Med Bank: a different business model

Med Bank: a different business model

Mediterranean Bank was given a second chance after its embarrassing default in 2009. But its business model – radically different to that of Malta’s major banks – has not always been fully understood or appreciated. Vanessa Macdonald spoke to CEO Mark Watson soon after it announced the purchase of Volksbank for €35.3 million.

Why did Mediterranean Bank buy Volksbank?

It had been established in 2004/2005 with a completely different operating model. It was set up as essentially an ‘offshore-style’ private bank, but that business model did not work.

I put together a deal with my private equity business, AnaCap, and we recapitalised the bank and adopted a different strategy.

It is one that people in Malta have not seen before, but in order to raise the capital, we had to demonstrate how we were going to get a return.

So we built up the treasury function of the bank and got it into profitability very quickly. We then used that profitability to build up the functional capability of the bank.

The front end that we have become known for is savings and wealth management. We are very focussed on a mass affluent local audience. Most banks’ customers are people who don’t have money, who go to a bank for a loan; we have 18,000 (mostly local) retail customers, customers who have money.

We started off stabilising the funding of the balance sheet with a very successful term-deposit strategy. The products attracted people with money, not high net worth individuals but mass affluent ones from across society. We then supplemented these innovative savings products with access to broader investment products.

Over the last couple of years, we rebuilt the IT systems that support the bank, which enabled us to put up an online execution platform that has been quite successful.

However, we wanted to put together a business model which supported international expansion. So we recently opened a branch in Belgium focussing on the mass affluent savings investment and wealth management market.

It operates under the Me Direct brand but we operate it almost entirely from Malta – we have just five people in Belgium and 230 here. We are contemplating turning it into a bank in the near future, a separate legal entity as a subsidiary, operating under the Me Direct brand.

We hope that as we build up our business in Belgium, we will be able to go into other countries, still operating the business from Malta, as it is very efficient and effective here.

One area we were not so well known for was our corporate banking capability. In the last four years, we have built up over 700 corporate clients, mostly here in Malta, and it is an area that we want to continue to build up.

Although Volksbank does many different things, the attraction was that it could expedite that strategy of building our corporate lending business.

Didn’t Volksbank whittle down most of its corporate business prior to the sale?

It did, but it still has assets of over €150 million which allow us to put our capital into the local market at a quicker rate than we could do organically.

Over the past three years we have become a much more significant presence with a balance sheet in excess of €2 billion and a deposit base of over €700 million. We now have a capital base of around €140 million which is going to grow quite quickly and, on many counts, we are probably the third largest bank now in Malta.

Does taking over Volksbank mean you will go into retail loans?

We already offer loans to corporate customers but we don’t have ambitions to become a full-scale bank. I think that HSBC, Bank of Valletta, APS and Banif serve that market very well.

I think it is very difficult to compete with them in any kind of meaningful or sustainable way. But there is scope to grow local corporate business.

Analysts commented recently that you are taking more from the economy than you are giving back and that you could play a bigger role...

Buying Volksbank is partly to do with deploying our capital into the local economy. I acknowledge that we have a different model to other banks, but the fact that we have gone from five employees to 250 overall – with very well-paid jobs – is a significant contribution to the local economy.

The fact that we have aspirations to operate international business from Malta is strategically quite significant for the local economy. Just because you have a different business model doesn’t mean it is an inferior business model.

That was not the implication. However, there is an expectation, for example, that as a local bank you will invest in government paper, for example.

We already hold government paper.

A significant amount?

Many tens of millions. And the amount will continue to grow. But as you know there is a European-wide desire to break the links between governments and banks.

Part of what we are doing with Volksbank is investing in that local strategy. We think spending €35 million is a meaningful and significant investment.

It is probably a fraction of what the bank was worth...

You see a rate of 5.5 per cent and you say they must be investing at 10 per cent, which would be very risky... but that is just not the case

We believe it was an attractive opportunity. It was an opportunity that came up which was attractive in that they were willing sellers and we were willing buyers. Time will tell. And it is clearly more than anyone else was willing to pay for it.

With regard to corporate loans, there has been a lot said about lending rates to SMEs. What is your take on that?

There is a lot of inertia in the local market. People have got very long-standing banking relationships and they are often quite complex between personal and corporate relationships.

We put together what we thought were attract-ive financing packages but got tied up with other considerations that we could not necessarily deliver because we are not a full service bank.

