In spite of rising regulatory and compliance costs and impairment provisions of €32.7 million, Bank of Valletta managed to announce a record pre-tax profit for 2014/15 of €117.9 million. Chairman John Cassar White nevertheless told Vanessa Macdonald that future expectations should be realistic.

BOV has been in the headlines far too often over the past years, for its Electrogas involvement, the golden handshake to Michael Falzon, House of the Four Winds, and even bonus payments. Is all this controversy good for a bank of systemic importance?

Not at all. However, I think the controversy was built on false assumptions. Unfortunately for the bank, it is hard to respond because there are often professional secrecy considerations and we are not free to discuss customers’ or employees’ matters.

What I can tell you is that the regulators are not worried about these issues, and whenever we meet them we speak about things which are far more important and which deserve to be discussed more openly.

So the regulators have not called you in to discuss any of these issues?

No. Not at all.

Last year when we spoke, the Asset Quality Review of the European Central Bank (ECB) had been completed, but it was at that time too early to say what changes would be needed. Could you update us?

The AQR and the stress tests were the beginning of what is called the Single Supervisory Mechanism. As of November last year we fall under the jurisdiction of the ECB and the Malta Financial Services Authority (MFSA).

There have been major changes. The first was that we had to slim down the executive team to a more reasonable level. We had a recommendation from our consultants on this matter which we discussed with our regulators – this was in the interim period before the Joint Supervisory Team came into force – and they agreed.

There was also much more emphasis on risk management, a broad spectrum of activities that hits many areas.

On the credit side we were advised to be more prudent with our provisioning policy, and are therefore adopting much more prudent rules to provide for loans that do not perform well.

Another change, which has generated a lot of controversy, affects the selection of directors. In the past, the regulators always had the prerogative of refusing candidates to serve on the board – although in the case of BOV, I believe this happened only once many years ago. Today we have been told it will not be at all unusual for candidates not to be approved.

How many were refused? We know about George Portanier because he went to court to fight it …

Two failed the bank’s suitability test, but that is only the first step. There are still two other steps: the MFSA and the Joint Supervisory Team (JST).

Isn’t it extraordinary that someone who has been a director for decades should be deemed ‘unsuitable’?

Speaking in general and not about any particular director, I don’t think the length of service means that you are suitable as a director. In some cases it might actually be a disadvantage because the import-ance of fresh ideas is being highlighted at all levels of the bank. You become a victim of ‘group think’ when people work together for too long and don’t contradict each other as they want to co-exist peacefully.

You reduced the number of chief officers from 11 to four, effectively putting the old executive team into third tier. That is quite a lot of upheaval – and it will not help if a new CEO is appointed.

Even the CEO has to be approved by the JST. I cannot just pick someone unless they pass the solid criteria embedded in the European Banking Authority’s regulations and guidelines.

It is the duty of the board of directors to ensure that an executive team is in place which they believe can lead the bank forward. Of course, there is subjectivity in this.

We have to shoulder this responsibility very carefully. We were advised, both by our consultants and our regulators, that the board should be more vigilant and intrusive in the way that it challenges decisions taken by the executive team, and should also look at the business model. For too long the bank has adopted a model which was ‘more of the same’. We are realising that this is not necessarily the way ahead. We are going to look at areas where we see growth which carries a manageable risk.

I found it interesting to see the chief risk officer’s office here at House of Four Winds …

There are two reasons. He is the link with the regulators and we are in touch with them virtually on a daily basis. So logistically it makes sense as he can provide the inform-ation they require – often at very short deadlines.

He also attends every board meeting, together with the chief operating officer and the chief executive officer.

One of the things to emerge from the AQR was that you were under-provisioned by €16 million in corporate lending. This year your impairment provisions went up by €13.3 million to €32.7 million. Is there a connection between the two?

Not necessarily. The AQR and stress tests showed we were under-provisioned in one area but over-provisioned in another, but we could not set off one against the other.

What you see this year is mainly accounting provisions, not prudential ones. We also have to make the latter – for example, if we see a geopolitical risk that could affect our balance sheet, even if it is not linked to a particular account or accounts.

The tendency is to be more granular and to look at specific accounts. Most of the time we are talking about facilities that were granted 10 or 15 years ago.

Shouldn’t most of them have been paid off by now?

We have some long-term investments like hotels and so on. Usually we lend short-to-medium-term but there is rolling over, which we should be careful of. It is good practice – except when you do so to kick the can further down the road so someone else can deal with it at some other time!

