Bank of Valletta reported a pre-tax interim profit of €68.5 million but reduced its dividend payout to 22 per cent post-tax. Chief executive officer Mario Mallia explained to Vanessa Macdonald that the profit had to be seen in the long-term context.

Why am I interviewing you and not the chairman, as has been the practice for years? Is it to send some subtle message that the chairman is non-executive?

I am the chief executive officer of the bank and I lead the executive. The board sets the strategy and the chief executive officers see that it is executed. I am the custodian of strategy as communicated by the board and I oversee its implementation.

A local newspaper recently carried claims about a lack of due diligence when opening Libyan accounts. This is particularly alarming when banks are being criticised for taking months to open accounts…

Nowadays, people say that it is easier to rob a bank than to open a bank account. The consciousness about money laundering has grown a lot so we do our due diligence in accordance with international standards in order to minimise that risk.

We do not only rely on our own knowledge but have undertaken three separate consultation exercises to ensure that our measures are in line with expectations.

It does not mean that something might slip through, just as there might be the occasional bad debt when you give a loan.

The bank has repeatedly said that there are numerous procedures in place to prevent the sort of abuse with regards to lending that MP Kristy Debono is claiming. Do top executives – or board members – ever write to managers with personal introductions to clients? If so, could that not be construed as implied pressure to approve that client’s application, even if they are told to judge it on its merits?

I do not know of any letters of introduction. I certainly never interfere in my managers’ decisions. We have a set-up based on a dual sanctioning system and if I had an interest in getting a loan approved, I would need to convince not one department but at least two – which is not realistic.

A chain is only as strong as its weakest link. There might be staff who are afraid of missing out on promotions, or those who want to curry favour with their seniors. If that happened, are you convinced that their decisions would be caught on the way up through the system?

Any such letter of introduction would be kept on file. The due diligence would then kick in and in the case of a loan we are giving money, not receiving it, so we are not just talking about the due diligence that we would do on new account holders but also the credit risk side. There are numerous filters. I believe that the system is working well. Our levels of non-performing loans has stabilised – the remaining ones are mostly legacy loans. We are seeing very few new ones since we introduced this new system.

Prime Minister Joseph Muscat referred recently to ‘saving the banks’. Was he referring to BOV and loans to government entities, such as Enemalta?

I don’t know what he was referring to but I can confirm that BOV was not subject to any government intervention over these past years.

But BOV has a heavy amount of government lending. Are government loans covered by guarantees or not?

We require guarantees for some government companies but not for others. It depends on the risk of the project. However, we consider government lending to be the lowest risk possible.

Investment opportunities today are limited and the bank has a lot of liquidity – a ‘welcome problem’ as it is a sign of strength – but we have to deploy it somewhere and margins will suffer

Enemalta was not. The government has made it quite clear that it was close to default on hundreds of millions of euro. Was BOV’s loan to it covered by a guarantee?

I clearly cannot comment on individual customers. But in general, I can say that government lending is our lowest risk lending. Obviously today it is subject to restrictions by international regulators who are trying to cut the bond between the sovereign and the banking system. We saw in 2008 how toxic that could be.

They are now saying that we should limit our exposure – not only lending but also government bonds. We hold government paper to maturity, unless we find some compelling reason to sell. But we plan in the long-term to reduce our exposure to government debt.

If you do not invest as much in government paper, your Treasury has to go for riskier options. With your background in risk, you must view this with concern…

You are right. It is a great challenge. We have to keep in mind two things. The first is the profitability of the bank: we cannot use our liquidity in a careless way but must try to maximise profit.

But the second consideration is risk, as today profitability takes second place to risk. I prefer to go for a lower return asset and have marginal returns but ones which have a well-controlled risk profile.

Investment opportunities today are limited and the bank has a lot of liquidity – a ‘welcome problem’ as it is a sign of strength – but we have to deploy it somewhere and margins will suffer.

We just reported very good results but the strains are there and margins are under pressure because we are refusing to raise our risk profile – obviously at the cost of profit.

Interim profits were up 16 per cent. How long can you continue to argue that shareholders have to accept lower dividends, down to 22 per cent from the 33 per cent policy in place for years? How long before they start to seek better equities to invest in?

We are trying to balance dividend expectations with the capital requirements of the bank.

BOV, unlike many other European banks, never had to seek government help so we were never recapitalised. So while other banks were recapitalised in a big leap, our capitalisation went up slowly but surely every years.

Because of evolving regulation, including the Recovery and Resolution Directive, there is no way to get help from the government in the case of a crisis, so you have to build up your own capacity.

Now with bail-in procedures, if a bank is not sufficiently capitalised and something goes wrong, they are the ones who would suffer, not the depositors. So capital protects the shareholders. The easiest, most direct way and least costly way to do this is to retain more profits by controlling dividend payout.

We know shareholders expect a dividend but we need to educate investors that shares are not a deposit account from which you expect interest every year. A dividend is only distributed if there are sufficient profits and if the company does not need more capital buffers.

And the net asset value of the bank is mirrored by the share price, as the former is the real value of the bank. So the retention of profits increases net assets, which is reflected in the share price as well.

You are shutting down trust business because of the risk involved. Are there any other business lines being reviewed?

Our business model is constantly being reviewed. We are very careful to ensure that the return we get is justified by the risk. It is not the accounting profit we look at but the risk/return ratio. We started with trusts, which were never a core operation of the bank. We will review other lines but there are no serious curtailments being considered at the moment. But we do not exclude that there may be in the future – particularly in peripheral areas.

The bank embarked on an international strategy through representative offices overseas. What is happening now?

Today the world is coming to Malta whereas before Malta was going out there to cater for it. We are internationalising our balance sheet by staying here! So we are no longer looking at a network around the world, perhaps one or two strategic places around the world where we would have an office.

Will you review the branch network? And what will the new development at Fleur de Lys be used for?

That will be our premium banking centre for high net worth customers. At the moment, the head office has a mix of operations and customer facing units. The latter will go to the other side of the road.

Our biggest project at the moment is our core banking transformation, which is the replacement of the core system. We will redesign our business processes and network around the potential that the new state-of-the-art system will provide.

This will improve customer response time. That will lead to a change in processes and also in the use of space in our branches. We need privacy for more investment advisory services, for example, which is sometimes lacking.

People are becoming more aware that they have to support their life­style with their own savings, whether through pension or savings schemes. And demand will only keep growing. This is an area that the bank finds of great interest.