Bank of Valletta recently announced that it will be offering to the public a maximum amount of €75 million 3.50% p.a. subordinated notes maturing in 2030, part of a €150 million 12-month subordinated debt issuance programme. Outgoing BOV CEO Charles Borg speaks to Anthony Manduca about the structure of the bond and the future of the bank and the Maltese economy.
“We always tell our clients who borrow from us that they have to have a very sound and stable financial model. We practise what we preach, and when we expand our business we strengthen our capital,” BOV CEO Charles Borg says, referring to the bank’s recent offering of subordinated notes.
The fact that the bond issue is unsecured is common practice by banks, he says. “Banks usually don’t issue secured bonds. Secured by what? We don’t own properties, one has to have faith and confidence in the financial system that is issuing this paper.
“You also have to look at the history of the bank which made a €450 million profit over the past four years. The bank substantially increased its balance sheet, which is close to €10 billion. We are a bank that has consistently announced a lot of profit.”
The market needs to look at Bank of Valletta in a positive manner, he says, as the bank has over the years consistently come to the market to raise capital.
Asked about the bond’s particular structure, Mr Borg explains that the bank has different forms of capital, and this bond is a tier 2 capital, which is a lower level of capital than equity. BOV, he says, has issued bonds like this in the past.
He explains the main reason behind the bond issue: “One of the European Central Bank’s strategic objectives is for banks in Europe to strengthen their capital. When a company grows it has to strengthen its own internal capital and we are no exception as a bank both on a tier 1 level, which is equity, as well as tier 2.
“Bonds that we had issued in the past are being amortised so their use as capital is always decreasing. These have to be replaced, so we planned to issue a medium-term note of €150 million over 12 months, which is subordinated, which means its ranking is lower than normal assets.
“The major objective of the ECB is to strengthen tier 1, which is equity or quasi-equity. This programme is still in the pipeline. We decided to first issue the tier 2 capital because issuing tier 1 is more difficult. Our next objective is to get the other €75 million – or up to this amount – in tier 2 capital.”
Asked if BOV had any complaints from retail investors about the complicated procedure for applying for these subordinated notes, Mr Borg says that this time the format was different because new regulations came into place from regulators abroad.
“Following the banking crisis in Cyprus, the concept of a bail-in was launched. This means that if a bank is in trouble and needs to be bailed out, rather than following the Irish model where taxpayers bailed out the banks, it is the shareholders, bondholders and depositors of the bank who will rescue the bank.
“If God forbid, Bank of Valletta collapses it will be the shareholders first, followed by bondholders and then the depositors who will save the bank. This is a new concept and it has been termed a complex instrument. Safeguards are therefore in place for these subordinated notes that were not there before.”
He highlights that these safeguards include requiring applicants who apply for the BOV bonds to undergo an appropriateness or a suitability assessment, depending of the investment required.
We avoided the financial crisis precisely because we had a diversified economy, and we need to continue to find these economic niches
“These tests are obligatory procedures we have to carry out, due to the ECB. We could have issued such a product for institutions only, both locally and abroad, with a minimum of €100,000.
“I can assure you that abroad there is a great demand for such products. BOV is seen in very good light both internationally and locally and we could have sold the product overnight.
“However, we have 19,000 shareholders, 1,600 employees, over 300,000 clients; shouldn’t we give them the opportunity to share these investments?”
Mr Borg says that since BOV wanted to give retail clients the opportunity to invest in the bonds, “as we always have done, we have to go through these procedures”.
He explains that the suitability test for investors of €5,000 basically consists of giving investment advice to ensure that the potential investor understands what a bond is, what a bail-in is, and everything associated with it. This procedure is now going to apply for bonds of banks of this nature.
For people who understand more, the bank raised the limit to a minimum of €25,000 after consulting the regulator, and carries out an appropriateness test that is not as rigorous as a suitability test, and is an explanation of the product.
He adds: “It is important to realise that in the new regulations, which have not yet come into force, the practice of deciding to buy shares or bonds by simply applying is going to end.”
Mr Borg, who is stepping down as CEO and leaving the bank at the end of the year after 34 years of service, says BOV wants to continue supporting Malta’s sustainable economy.
“The bank wants to continue to support the Maltese economy; this is the main message I would like to pass on to my successor.
“After 34 years I have decided to move on and my message is this: Bank of Valletta today is almost half the Maltese economy, all our business is Malta, so we are very interested to ensure that the Maltese economy continues to grow sustainably, and I emphasise the word sustainably, not growth at all costs, we don’t want the bubble to burst.
“We don’t want to be there; we were not there, not even when certain European countries grew significantly and then exploded; we need to ensure the economy continues to grow sustainably, and the bank plays a very important role here.”
He warns, however, that if the bank sees that certain sectors are overheating, it has to reduce its exposure, for example in real estate.
“This is not just the case in Malta, we have seen similar cases in Europe, and so we have to be very careful, particularly in the situation we have today. We have excessive liquidity in our country and low interest rates, so the opportunities are limited.
“Everybody is running after yield, many people in Malta with a lot of money like investing in property, and so everyone becomes an expert in property; they buy properties to rent out – there is a demand for this, especially from abroad – but we must be careful not to allow this sector to grow to an unsustainable level. So Malta has to grow sustainably and we have to support it as a bank.”
Regarding economic sectors the bank can support, Mr Borg says BOV has carried out a number of analyses that point to new potential growth areas such as healthcare, education, transport and logistics, which as a country we need to encourage.
“We avoided the financial crisis precisely because we had a diversified economy, and we need to continue to find these economic niches.
“We can’t remain focused just on gaming, for example; gaming is good while it lasts, but if this sector had to move away, what will happen to those employed in this area and the properties that are rented out?”
He stresses that Bank of Valletta, as an important Maltese institution, needs to support the growth of new niches.
“This is what BOV has been doing and this is what I augur it does as it goes forward. If we do this we will be supporting the Maltese economy in a sustainable manner.
The bank substantially increased its balance sheet, which is close to €10 billion
“We are a liquid bank, and when we speak to our regulators, we are told: continue to diversify and reduce concentration. I am very much in favour of strengthening and investing in the new sectors the country wants to promote.”
He says Malta has always been successful in offering services such as gaming, the financial sector, IT and tourism, and as the outgoing CEO he is confident the bank will continue to be a catalyst for change, and that the economy will continue to go forward.
He adds: “We must be cautious, let’s not run, because if you fall when you run you can get hurt. I am pretty sure that BOV will continue to support the new sectors coming in as well as the established sectors but we need to be selective.
“This is my message, I wish the bank well and to be successful as it has been in the past because this will be good for its clients, for the economy, the shareholders and its employees,” he says.