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Interview: 'I do not see the risk of a property bubble', says BOV CEO

Mario Mallia says regulation has made bank lending more costly

Mario Mallia: “We have to be selective about which projects to finance, so that any new lending to the sector is linked to good projects, where risks are mitigated. Photo: Jonathan Borg

Mario Mallia: “We have to be selective about which projects to finance, so that any new lending to the sector is linked to good projects, where risks are mitigated. Photo: Jonathan Borg

Bank of Valletta, Malta’s largest bank, has a conservative risk appetite, a lot of liquidity and a pulse on the economy. CEO Mario Mallia talks to Kurt Sansone about a planned share capital increase, the property market and Deutsche Bank’s withdrawal of US dollar services.

Bank of Valletta’s board of directors are proposing a resolution at the forthcoming extraordinary general meeting to increase the authorised share capital to €1 billion from the current €500 million. What is the principal reason for this?

There is a very practical reason. The authorised share capital is the limit, and the bank currently has €420 million in issued share capital. If this year we proceed with another share issue of €150 million, we will surpass the limit. This means we have to seek permission from shareholders to increase the authorised share capital. The bonus shares we issue every year also eat into the authorised share capital. This is why the board is proposing a substantially higher limit, so that shareholders will not have to be inconvenienced every time the authorised share capital has to be increased. We are not going to use the billion euros but it gives us ample headroom.

But is this move also in line with the emphasis being placed on banks by regulators to have higher capital buffers?

That pressure will always be there, but in this particular case, it has nothing to do with any such requirement. In this case, it is not driven by the regulator.

What will BOV do with the €150 million share issue it is planning for the next 12 months?

BOV and another two Maltese banks are considered to be systemically important banks in Malta. This means that if something happens to them, they can cause serious problems to the country’s financial stability. As a result of this status, these three banks are regulated by the Maltese financial services regulator and the European Central Bank. These banks, including BOV, are also required to keep capital buffers that are much higher than those requested of other banks that are not systemically important.

This is the principal driver for the forthcoming share issue. BOV wants to secure the necessary capital buffers through the share issue, because in its absence it would have to scale down on the distribution of dividends and be required to set profits aside. We have always paid fair and attractive dividends to investors and we intend to continue doing so.

A common complaint bankers have been making since the 2008 financial crash is the rising cost of compliance being imposed by regulators. Can you put a figure on it?

It runs into the millions, but it is difficult to put a tangible figure to it because it is also a question of shifting resources to deal with compliance. For example, our finance department has to pass on volumes of data to the ECB, which means the department’s resources are being used to produce these reports rather than preparing more detailed management accounts. Compliance has not only pushed us to add resources, but it has also absorbed resources that could otherwise be more usefully employed.

The anti-financial-crime department has to increase from three people to 40 over the next two years. There are quantifiable costs, but there are a lot of non-quantifiable expenses. But there is also the depositor compensation scheme, which banks are obliged to finance by contributing to the fund. Our contribution to the fund has increased at par with the increase in deposits. Compliance is not a bad thing; on the contrary it is desirable, especially to protect the country’s reputation, but the costs do impinge on our profitability.

Compliance comes at a cost, but is this a cost borne by customers through higher bank charges?

Obviously, compliance charges are levelled depending on the client’s risk profile. If you have a foreign company that has a multi-tiered shareholding structure, its compliance costs will be higher. Retail customers do not have these complex structures, and so we do not charge compliance costs to this tune. If the client wants to use our banking services and retain a complex structure, she will have to pay the relevant compliance costs.

Risk management has assumed greater importance over the past few years. Is BOV equipped for this?

Risk management is an area we have focussed on. It was prompted by regulation, but this does not mean we were waiting for regulation, because banking in its own right is a risk-management business. We have a fully fledged risk management department with a chief risk officer, and the bank has a defined risk appetite. The risk appetite is a statement made by the board on the level of risk the bank is ready to assume. The risk appetite parameters are approved by the ECB and MFSA.