We started lending to the local market a year ago and hopefully Volksbank will get us along that path quicker than we would otherwise have managed.

The Governor of the Central Bank at one time made thinly-veiled comments around the time when Mediterranean Bank was embarking on its fixed term deposit products, saying he was very unhappy that the Depositor Guarantee Scheme was being used in marketing materials to lure people into higher interest rate products... was he referring to Mediterranean Bank?

It is best you ask the governor.

You used the scheme in your marketing and have since toned it down.

It was never actually a part of our strategy to build a business around the Deposit Guarantee Scheme. It is not unique to Malta – the scheme is in place across Europe. It is there to provide stability in the banking system but also to support competition. When you come into a market which is dominated by two large and successful institutions, you have to do it by price.

But to offer interest rates so much higher than the rest of the market sustains because of their business model surely means that you had to invest your assets into things which are perhaps riskier...

I disagree with that completely. Look at our balance sheet and the quality of the diverse assets on our balance sheet. They are very prudently managed. I think what you are articulating is actually a view which is born out of ignorance and people who are too lazy to look into the actual facts.

I found an article written some years ago, at the time of a bond issue, where a stockbroker said there were places where you had over 3.5 per cent of your portfolio invested with a single issuer... has this changed?

To get a higher return than the interest rates that you are paying your customers, wouldn’t you have to invest in riskier products?

We started with a treasury portfolio, which was wholesale-funded. The rate at which we were funding that Treasury portfolio was one per cent or less. If you look at the term funding of local banks, it is actually very short-term in nature, because there are so many sight deposits, which is something that people should probably pay a bit more attention to.

I have no issues with any of the other banks in Malta. I think that they are actually pretty well run. But there is a tendency here to throw stones at people who come in with a different business model. And I have actually ignored it. I just got on with trying to build a business.

We have a funding model where 90 per cent of our funding was at less than one per cent. What does that mean? I pay out for five-year funding at 5.5 per cent but the average cost of our funds was very low, just north of one per cent. And people did not actually look at how the balance sheet was funded. So you see a rate of 5.5 per cent and you say they must be investing at 10 per cent, which would be very risky ... But that is just not the case.

We were paying out for term with an average duration of just over two years, which is significantly longer than any other institution in Malta and quite significantly more than many other institutions in Europe.

So in terms of stability in the balance sheet, we are very focused on both the capital ratios that we have and the liquidity that we managed on the balance sheet.

Your liquidity is much higher than that of local banks...

Yes. This is something that we have always been very cognisant of.

It was not that we were investing in 10 per cent assets! We were actually investing in very high quality assets which, as we built stability into the balance sheet, we turned into an international corporate portfolio lending business.

We have built a portfolio of €900 million of corporate credits in the internationally syndicated loan market, which is very diversified by geo-graphy and industry. That is supplemented by our treasury portfolio, which is decreasing in importance but from which we still manage to generate some attractive returns.

The stock exchange has been trying to create a market maker...

To make markets, which is my historic business, you need liquidity. The natural investors in long-term securities are pension funds.

They build up their portfolio and then lend those securities out to people who can use them in the shorter term and get a better return on their investments.

You don’t have an institutional investment market in Malta. You have a very vibrant retail investment market, principally based around bonds. But building a market-making capability or liquidity is not just about deploying capital but also about the supporting functionality which can make these things happen.

Unfortunately, Malta structurally is not at that point yet and it does not have an institutional investor base that can facilitate lending on repo market for securities.

If and when that occurs, you could start to develop market-making facilities.

But it is very difficult in pure retail markets, which Malta is, to garner any liquidity.

You mentioned the lack of private pensions... is Med Bank ready?

If you look where we operate it is long-term financial planning; funds are at the centre of what we do.

We work with big international providers like Morning Star, one of the world’s largest independent research houses, for algorithms and analysis that drive our models for asset allocation. This is something we have planned for...


Mediterranean Bank was set up in 2004 and licensed in 2005. But in November 2008 it failed to maintain sufficient ‘own’ funds and was fined, and the Malta Financial Services Authority restricted its licence.

In 2009 it was acquired by AnaCap Financial Partners (91.4 per cent), a private equity firm, with the balance being held by top bank management.

As a result, the bank received a capital injection of €19.2 million via the holding company Medifin and the MFSA removed the restrictions on the licence.

It now has six branches in Malta and an online branch in Belgium.

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