my being here.

Clearly, the strong support in terms of equity and funding does provide the market with significant comfort.

We are venturing into newer forms of customer funding, but they will involve testing the appetite for Fimbank stand-alones, knowing our support structure. What is the brand, on its own, able to command in the way of pricing for institutional wholesale deposits from professional markets?

Our focus is on returning to profitability and generating returns for our shareholders and we will do this by stabilising a platform from which Fimbank can grow and realise its true potential.