In an article titled ‘Impact of loan etc impairments on the profitability of local core domestic banks’ (Times of Malta, October 14, 2014) I produced a table of comparative statistics of the then five core domestic banks. Since then the number increased by one as Medbank was reclassified because of its balance sheet size.

My previous article followed the publication by the Central Bank of Malta of their Financial Stability Report 2013 from which I quoted the following concluding comment in the report’s preface:-

“In view of the upcoming regulatory measures, fragile global economic conditions, especially in the euro area, and remaining threats to the financial system, banks are still encouraged to increase their provisioning levels and strengthen their capital through prudent dividend policies. Furthermore, banks should continue to diversify their funding sources while implementing further measures to reverse the contraction in corporate loans.”

The table accompanying this article includes the six banks currently classified as ‘core banks’ plus Fimbank, in view of that bank’s substantial customer deposit base and the volatility of its net impairment provisions and, as a consequence, its erratic annual results.

Net impairment provisions (charges) are defined in the CBM’s report as being “costs incurred as a result of a decline in the value of assets. These include write-down of loans, investments and non-financial assets, net of recoveries and reversals”.

The table traces, over a five-year period, the banks’ annual operating profits (before provisions); net impairment provisions; post-tax profits; equity base (shareholders’ funds); customers’ deposits and the ratio between customers’ and shareholders’ funds.

In general, the indications are that the banks have adhered to the directive that capital and reserves should be raised at the expense of reducing the amount of dividends paid out to shareholders annually. Banks were also requested to raise the rate of impairment provisioning for loans and financial instruments.

The figures for impairments reveal a mixed bag with the major banks having no problem in increasing provisions and still producing an acceptable level of post-tax profits notwithstanding that HSBC’s net impairments in 2014 (€22,668,000) were seven times those for 2013 (€3,220,000).

The figures for three other banks also call for comment. Until 2012 Banif’s provisions were not based on a sufficiently long loan experience (having commenced business in 2007) but by using market probability for defaults. The 2014 net figure (€1,820,000) showed a 39 per cent rise on that for 2013 (€1,319,000).

Delving more deeply into the 2014 figure it transpires that this is made up of reversals of specific allowances of €3,089,000 (the main component probably being whatever provisions had been made for the loan to the Café’ Premier temporary leaseholders) and collective allowances of €1,114,000. Against this total of €4,198,000, new provisions made totalled €2,378,000. Thus, without the write-backs, Banif would have reverted into a loss situation and not showed post-tax profits of €858,000.

The indications are that the banks have adhered to the directive that capital and reserves should be raised at the expense of reducing the amount of dividends paid out to shareholders annually

Medbank’s provisions have stabilised after the disastrous result for the 15 months to March 31, 2012, when the bank’s substantial operating profits were virtually all wiped out by losses on an abnormally large exposure to Greek government and corporate bonds.

Fimbank’s provisions are highly volatile. Not surprising, considering the higher risk geographical area in which the bank operates and also the particular nature of its business (particularly factoring and forfeiting). Clearly 2014 was a particularly bad year for the bank with net provisions of nearly $64 million resulting in post-tax losses of $50 million.

Although the bank’s interim figures as at June 30, 2015 still revealed the need for more provisions of nearly $10 million, and a post-tax loss of about the same amount, the chairman affirmed at a recent meeting with stockbrokers and financial intermediaries that the worst is over and that the bank has taken determined steps to return to profitability. The market’s reception was that the day after the interim results were announced on August 6, the share price dropped by 9.1 per cent to $0.45.

As regards post-tax results Fimbank lags well behind all the other banks reviewed in the table. However, in terms of the ratio of shareholders’ funds to customers’ deposits, it ranks well ahead of all the other banks with an exceptionally high ratio of nearly 30 per cent. Thus the bank is very well capitalised.

This is a reassuring factor added to which it can rely on funding by its major shareholders i.e. Burgan Bank SAK (19.53 per cent) and United Gulf Bank (61.12 per cent). Significantly, Lombard’s post-tax profits halved over the five-year period to 2014.

APS, Lombard and Medbank also show very creditable double digit ratios of equity to customers’ funds compared to the more normal eight per cent ratio for the two major banks.

Banif is the laggard with a ratio of just under four per cent. The bank clearly needs to be recapitalised but it appears that this is being hampered by, as yet, unsuccessful efforts of the existing majority shareholder (Banif Financial Group, Madeira) that has been given until 2016 by the European Commission to disinvest its holdings in Banif Malta and elsewhere. This is a condition of the EC’s approval of a restructuring plan linked to the bailout of the Group by the Portuguese government.

Finally, as regards customers’ deposits it is significant that, between them, the seven banks reviewed held a total of €15.7 billion, of which 77 per cent was held by BOV and HSBC. Banif held just 3.69 per cent and Fimbank even less at 2.59 per cent.

It is noteworthy that in the six months to June 30, 2015, Fimbank’s customers funds decreased by 18 per cent and this notwithstanding the fact that interest rates paid on both savings and term deposits are higher than those offered by the local retail banks.

Anthony Curmi is a former bank executive.