Your dividends have been going down from 33 per cent of profits to 27.7 per cent and this year even lower. You said that even 25 per cent might be too high in future … Where do you see it levelling off?

I cannot say. In the short term there will not be any big earthquakes in the bank’s income and profits. However, it is difficult to predict profitability in the medium term as regulation is becoming such an important feature.

Before we recommend a divid-end, we have to discuss it with the regulators and I can tell you that they are being very tough on the distribution of profits. We can issue scrip dividends, converting reserves into shares that people can sell.

As you know we are going to increase our capital, so distributing dividends can go against this principle. This year we reached a compromise for both the interim and final dividends, balancing what shareholders expect as a reward for their investment in the bank and what regulation allows us to do.

We will have to pull out of business lines which are not profitable – and there are one or two which we are considering

The record profits will definitely add more fuel to the recent reports by the MFSA and the Malta Competition and Consumer Affairs Authority that banks could do more, both with regard to retail services like EPOS and ATMs, and to SME lending. Can’t you afford to be more generous?

This argument is going on throughout the EU; and electronic payments are coming under the increasing scrutiny of regulators.

If the European Commission decides that banks should be charging less for the services they charge, mainly for point-of-sale terminals, then obviously we will comply with any directives.

The big disadvantage for us as a small bank is that the amount of information technology investment you need to make to support such a small customer base means our margins are much narrower than those of bigger banks.

I tend to disagree with the regulators when it comes to the risk premium that banks should charge – and I don’t think any of them would ever attempt to intervene!

It is the primary responsibility of a bank director and the board itself to manage risk – which also implies pricing that risk.

It is not true, as has been implied, that there is no competition in lending. Quite the contrary. The margins on lending have been going down in real terms, because of competition. We fight to the last cent to keep our clients!

We are, of course, not interested in taking on clients who are not credit-worthy. I have made it very clear that companies in Malta are under-capitalised, which means that banks are expected to take on more risk than is normal in other countries. Malta ranks among the top countries when it comes to bank borrowing as a percentage of GDP. This means some businesses do not plough extra cash into their business but use it to buy property, as they believe that it will give them a better return.

We are doing our best to provide finance to SMEs, but we are not here to provide venture capital.

Interest rates are still 1.2 percentage points above eurozone banks – and Maltese banks are the profitable ones! Aren’t you the local bank that boasts the slogan “Your success is our goal”? You are only doing what you are being forced to do ...

I beg to differ. I don’t think there is anything wrong with a bank making money and making good profits, as that is how you survive when there is a rainy day.

The test was in 2007/08 when no local bank needed rescue by taxpayers. That is because we were prudent and because we had enough reserves to deal with provisioning.

Banks are likely to become less profitable because regulation is making us increase capital and increase provisions, so we will have to pull out of business lines which are not profitable – and there are one or two which we are considering. We have to be very careful.

The bank will be spending a considerable amount on IT in the coming two to three years to make up for the ‘benevolent neglect’ of the past 15 years. I don’t understand. The bank has been boasting about being at the forefront of technology with internet and mobile banking, Visa security systems and so on.

We have a very good internet banking system. What we are talking about is the core banking system, which is the heart and soul of what we do. Like many other banks, over a period of time the bank lost its connectivity. We have changed so many different systems that they no longer speak to one another – which brings with it a lot of risk.

Our last banking system was bought in 2000. Fifteen years is a long time in IT!

I called it ‘benevolent neglect’ because I do not think anyone deli-berately tried to save money by not investing in IT. I am not referring to that at all. What I think has happened is that people took IT for granted and underestimated its complexity.

Our regulators were worried about the systems and we have given the go-ahead for a replacement. We have shortlisted two companies out of six bids and are in the final stages of the adjudication.

We have not yet got a definite figure on what it will cost, but that is not what worries me: it is the upheaval that it will cause – including training of staff, testing and so on.

The Opposition said that the change of House of Four Winds’ contract from rental to lease is against the law. What happens now?

I don’t want to enter into political arguments. If any regulatory authority decides that the lease is not legal, then we will abide by whatever decision is taken.

We wanted to protect our multimillion-euro investment in this building as it would have been written off over 26 years.

I think the original contract was not ideal. This board was not the one that decided to take House of Four Winds. I would have preferred to build a state-of-the-art training centre … I have no emotional attachment to this place.

Are you going for another term as chairman?

The names of all the present directors and the two additional candidates – including the overnment’s nominees – have been submitted to the regulators. It is up to them to decide who is ‘fit and proper’ to hold the positions.

But your name is on the list?

Yes. It is.