Bank of Valletta reported a profit of €146 million for financial year 2015/6 but €27.5 million of that came from the sale of its shares in Visa Europe. This means its operating profit was only €500,000 more than the previous year’s. Chief executive officer Mario Mallia told Vanessa Macdonald this is the result of the bank’s lower risk appetite.

Adjusted for the Visa Europe sale, BOV’s profits are more or less the same as last year’s – albeit also dragged down by lower profits from associates and subsidiaries. Is this the beginning of the new phase that chairman John Cassar White has been warning about?

The bank wants to diversify its sources of income and, at the same time, shed risk which is not justified, in our opinion, by the return. When you shed risk that will obviously affect your profits so you will have a safer bank with lower returns. Part of that is reflected in our financial status.

BOV said that it would drop some business lines and diversify into others. So far we know BOV has dropped trusts – after getting embroiled in a court case – but we have heard nothing about what you are going to go into…

We learned our lesson from the case and said that we did not want to be in businesses where the risk was not justified and where we do not have core competencies and strengths.

There are other lines we are currently winding down and which are being de-risked. For example, we are not interested in business with companies that do not have an economic presence or ‘substance’ in Malta.

Obviously this is having an impact on the short-term profitability of the bank but we believe we have to look at the long term, so we are developing sustainable business. It is no longer about quantity but quality.

However, you need to replace this activity with something new or the bank will shrink…

We are developing certain lines of business, like investment services where we are bringing more value to the retail market. We have a number of products coming online at the moment. We are also looking at the digitisation of our services because today we can no longer rest on our branch network, saying that we have a presence in every town and village in Malta. That is no longer relevant.

These two things are at the forefront of our initiatives.

BOV is very proud of being the ‘local bank’. Are you free to drop lines that are not very lucrative – or is there political pressure from your main shareholder, the government, to keep them in order to keep the economy going?

We are free to do what we need to – and that is why we are doing it.

A lot of what you do is still very insular and local. You have been talking about internationalisation for some time. The bank has a BBB+ rating from Fitch. Do you exploit this with syndicated loans?

Today, the Maltese economy has internationalised so when you finance sectors of the local economy, you are financing overseas risk. So internationalisation has come to us, whether we were looking for it or not. However, as you say, there is a multitude of opportunities. We have to be careful because we are financed by depositors’ funds – we do not borrow on the money market – so our risk appetite has to reflect that. We cannot go into speculative ventures and we cannot risk depositors’ funds unduly. But yes, we are looking at these kinds of ventures: more syndicated loans, securitisation – within our risk appetite.

We believe we have to look at the long term, so we are developing sustainable business. It is no longer about quantity but quality

You are embarking on a huge upgrade of the bank’s core IT systems. What will this mean for customers?

Before we can start talking about glamorous delivery channels, we have to have a solid foundation: our core system. This will not directly impact customers but indirectly it will as our processes will be more efficient: shorter response times and better customer services. While this is under way, we will put all other initiatives on hold unless they are mandated by regulatory requirements, with the exception of the development of digital channels for the future.

The chairman referred to competition from “small banks in small flats”. The reality is that these have limited services but a much better cost-to-income ratio. Isn’t it time to start making tough decisions about the branch network?

We have started an exercise to revisit the branch network to see whether each of our branches should be a self-contained bank as it is today; at the moment, you can go into any branch for a whole suite of services. Is that the model to follow in the future? We don’t think so.

We are not thinking of reducing our network coverage but of optimising their use, by having branches which specialise in personal credit or investment services, for example. It is not necessary to have all branches providing all services from A to Z.

Would I be correct in saying that any other bank besides BOV would be able to close branches but that as the ‘local bank’ you are under pressure to keep them open for social reasons…

You assume that they are not profitable. Whenever we had branches which were not pulling their weight we relocated them.

And you know, I do see a future for branch banking. It is not passé. I know there was a time when we thought that we should be focusing on ‘clicks not bricks’. Some banks tried that but came back to the original format. Branches, whether you like it or not, are and continue to be a touch point with customers. Perhaps the younger generation, who use other channels, do not use branches as much – which is why we have to ensure that we develop more channels for the millennials.

Banif has been sold to a Qatari investor who is going to ‘grow the bank considerably’. Will they beat you to the gate on Islamic finance?

I am not sure whether Islamic finance is in their plans. It is a niche which we are also exploring. It will never be more than a niche.

That is not what Joe Portelli, the chairman of the Malta Stock Exchange, thinks. It is one of the three new thrusts he outlined in the Capital markets Strategic Plan last week….

Islamic finance has been around for quite some time and I think in Malta, demand for it, from our experience, has not been high. If we develop it, it would be as a niche. We are not looking at it – at least in the medium term – as one of the pillars of our business.

A new product has been launched, MyNey, which offers merchants electronic payments without the expenses associated with ePOS systems, particularly the hated transaction fees. How are you going to compete?

Through digitilisation. This is the type of disruption we see coming our way. If you are not the disruptor, you will be disrupted. So we need to develop our own channels or form alliances with the disruptors. Nowadays, disruptors are aligning themselves with big banks because it is a symbiotic relationship. MyNey is a universe which enables money transfers. It is free as long as you keep the money in the system.  It is one of a number of initiatives under way. We are very aware of them and are very interested in them.

They are a threat and an opportunity as you can provide services to these disruptors which they need: they need bank accounts at the end of the day. But we can work with them; we can buy their technology; we can form a strategic alliance with them. They can go where we cannot. We go to the higher end of the market and they go to the lower end, so we can help each other.

Islamic finance has been around for quite some time and I think in Malta, demand for it, from our experience, has not been high

Has BOV’s holding of government paper changed over the past years – given regulatory pressures – and what is the future strategy?

The regulatory strategy is to sever the link between sovereigns and banks which was one of the vicious circles which fuelled the 2008 crisis. This is why banks are being told to cut back on their links with sovereigns.

We have two types of exposure: credit to public sector companies and treasury exposure to Malta Government Stocks and Treasury Bills.

There is a balancing act so if we are going to increase our exposure to the former, we must reduce our exposure to the latter, and vice versa. We have set internal limits on government exposure but they will not prevent us from lending to government because we can avail of this counter-balancing.

Will the Development Bank be viewed differently? Could you channel money to government projects through it without affecting your sovereign exposure?

We will work with the bank through guarantees, where it is possible to do so. But it will also be part of our sovereign exposure. So it will fall within the same limits.

What about your guarantee to cover the Electrogas deal? What happened to the security of supply agreement?

That is a commercial agreement and we cannot give information on our customers.

UniCredit is selling off several subsidiaries and shares in other companies. Isn’t it about time BOV had a more active strategic partner?

UniCredit is a strategic partner. It has helped BOV in a number of ways…

Name one.

They do help on due diligence procedures as we can see how they handle this, for example. That is where it stops. It depends on what you mean by ‘more active’.

Helping you with international opportunities, for example, like more syndicated loans.

We have our own networks of banks and of international partners. We have our own office in Milan. A more active bank could be of help but I do not see it as a critical issue.