Bank of Valletta reported an interim pre-tax profit of 50.7 million, a decrease of 21 per cent. But €50.7 million is still nothing to be sneezed at. So why are the banks so concerned about calls to narrow the interest rate margin? BOV chairman John Cassar White spoke to Vanessa Macdonald, explaining why doing that could prove to be short-sighted. He also revealed that the bank is considering funding from wholesale markets and that if more capital were needed, the shareholding might need to be reviewed, including the role of Uni Credit.

Core profits are going down. Is this something that you should be worried about?

Core profits are the lifeblood of an organisation and even if they go down by 1 per cent, it is something the management of an organisation needs to worry about.

We are no exception. Over the past four years our core profits initially stopped growing and then started to show a slight decline. However slight that decline is, I think it is very important we address it.

The Governor of the Central Bank is not impressed. He still seems to believe that whether they are going down or not, they are still very healthy at €40.6 million. Should some of those profits be sacrificed to offer more help to the business community?

First of all, out of our net profits, a third of the dividends goes to public coffers. The other third goes to shareholders and it is important that they are rewarded for the risk they take in investing in an organisation. We are seeing a lot of volatility in the equity prices of banks, not just in Malta but internationally, which means the value of shares can go up or down and they are no longer considered a risk-free return – if they ever were!

The other third we plough back into the business. This year we are undergoing very tough exercises, which could mean that certain banks will have to increase their capital. Regulators are getting tougher as they want banks to use more of their own capital to cushion against the negative effects of a downturn, whatever the cause, and not to rely either on bailouts or perhaps, more importantly, on bail-ins, which means depositors would have to pay.

The point made by the governor of the Central Bank and by other people is that banks – when compared to other banks in Europe – may be charging too much for the risk they take. I am not the best person to judge whether this is a reality and we welcome the review of present market practices to see whether there is anything which is not above board being done by banks in Malta as far as charging interest to our clients is concerned.

However, I emphasise that the dynamics of how we determine what interest rate we charge our clients is what it is. We charge on what we perceive to be the risk that we are taking with our depositors’ money.

To put it more simply, some customers are given a lower interest rate than others simply because we perceive their business to be much stronger than that of others who are charged higher rates.

What makes a business stronger? Mainly it is capital and we always advise our clients to invest more in their business and have a strong capital base. Also, the quality of the organisation’s management, because Malta is small and we know what a particular company can achieve, according to its good or bad management.

There are also the costs of securing the money we lend. The model we have is basically to collect money from our retail customers, rather than to rely on the wholesale market or on ECB funds, which makes the cost of funds higher than it is for other banks which get their money from the wholesale market. We believe this is a good strategy and I think when you consider everything, the prices we charge for our lending is a fair one.

There is no disputing that if SMEs are discouraged from borrowing, there won’t be growth, and if there is no growth, the bank will not have new customers. Are you throttling economic growth?

I don’t think so. We have special schemes for small businesses like the very successful Jeremie scheme. This is a loan with less onerous clauses: lower interest rates and less security...

Is that one of the issues? People are talking about the interest rates charged to SMEs but isn’t it just as much of a deterrent for them to have to put up so much collateral?

The issue of collateral ties up to the point I made about capital. In Malta, traditionally you only needed Lm500 to set up a company and it is ingrained in the mindset of many business people: if they can, they will only invest the equivalent of Lm500 and this is very much the wrong way to start a business. They prefer to invest that money in property or in some other financial assets which are not part of the assets of the company. This is why banks ask for so much collateral: it is because so many businesses are undercapitalised.

If your capital is not enough to cushion the risk we are taking by lending you money, we will ask for collateral. This is causing a situation where rating agencies are telling us that we have a very heavy reliance on property as collateral and must do something about it. This is part of the business culture in Malta and we need to change it, encouraging people to put more liquid money into their businesses so that banks can then charge them less interest and also require less security in the form of property. This is a vicious circle we need to break.

We are at the moment negotiating new schemes to help SMEs in different areas – Jeremie does not cover the full spectrum of business activities. There are some businesses in Malta that are doing very well, like financial services and i-gaming, but these are not exactly ones that need to borrow money from banks!

We are concerned that demand is not as good. There are certain areas of the economy where, for whatever reason, business people are not feeling the need to invest more.

Honestly, I do not believe that banks are starving these sectors. As I showed in the press conference when we announced our results, businesses in Malta are among the biggest borrowers from banks throughout the EU and which shows it is not true that banks are starving small businesses from the money they need to expand.

This week, we set up a task force to consider what we can do with this availability of funds from either the ECB or the wholesale market

I do not think banks should provide venture capital. This is not their mission. Venture capital should be provided by the government or by rich businesses who will encourage young business people to take risks by helping and supporting them.

I was reading that nine out of 10 go bust after a while but the one that is successful compensates for the rest. In Malta we don’t have dozens of venture capital targets which could justify it.

As a bank, what we can do is provide loans with less onerous clauses – what we call ‘security light’ – which for new business people would be more manageable than providing the security we normally ask for.

Once the new European Parliament takes over, I understand that one of the things they are discussing is a new European investment fund package which will encourage banks in the different countries of the EU to support more small businesses.