How do you assess BOV’s risk appetite?

 Quite conservative. But I believe this is also true for the whole Maltese banking sector.

The Individual Investor Programme has attracted very wealthy people. Large investments in the property sector are being prospected, partially driven by the influx of foreign workers and investors. The economy’s dynamics seem to be changing, with a greater onus being placed on risk. How will BOV respond to this?

The economy has been internationalised. Whereas a few years ago when a Maltese client walked into the bank, there would definitely be someone who would know him, today, with the expatriate population growing and the IIP, we get customers from all over the world. This means that the bank has had to ensure its compliance structures are up to scratch to protect its reputation and that of the country.

We are upping our act to be able to tap into these new opportunities, always within the approved risk appetite and compliance constraints. If a client clears the compliance hurdle, she will be on board, but this does not mean compliance monitoring stops at that. This is particularly true for corporate customers, where the review process is ongoing.

New regulations are calling for enhanced due diligence on politically exposed persons (PEPs) which will encompass a wider cohort of people linked to the PEP individual. This adds to the compliance cost. Has BOV calculated this new cost?

PEP monitoring already happens at all banks. The definition has now been widened to include more people. The monitoring process will remain the same, but it will now have a wider scope. I do not see significant additional costs in this regard, because the infrastructure is already in place.

The business community has often complained that access to credit is a problem. What is your perspective as a banker?

Regulation has made lending more costly. When a bank lends money, it has to set aside capital against that loan, so that if it goes bad, the losses will be absorbed by the shareholders and not by the depositors. Regulation has increased the amount of capital that we have to set aside, especially for loans deemed to be higher risk. It has made it more expensive for banks to lend. Nevertheless, I do not think in Malta this is posing a major obstacle to bank lending. As a whole, bank finance in the economy has not decreased.

Today, I do not see the risk of a property bubble

Last year alone, finance provided by the Maltese banking sector increased by a net three per cent after taking into account the repayment of loans. Obviously, the risk appetite is what it is, and the bank has to ensure that business proposals presented to it are acceptable. Whenever this was the case, BOV never had problems in issuing loans.

The bank has a problem of liquidity, which earns us nothing and which means we are more than willing to lend money. But when we lend, we have to do so against serious proposals. The client has to do his homework and put forward a proposal that shares the risk equitably between the bank and the investor. A proposal that shifts all the risk onto the bank and almost nothing onto the company shareholder indicates there is something wrong.

The economy is experiencing a property and construction boom that looks to continue for quite some time. What relationship do you foresee between the banking sector and this boom, given that the property sector was to blame for the global financial crash of 2008?

The 2008 crisis was triggered by sub-prime lending in the US, when banks threw caution to the wind and started lending to non-bankable persons. This led to the domino effect that hit the rest of the world.

As a result of that, the regulator today is particularly focused on property lending. We continuously tell the regulator that Malta’s economy cannot be compared to that in mainland Europe or the US, because the dynamics of the property market here are different, for the simple reason that land is limited.

There is a natural situation that acts as a crisis stabiliser. This does not mean the property sector in Malta is not subject to downturns, and we have experienced them, but not in as dramatic a fashion as elsewhere. Having said that, we do not want to expose ourselves in any sector unduly.

We avoid concentration risk in any particular sector. If property finance demand is high, we have to be certain that we do not overexpose ourselves to it. This also holds true for individual companies.

We have to be selective about which projects to finance, so that any new lending to the sector is linked to good projects, where risks are mitigated.

This means BOV is still open to lending money to some of the large property projects in the pipeline.

Yes but in the context of our risk appetite, our determination not to be overexposed to a particular sector and also with regard to what our regulator is telling us.

We often hear the warning that Malta is heading towards a property bubble that can have dire consequences if it explodes. This is a warning that we have heard quite often over different periods, but somehow the bubble has never exploded. Do you subscribe to this idea?

