It is the time of the year when companies quoted on the Stock Exchange publish their annual report and accounts. These documents are primarily aimed for shareholders but often reflect the views of management on the sector in which they operate. 

The 2018 HSBC results send mixed messages to shareholders. The headline news is that the bank’s profits fell by 23 per cent to almost €39 million. Low-interest rates and a fall in corporate lending was behind this disappointing result. However, the HSBC board decided to pay 47 per cent of these profits to its shareholders despite the fall in profits. 

This significant dividend may appease shareholders in the short term, but many are asking whether the bank’s business model that has recently seen the balance sheet shrinking could lead to further decline in profitability in the coming years. In the context of a growing economy, one would have expected growth rather than a decline in business revenue.

However, what is more relevant to the country are the comments made by HSBC CEO Andrew Beane. In his address to shareholders, Mr Beane said that 2018 was difficult for the local financial services sector which suffered further reputational damage. He urged market participants to ensure that anti-money-laundering standards are implemented without delay in order to avoid more significant long-term risks. 

Minister of Finance Edward Scicluna admitted that he was “obviously concerned” about Mr Beane’s comments. Even if he is one of the few ministers that have expressed such concern, the underlying causes of Malta’s sliding reputation as a respectable financial services jurisdiction have not been acknowledged openly enough by this administration.

Warren Buffett’s comment that it takes 20 years to build a reputation and five minutes to ruin it has never been more correct. The local financial services sector has been hit with various incidents of bad management and even worse regulation in the last few years. Nemea Bank, Pilatus Bank, and Satabank had their licences revoked only when it was rather late in the day to control the reputational damage that is inevitable when a bank goes out of business. 

Root and branch reforms of the MFSA and FIAU have been announced, but it will take time to see how effective these reforms will be in restoring Malta’s reputation. The financial services sector operates in a national context and what happens in this context affects the perception of international investors on Malta. The whiff of corrupt practices by elected and non-elected public officials continues to perpetuate the suspicion that Malta does not take its anti-financial crime obligations seriously enough.

While the Prime Minister has often hit at banks for not extending their services more broadly and efficiently, he has failed to bring about the legal reforms to enable banks to realise their security in the case of non-performing loans. Mr Beane argues that the delays experienced in the legal process to liquidate lending collateral are often forcing banks to increase their capital and expenses. The government will do well to reform this legal process without further delays.

HSBC remains a solid bank that enjoys the support of its parent company. However, it needs to ensure that it benefits more significantly from a growing economy even if it does well to stir away from high-risk activities.

This is a Times of Malta print editorial

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