Contrasting bank strategies and some common features

Contrasting bank strategies and some common features

Two of the banks in Malta licensed to conduct retail banking – Banif Bank Malta and FCM Bank – stand out for their divergent strategies but at the same time have something in common. As for their common features, they both have accumulated losses which depleted their capital base. Moreover, both banks market themselves heavily through the local media. As they sponsor the daily financial report and the sports report at prime time immediately after the 8pm news bulletin on TVM, it is obvious that their aim is to attract local depositors.

Banif has a longer record as it was incorporated in 2007 but commenced operations in 2008 while FCM was established in 2010. FCM operates from a single office in St Julian’s while Banif opted for the more expensive strategy of setting up a branch network that presently consists of 12 branches in Malta and Gozo. Its stated aim is to capture 10-20 per cent of the local market and to operate 22 offices. This implies a costly structure.

It is not surprising therefore that, as at the end of 2013, Banif had run up accumulated losses of €10.9 million (one-third of its paid-up capital of €32.5 million). In that year it returned a post-tax profit of a mere €124,000 i.e. lower than the €173,000 registered the previous year after four years of successive losses totaling €11.17 million as a result of which the bank was constrained to increase its paid-up capital by €7.5 million (from €25 million).

It is significant that net impairment losses increased steadily and stand at €1.32 million as Banif’s loans and advances rose from nearly €7 million in 2017 to €460.6 million in 2013. One wonders if higher impairment losses would have completely wiped out the insignificant 2013 profit had not the bank been relieved by the government of the much commented upon lending of €2.4 million to the former temporary leaseholders of the Café Premier in Valletta.

Out of €460 million of loans and advances to banks and customers as much as €117 million (25 per cent) were classified as ‘related party balances’ i.e. lendings to the parent company; related banks; and also to Banif’s directors. It remains to be seen if specific impairment losses will become necessary in light of the parent’s financial problems and the general uneasy banking situation in Portugal.

On the positive side, it is somewhat reassuring to see that Banif reduced significantly its loans and advances exposure to banks from 57 per cent in 2008 to 26 per cent in 2013. Customers’ deposits show a remarkable increase from €21.6 million in 2008 to €554 million (76 per cent of which are locked in on term deposits) in 2013. Thus it is clear that Banif’s marketing is effective.

An important factor is that Banif’s future has yet to be clarified following the European Commission’s approval of a restructuring plan linked to the bailout of the Banif financial group by the Portuguese government which included a condition that the group disposes of its controlling participation in, among others, Banif Bank Malta. The MFSA issued a statement earlier this year that a change of shareholder is a “very normal process” in the banking sector and should not be of concern to depositors. It was pointed out also that two major shareholder changes had already been carried out in “seamless” fashion in Malta.

It was stated by Banif that the bank is looking for a strategic partner that would buy the shares held by the bank’s parent company (78.48 per cent). It remains to be seen how long this will take, as well as whether the new shareholder will be prepared to pump more capital into the local operation.

The regulator is said to be insisting on a further capital injection of €17.5 million with a possible dilution of the existing 21.52 per cent stake held by local shareholders, who may well decide not to take up their option for increasing a shareholding on which, to date, they have received no dividends.

It will be recalled that these developments resulted in Banif publishing its 2013 results at the end of May i.e. one month later that the statutory deadline. This attracted a lot of comment in the printed media at the time but so far Banif has not come up with news of any developments on its search for a new majority shareholder. Presumably such shareholder would also be expected to take over the subordinated unsecured loan of €5 million made in 2012 by the parent at a very high interest rate of 10 per cent. This is repayable in 2017.

Coming back to FCM, its first published accounts were as at December 31, 2011 and covered a period of 17 months. Accumulated losses as at December 31, 2013 were €0.7 million i.e. more than double the 2012 figure but still less than 1 per cent of the paid-up capital of €8 million (all in cash/cash equivalents). Customers’ deposits rose from €100,000 in 2011 to €16.2 million in 2013 – a significant rise in just two years.

It is noteworthy that these are all classified as being term deposits. Thus the emphasis is on customers being locked in for a defined term although FCM’s advertising now includes an attempt to attract savings accounts customers.

However, this must be viewed in light of the well-above market interest rates that FCM is offering. At present the advertised rate is 2.1 per cent p.a. on a bonus savings account plus a bonus of 0.25 per cent p.a. The question is how the bank can sustain such a high cost of raising funds that are on call. These are well in excess of interest rates offered by the major retail banks in Malta and so one needs to examine in what sort of assets these funds are invested – more so if these are not employed locally.

The assets side of FCM’s balance sheet shows that virtually the entire amount of customers’ deposits in placed in investments. These are further described as being “debt and other fixed income instruments” about half of which are held to maturity and the rest on an available-for-sale basis. The bulk of these (97 per cent) are said to be rated BB+ or lower i.e. just one grade above low credit quality bonds (technically known as non investment grade or junk bonds).

Banif Bank Malta and FCM Bank both have accumulated losses which depleted their capital base

The sole shareholder in FCM is a UK-based asset manager said to have been active in the European credit market since 2007, i.e. not long before the bank established itself in Malta. So it is likely that the investments are in instruments issued by institutions registered outside Malta – and therefore not easy to monitor. Moreover, the high cost of raising funds in Malta points to these being high yielding investments and brings to mind the obvious maxim of “the higher the rate, the higher the risk”. Moreover, what benefit is Malta getting if deposits raised locally are re-employed entirely outside Malta?

On the positive side, it is to be mentioned that, in 2011, 47 per cent of FCB’s exposure by location was to problematical countries such as Spain and Portugal but this had disappeared by 2013. Indeed the financial statements state categorically that the bank had no exposure to Greece, Ireland, Portugal, Spain and Cyprus. Another positive factor is that in 2011, the bank had an exposure of no less 75 per cent to other banks. This item disappeared from FCM’s balance sheet by 2013 although, of course, one cannot exclude the possibility that investments held include an element of instruments issued by banks.

One final comment. Unlike the main retail banks, both Banif and FCM publish their annual audited accounts only on their respective website and not in the print media. Yet they must spend hundreds of thousands of euros annually on their marketing on TV, etc. One wonders how many of their local depositors bother to look up the annual financial reports of these banks (60/70 pages!) on their websites!

It is time that the regulatory authorities went back to the days when banking legislation made it compulsory for all deposit-taking banks in Malta to publish in, at least, one English and one Maltese language daily newspaper a summarised version of their annual financial statements.

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