A story on Bloomberg last April indicated Malta was among the smaller operations that HSBC Holdings Plc was considering pulling out of. At a strategy meeting in June, however, no mention of any operations was made. Is its presence in Malta now secure again? HSBC Malta’s CEO Andrew Beane spoke to Vanessa Macdonald.

CEO John Flint said at the recent HSBC strategy meeting that a priority would be the turn-around of low-return businesses, “improving capital efficiency and re-replying capital into high-return businesses”. Your return on equity is down to 11.7 per cent, and you cannot blame the local market as BOV’s in 2016 was 16.9 per cent. You are clearly not one of the higher performing businesses in the group…

I just returned from a week in Hong Kong with John, talking about the new group strategy and it is all about a return to growth and value creation for the group overall, after a period of necessary change following the financial crisis of 2008/9, and then latterly the need to change compliance standards in our industry.

All banks these days have to give shareholders a return above the cost of capital. Clearly, John is quite right, from my perspective, in saying that all subsidiaries have to play their role by delivering an acceptable return.

If you look at HSBC Malta, our return on an EU-wide basis is quite good, in a zero-interest rate environment, although we do see some scope to improve it.

Personally, I don’t see local banks as a benchmark for return on equity. We want to deliver a return which we feel is sustainable. John has set a target for the group as a whole of above 11 per cent by 2020 and I believe that Malta can play its part in that.

Your cost-to-income ratio in 2008 was pretty much on par with that of BOV but since then, HSBC’s has deteriorated. It was 43.8 per cent when Mark Watkinson took over as CEO in 2011, and went up to 55.6 per cent when he left in 2015. It was 66.2 per cent in 2017. Is it really about your risk profile or are your costs still too high?

We had to change our business model: it is a simple fact of life that the rules and regulations that banks need to operate within nowadays are different. Whenever you go through a business model change, it can disrupt some aspects of your financial performance, so some elements of our revenue, for example, have come down. This was consciously done as we changed some of our portfolios and adjusted the risk appetite we have.

A number of elements in the cost base are temporary and associated with change, and others are longer term.

The strategic plan we agreed with the board last February targets the move to ‘positive jaws’: where our revenues grow faster than our costs. This is also one of the measures that John has set for the group.

We want the cost-to-income ratio to be lower in due course. We are looking to build a strong, sustainable business for the long term, not just at a point in time.

In your message in the 2017 annual report, you announced more dividends. How does that tie in with the strategy?

Your capacity to pay profits or retained earnings through to shareholders as dividends depends on being able to demonstrate to your regulators or supervisors that you meet the expectations of the system in terms of risk-management. The quality of the profit in banking is as important as the quantum. You can easily make more profit by taking more risk.

But if you can’t demonstrate that you can manage the risk, you will never be able to turn that profit into dividends. We have been very clear to the market that we have, in this particular period, prioritised paying strong dividends above bank profitability.

Isn’t that all about appeasing the 70 per cent shareholder so they don’t shut you down?

It is a different perspective: the HSBC Group is a $200 billion corporation. Our thinking on the dividend has been more to do with the 9,600 minority shareholders, actually. The dividend is very important to them. If you look at the dividend league table that Edward Rizzo published recently, you will find that HSBC is at the top. That is a sign of our strength and something we are proud of.

Personal lending has gone up marginally but your corporate book has gone down by €300 million. Why is it shrinking? Are you not taking on new business or actively weeding out the weaker ones?

We had to change our business model quite significantly, particularly in the commercial division, to protect our business for the long term, and I think it is fair to say that we are now more selective in terms of where we have a risk appetite and where we don’t. In today’s world, you have to assess both credit risk and compliance risk for every single customer. So we bank fewer customers than we used to but we are comfortable with that decision.

A business model change is disruptive to asset generation and it has affected our commercial division. But we knew that would be the case. As we have said many times, the performance of that division has been in line with our expectations.

John said very clearly last week that this is now the next inflection point for HSBC and we are now ready to return to growth and value creation, and particularly for the customers that we have the risk appetite to support in a significant way.

We now have a strong, safe, clean business which we have the capacity to grow

There is still quite a lot of legacy that you need to clean up. I added up the loans that you classify as ‘substandard’ to ‘impaired’ and your personal lending went down from four per cent of the total to three per cent in 2017. But your corporate went up from 17 per cent to 18 per cent: the global amount of lending has gone down so the percentage is higher. But isn’t that rate still seriously worrying?

If you look at the credit quality of our corporate book, it is fantastic. We had more than a €100 million reduction in non-performing loans and I am proud of the progress the team has made. The bank considers progress on corporate non-performing loans to have been excellent and that the majority of positions that remain relate to legacy cases that are broadly well-secured positions in  slow-moving legal processes. I am happy with the credit quality, and on the contrary I would now like to see us take more risk in our corporate bank…

Does that mean you might consider new segments of business?

We are not going to change our risk appetite: it is not that we are going to start banking industries or companies that we did not before. But we now have a strong, safe, clean business which we have the capacity to grow.

