APS Bank is still involved in the payments connected to the Pitkalija – even though there are still some issues related to late payments that are being tackled, chairman Lino Delia said.

The bank’s chairman is clearly not happy with the situation. The restructuring of the agricultural wholesale market at Ta’ Qali was meant to be part of a wider programme leading to a sustainable, competitive agricultural sector within the framework of the EU’s single market.

This would have involved the setting up of new organisational structures, such as producers’ organisations, that could induce changes in the existing culture of carrying out trade in this sector. Capital investment was one means to such an end.

“If such an objective is not attained, because the required mentality changes do not materialise or because capital is not allocated, then the sustainability of the sector would be put at risk,” he said.

For example, the recent announcement that the funds allocated for the restructuring of the Pitkalija in this year’s government budget are not immediately available as planned would prolong the restructuring exercise.

APS decided to withdraw its support to the Pitkali Settlement System because some Pitkala were falling months behind in their payments – in certain cases, the amounts due went up to hundreds of thousands of euros. As a result, a legal notice was issued in December 2014 saying that every Pitkal – who acts as middleman between the farmer and the market – had to deposit a bank guarantee equivalent to 10 per cent of their previous year’s turnover of agricultural produce .

Agriculture, Fisheries and Animal Rights Parliamentary Secretary Roderick Galdes said the bank guarantee was meant to ensure that Pitkala honoured their financial obligations to farmers. In the end, after much grumbling, the Pitkala produced the bank guarantee – but there has been little progress with the restructuring.

This case is one that hits a number of Prof. Delia’s buttons. For a start, the bank has historically had strong ties to the agriculture sector – and the decision to withdraw from the Pitkalija system was a last resort. But more importantly he believes customers should take their duties as seriously as the bank does.

The bank boasts a low home loan default rate, and he is quite open about the fact that the bank will only loan you as much as it thinks you can afford.

“We relate the loan amount and the repayment period to a customer’s potential financial means. We aim to avoid unnecessary pressure on our customers to meet their financial commitments in the long run. The duration of the repayment period is seen within this perspective. So, we avoid extending, perhaps unduly, the repayment period in order to lower the amount paid monthly. This approach is seen as ethical from our point of view,” he said.

In a world where ‘bank’ became a four-letter word, this statement actually comes across as moral rather than paternalistic.

“We aim to remain competitive, thus rendering a service to our customers. But in the process the gains have to be mutual, for clients and the bank. It is only in this way that we can meet the expectations of all stakeholders, namely, our shareholders who provide the capital, our depositors who trust us with their savings, and customers who borrow funds to carry out their business or buy their homes. Such an operational model tends to lead to relatively low provisioning in the long run”.

Part of the reason for the low provisioning is due to the emphasis in the loan book on low-risk mortgages – although Prof. Delia pointed out that whereas facilities were usually drawn down within a few months of the sanction letter, for the past two or three years, it was now taking longer in certain economic sectors.

“Borrowers tend to reconsider the perceived changes in selected markets and react accordingly. Thus they may ‘rush’ to benefit from the first-time buyers’ scheme or postpone implementation of a project, say property development, to reassess market conditions,” he said.

Having a strong presence in the mortgage sector is a double-edged sword: it may be less risky but the margins are very tight.

Over the past decade, there has been a massive capital injection in the Maltese economy through budget deficits, EU and other foreign funds and the banks’ credit creation

“This means that we were always focused on having a very efficient operation and on getting volume,” he said.

The model seems to be working. In 2014, the group made a pre-tax profit of €12.8 million out of an operating income of €28.3 million. However, he believes that over the future, the bank needs to tweak its strategy to continue generating value added. It has to continue attracting savings – especially since it has to compete with both core domestic banks and non-core banks, some of whom have a very different risk appetite. And it has to keep supporting new demands for capital.

The bank has already started to look overseas for lending opportunities, mostly through co-financing loans. It participates in projects that fit its vision of supporting the creation of sustainable economic systems.

“Each exposure is small but the activity allows us to build up experience and competence while meeting our ‘social’ objectives,” he said.

The bank is also getting involved in North Africa and the Mediterranean rim, through Coopmed, a new activity seeing European Federation of Alternative Banks (FEBEA) members collaborating with international and EU fund agencies.

“We are partnering with banks within FEBEA to put in small amounts of share capital to develop institutions and investment in technology in North Africa. This project is a replica of Coopest, which gave rise to similar institutions in Eastern Europe. It is based on collaboration with selected institutions in a region who thus receive seed capital with which to generate a new source of funding in the area. Risks are carefully assessed and generally the results are positive and give participants a reasonable rate of return over the duration of the project,” he said.

“The bank could even get on to the board of these institutions and take a much more proactive role than it did in the past.”

The financing foray overseas is complemented by the provision of expertise. In a sense, it is a replica of the model the bank adopted in Malta with the setting up of APS Consult, a consultancy service aimed at improving the usage of funds in sectors like agriculture and fisheries, social welfare and sport.