You said businesses need a change in culture but let me challenge you. Does BOV need a change in culture? Just because it has so far had a business model based on depositors’ money, does that mean it should never go for wholesale and ECB funding? Why are you still sticking stubbornly to the old model?

The bank needs a change in culture and we are at the moment going through a strategic review of what we should be doing in the next five years.

It is no longer sufficient to plan for the next year, especially when that consists of incremental changes and improvements to our business lines.

When I came here last year, I insisted on the importance of our executives changing their attitude and planning. And part of this is exactly what you are asking.

We are challenging ourselves... Our model of relying on the retail market is very important and will continue, but this week we set up a task force to consider what we can do with this availability of funds from either the ECB or the wholesale market.

Ironically, at the moment, the bank is very liquid as most banks in Europe are. Part of this might be because banks are rigid – I have to admit – but part is perhaps that business people have no appetite to invest more. We have to work with the European Parliament and European Commission to come up with ways to stimulate the economy.

In the past three years, there has been an obsession with regulation. I call it an obsession because although I agree there is a need for more regulation, it has to be combined with realisation that unless the economy grows, unless families feel more at ease with the income they are getting, and unless unemployment levels are brought down, the European economy will not grow enough to make people’s lives better.

We are very conscious of our social obligation. The economy is part of the social infrastructure of this country and unless we are more daring and not rely on old conservative formulas, we will probably stall economic growth and that is certainly not something we want to do.

I was very surprised that your impairments went down last year, especially when you have an asset quality review looming which may force you to increase it substantially. Why didn’t you take out more collective impairments in this interim report? It will be more of a shock next year!

Last year, we increased our impairment provisions substantially. We are now being more granular in the assessment we are making of each and every account. However, I must emphasise that this does not mean that there more impairment provisions will not be needed in future. Once the AQR is completed, we will know, probably just before the public does – it is a very transparent exercise – I have no hesitation in recommending more provisioning if need be.

This ties up to the question of what dividend we pay and how much money we plough back into the business... I know shareholders will only be looking at how much dividend they are getting because that is their main interest. This year, there was some disappointment because we reduced our dividend because profits are down.

The Central Bank, very rightly, is focusing on the charges we impose. It is its role I respect as it has an interest to see the economy growing.

But as a bank we want to make sure that BOV has a very sound capital base and that it is prepared in case there is a downturn in the local economy or in the European economy.

I am confident that we are looking at all these aspects. I cannot promise that dividends will be higher at the end of this year or even next year. I cannot promise that there will not be any need for more provisioning. No matter how much we try to plan and try to forecast what our results will be, this is a very volatile environment. One thing we know for certain is that regulation is going to get tougher and our regulators – the European Central Bank and the European Banking Authority – are going to be much more demanding.

Hopefully, we will not have to increase our capital. But there is a difference between what one would wish to happen and what realistically could happen.

People might not be as aware of the fact that the MFSA is vetting the amount of dividend declared...

For the first time this year, the MFSA very rightly used a prerogative it has according to law to request the banks to discuss their dividend policy on a micro level. This year it was for the half yearly results and, as far as I know, this is the first time they have asked for this rather than us just informing them...

Did they accept your proposed figure?

Yes. I was very clear with the board that we should not recommend anything to the regulators that we did not feel comfortable with. And it was not about keeping our shareholders or our staff happy; it was not about keeping our egos happy.

Every organisation leader would like to have a string of successes in their results. Sometimes there is volatility in our industry and we have to take account of that.

We will have to consider everything, including whether our shareholding structure should remain as it is

We discussed it at length with our regulators and they seemed happy with what we were proposing, which was a very prudent approach, meaning we reduced our interim dividend by the same level that our core profits went down.

Let’s talk about the shareholding. Is there anything on the horizon which could affect the government’s shareholding and is it time to start looking at the Uni Credit shareholding to see whether it could be better utilised through another strategic partner?

This is a very interesting question. I think Bank of Valletta has a very particular set-up which to some extent could – I am not saying that it does but that it could – affect its governance, in the sense that it does not have a majority shareholder.

The government is the largest shareholder but not the majority shareholder.

We also have Uni Credit which is not active at all in the running of the bank, even at board level. It has a director on the board, who attends meetings, but that is not an active role.

Uni Credit is facing challenges itself like most big European banks which have to increase their capital.

So this is an evolving picture. I do not want to speculate but this very much depends on what is going to happen after the AQR and the stress tests.

If we need to increase capital, that may be the time to consider how we are going to increase it. There are some painless or less painful ways of increasing capital than others. But when we get these results, it will be the right time to see which is the most appropriate way, if there is the need, to increase capital.

So far, the indications according to our present calculations are that there may not be a need. But a stress test by definition is taking worst case scenarios. So we will have to consider everything, including whether our shareholding structure should remain as it is or whether we should be considering some other structure.

We could leave it as it is and secure capital in a way which does not disturb the present shareholding.

Of course, the majority of shareholders in the bank, both in terms of volume and as numbers, are the small investors. Some of them may have an interest in subscribing to more capital but some may say they do not wish to invest anymore and that they are happy with what they have.

So we are keeping our options open.