Corporates have been with us on a journey to achieve new money-laundering standards, and doing due diligence which can be quite painful and very heavy on documentation; now we can have conversations with those customers along the lines of “let’s work together to agree how we can finance your growth plans”.

Because we have made so much progress, we can re-pivot how we allocate our capacity and we have already seen our new lending approvals up more than 200 per cent, compared to last year, which is an early stage indicator.

We have spent an enormous volume of our own capacity in the past two years to focus on compliance and risk-management with our corporate customers. Now I would like to take part of that time and spend it on growth. We offer access to global trade and capital flows that no one else can: I know our customers and my colleagues will welcome that.

What are you offering in terms of innovation?

We are lucky to be part of the HSBC Group, which I think of as a sort of app store, as it does fantastic innovation globally, which we can draw on locally.

One of things John drove as chief executive of our retail bank was to significantly increase investment in this area. And we can already start to see the benefits in Malta. We were the first bank to launch contactless payments and Touch ID so internet banking can be used without all those annoying passwords. We launched Face ID for corporate customers as well as for personal customers, and a new technology platform for small businesses call Fusion, which allows them to have personal banking on the same system. There is more to come: we are launching digital sign-ins at the branches so that customers do not have to spend so much time signing different bits of paper.

HSBC was the first bank to use blockchain for trade finance, which we piloted overseas.  I am hugely optimistic about the innovation agenda and how our customers are already benefitting.

In your annual report, you said the “long-term risk profile of the local bond market is increasing”. That is quite alarming. What did you mean?

The banking system intermediates between savers and borrowers and its role is essentially to manage the risk. If banks make risk management mistakes, it is absorbed by the capital that belongs to the shareholders. The depositor does not take a risk… and there is also the Depositor Guarantee Scheme.

A bond, by its nature, is a loan that disintermediates the banking system, working outside it. Investors in bonds make their own risk management assessment of whether that loan is a good risk to accept or not.

I think our concern as a responsible participant in the financial system – and it is not an HSBC concern directly – is that because there is a lot of liquidity in the market, people are searching for things to invest in.

We have seen the risk profile of bonds increase, with higher risk counterparties that are seeking loans from investors for a long period of time, not always with the provision of security, for example. Our concern is that it is very important that investors understand the risk that they are taking before they decide to invest their own capital to make a loan to another party. These are long-term decisions, because a bond is for 10 years – which is potentially a full economic cycle.

We have a new man at the helm of the regulator: what advice would you give him? Should we insist on bonds being secured, or should we focus on more investor education?

Ultimately, our collective obligation to the financial system has got to be what is good for society and to protect those who use it by ensuring that they understand the risks they are taking.

As with any other investment, sometimes they can go up and sometimes down.

One of the nuances of regulation around the bond market is that it is very much based on the complexity of an instrument, not the risk profile – so you can have something which is high in complexity and low in risk, or vice versa.

Where we would encourage more focus is on making sure that supervisory intervention is focussed on the risk profile, and not simply the complexity…

You mentioned in the past that the reputation of Malta has taken a bit of a knock. What should we be doing to repair that reputation?

The financial services industry, if you pare it back to its foundations, is built on trust, between customers and the bank, and in the international system between individual banks and the network that binds them.

Reputation clearly affects trust. If it goes down, the burden of proof around trust goes up.

We have to demonstrate to the international community that we operate by the rules and regulations that govern the financial system.

This year Moneyval from the Council of Europe will visit to inspect the system and check enforcement against financial crime.

Personally, I am looking forward to showing them how HSBC already meets – and in places exceeds – these requirements.

What we need is for all parts of the system to do the same thing. We have to see high standards as an advantage, and not a disadvantage. I sat down with three or four large local corporates in recent weeks and our high standards are why they choose to do business with us.

Take US dollars which are used for more than 80 per cent of world trade, starting with oil. Access to US dollars is fundamental for any bank and any business that trades internationally. To secure that access, you have to demonstrate ongoing compliance to international regulations.

We have invested hugely in HSBC to meet what we call global standards in that area. It has been tough at times to make the change, and our customers also felt this. But at the beginning of our journey, I explained that what might feel like a disadvantage would turn out to be an advantage. This is indeed why we are saying that we are ready to push back into growth: we have re-built the foundations.

Are you implying that the correspondent bank issue was linked to standards as we have been told over and over again that the only reason that Malta was finding it hard to find correspondent banks was because we are too small a jurisdiction…

I can only comment on HSBC. We work with our own correspondent bank on an arms’ length basis: there are no free passes in this area. We have independent testing to validate that the statements that we make around compliance are supported by evidence of our risk management.

We had to work very hard to prove that we meet these standards, and it is something that has turned into an advantage for us.

It is a reality that today’s financial system is a global one and not a local one and all participants in the system will need to demonstrate on an ongoing basis that they meet the requirements of their correspondent partners, just as we do.