Bankers are very good at identifying bubbles. When we had the 2008 downturn, we anticipated it and reined in our property lending. Today we are exercising caution, however I do not believe we have a property bubble, for the simple reason that the supply of property is being driven by sustainable demand.

I am talking of property of a certain calibre and quality in certain locations, even office space, where the demand is very strong. As long as the demand remains strong, and we are witnessing this, I don’t believe we will be in the position of a bubble.

You may rest assured that if the bank sees the first signs of a bubble, we will be the first to close the finance tap. We have done it before and will do it again if need be. Today, I do not see the risk of a property bubble.

What does BOV plan to do with its excess liquidity?

Liquidity is the result of increased activity. From a prudential point of view, liquidity gives the bank stability. But too much liquidity can be a problem in the current circumstances, because it does not give you a good return. Placing your liquidity with the ECB will even earn you negative interest rates, because it is considered safekeeping.

If you place liquidity in good quality paper such as European sovereigns, the best you can get is next to nothing in the short term or very low returns for longer terms. There is a problem. We do not want to impose the negative interest rates on our retail customers and so we have to absorb the cost. We are diversifying our portfolio within the established risk appetite. We do not want to widen our risk appetite, but we are shifting investments from deposits with banks to high quality corporates, where at least you get a thin margin.

Last month, Deutsche Bank withdrew the correspondent banking services it offered BOV. What is the problem?

The problem is one of risk and return for correspondent banks. Malta and other small jurisdictions are not exciting opportunities for correspondent banks, because our volumes are low and so are the returns they would expect. Regulations pressing down on correspondent banks require them to not only carry out due diligence on the banks they deal with, like BOV, but also on the customers of their clients.

The ever more onerous requirements on correspondent banks have increased their costs and the last thing they would be interested in is taking further risks in small jurisdictions, where it does not pay them. The major global players are pulling out of correspondent banking, and that is creating a major headache for world trade.

Malta has experienced this through Deutsche Bank’s partial withdrawal on US dollar services offered to BOV. However, this was on the cards for some time and we pre-empted the move by setting up alternative arrangements with another bank. We have a number of banks with which we have correspondent banking relationships and our focus is not to be dependent on one institution.

Could it be the withdrawal of correspondent banking services was a result of the reputational problems created by the Panama scandal and the political fallout associated with it over the past year?

There was a lot of politicisation of certain issues that did not help. However, I do not believe this was a major factor for the withdrawal of Deutsche Bank. We have witnessed this phenomenon happening around the world, and the IMF has long expressed concern on the matter. In Deutsche Bank’s case, it is a question of this bank retreating operations across the world, and it started from the smaller jurisdictions.

It is being said that the Financial Services Arbiter is expected to deliver his decision on the BOV-property fund saga, involving some 400 clients, in the coming weeks or months. Will BOV adhere to the decision or will it appeal?

There is a legal process that allows anybody to appeal any decision taken by the arbiter in a court of law. We are cooperating with the arbiter, and after he delivers his decision, we will evaluate whether it is in the bank’s interest to pursue the matter further by appealing.

BOV eyes London office

Brexit is a bonus for Bank of Valletta’s decision to open a representative office in London, which plans pre-date the British vote to leave the EU.

BOV CEO Mario Mallia says the bank had long been eyeing London to tap a wider European customer base in line with similar offices opened in Milan and Brussels.

“The decision was not prompted by Brexit but the UK’s departure from the EU offers new opportunities and it helps to have a presence on the ground in London to meet institutions planning on relocating out of Britain,” Mr Mallia says.

The office is expected to open within a year as BOV seeks to diversify its sources of income by tapping the investment market, going into wealth management and funds.

“Having a presence in London, the world’s foremost financial centre, will help us along this path,” he argues.

It is part of BOV’s strategy to chase European business people and investors, which marks a difference from the bank’s past efforts to go after the Maltese diaspora in Canada and Australia.

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