“We felt that what was lacking locally was not capital. Over the past decade, there has been a massive capital injection in the Maltese economy through budget deficits, EU and other foreign funds and the banks’ credit creation. This year alone, there is a projected injection of around €600 million in the government’s budget. The key questions are: ‘Where is it going?’ and ‘How is it being used?’

“What is often lacking in a community is the ability to bring people together, to work together, to organise sectors. Thus at APS Consult we teamed up with consultancy firms from abroad to bring in directly experience from EU countries. For the sector of agriculture and fisheries we cooperated with the Danish Farm Advisory Services, and for the Sports sector we collaborated with the Istituto per il Credito Sportivo. One can learn a lot from the experience of others even in the basic architectural/structural design of projects.”

There is still a lot to be done in various sectors. Economic activities have to be addressed in a holistic manner.

He referred again to the Pitkali issue: “But similar considerations apply for herdsmen and fishermen, both with regard to the payments system and the modernisation of the abattoir and fisheries. And the switch to producers’ organisations as an effective instrument of operations and culture change has been rather weak – and in some cases an outright failure.”

There has to be, in his view, better synchronisation between policy objectives and the means to attain them.

“You need clear objectives, setting out what you want to achieve, over what time period, stating how you are going to monitor them and speedily rectify the shortcomings that are bound to emerge. Unless these units are in place you will end up with the situations that we saw recently at the Pitkali, or Mater Dei or the entrance to Valletta.” he said.

“It is for this reason that the operations of APS Consult are being reconsidered with staff redeployed and its future involvement reassessed. We are still collaborating with public and private sector entities on several matters, like for example, social enterprises or family businesses – but our involvement will become more pronounced after we understand better the way ahead so we can participate effectively. Our contribution to several sectors through seminars and other initiatives are still valid,” he pointed out, referring to the impressive stack of publications APS has commissioned on various topics.

Within this context, what does he think of the setting up of a development bank?

What is often lacking in a community is the ability to bring people together, to work together, to organise sectors

“To do what? If such a bank is given a wider objective of assisting development in, say, the Mediterranean or any other geographical area, then one may consider it. But its reason for being can be queried if restricted to Malta.

“If we uphold the position that the Maltese economy did not lack funds but needs know-how to coordinate initiatives, simplify economic incentives and encourage entrepreneurship with long-term perspectives, then what is really needed is a ‘moderator’ to facilitate change, and encourage mergers to create stronger economic players and an understanding of where the value added in the future is coming from. From rentals? From competitive provision of other services? For whom are such services directed?”

The development bank is not the only new bank that he is sceptical about. Prof. Delia is also not impressed by the growing number of banks opening in Malta, believing that the stress on quantity may be short-sighted, in the sense that it could lead to conflicting objectives and strategies by the respective institutions.

An economist by profession, Prof. Delia sees such players as juggling within an imperfect ‘monetary union’ operating in the absence of a unified fiscal regime within the eurozone.

“One can no longer refer to one euro system, even though no one is talking about it,” he said.

“When Malta joined the eurozone, local banks opted for an interest rate regime which did not adopt the Euro Interbank Offered Rate (Euribor) as its base. They stuck to a different rate because their cost of funds had to account for local considerations. They supported this model for the past several years, notwithstanding the claims by monetary authorities in Malta to switch to a different rate regime. And they managed to generate a stable environment in which local operators could create wealth while savers could still trust the financial institutions with their savings.”

ECB president Mario Draghi is encouraging investors to move out of sovereigns and create cash to move into more risky product. In the process, the market has reduced the interest rates paid to record lows, indeed in some cases even to negative territory. But retirees find it hard to understand the logic behind such moves and they still expect to preserve their savings and be given a ‘reasonable rate of return’.

“I believe we acted responsibly, and the economic results for the Maltese islands in part speak for us. But one has always to look at the future with an open mind. And that is what we intend to do.”

An area where the Church-owned APS differs from other banks is in its dividend policy. Most years, it pays around €2 million in dividends, but retains €5-6 million.

“That is how this bank grew and we have to continue to rely on a prudent approach to dividends distribution in the future. Out of the shareholders’ funds of €110 million, €57 million is equity and the rest is accumulated profits.

“We have to keep a very high ratio of capital to turnover because rules are going to become more stringent from the regulatory point of view over the coming years. But we are considering several options for the future.

“Strong governance and prudent allocation of assets will continue to have a strong bearing on the future strategy of this institution”.

APS is currently in the final stages of appointing a new CEO, who will work hand in hand with incumbent Edward Cachia until his retirement in January 2016.

“This appointment will pave the way for many other changes. Not least the sources of capital growth which has to follow the decision regarding the way ahead for this bank and its subsidiaries.

“This decision will involve not only the employees and the board, but also the shareholders. These are challenging but at the same time interesting times. We look ahead positively and prepare ourselves for the more stringent conditions of operations that lie ahead”.