Sound banks are in everyone's best interest - BoV chairman

The titles of last Friday's press release announcing Bank of Valletta Group results for the year ended September 30 summed up the reasons behind the bank doubling the previous year's profit to just under €82 million.

"Bank of Valletta results recover as prudence pays" was the title, under which were two sub-titles: "higher profits and dividends as global financial markets stabilise" and "bank continues to support Malta's economy through the provision of credit".

These, in a nutshell, were the three reasons behind what chairman Roderick Chalmers described as the "marked improvement" in profitability.

The major contributing factor to the result was the €38 million clawback in the value of securities in the second half of the year. Securities held by the bank were adjusted downwards by €53 million in 2008 and a further €38 million in the first half of 2009 to reflect their fair market value. Essentially, it was not a real cash loss. The bank believes that most - but not all - of these markdowns will be clawed back over time.

At the press conference last week, Mr Chalmers reiterated that the bank's intention and, more importantly, its ability, to hold its portfolio to redemption has paid off, and will continue to pay off. Bank of Valletta has said time and again that its portfolio contains no toxic assets, and is spread over a wide range of quality holdings. Mr Chalmers remarked that the vast majority of these holdings have continued to pay interest and will be redeemed on due date. Between the beginning of the crisis in 2007 and September 2009, close to €900 million of investments (excluding sovereign holdings) held by the bank redeemed at par.

Mr Chalmers has described the 2009 financial year as a "year of two halves": its interim profit for the six months to March was just €6.3 million, but its end-of-year profit for the year climbed to €81.8 million from 2008's €40.6 million. The net operating profit from core corporate and retail banking operations amounted to €86 million, compared to 2008's €92.2 million. The reduction was mainly due to tighter net interest margins.

"The differentiating factor between the first half and the second half results is essentially the clawback on the value of our investments as the global markets recovered their poise and equilibrium after the torrid conditions that prevailed between September 2008 and March 2009," Mr Chalmers told The Times Business in an interview this week.

"The first half saw a markdown of €32 million, the second half a writeback of €38 million. That is the difference between the two halves. Clawback aside, the core operation was fairly steady although it went down a little in between the halves as the ECB interest rates reduction bit. Last year, there was a loss of €53 million from financial markets and this year there was a profit of €5 million from the markets. The major difference in our results stems from the behaviour of the financial markets."

Mr Chalmers has been intrigued by some criticism from certain quarters over the bank's enhanced profits. BoV making profits, he said, was a little bit of good news - badly needed in the current environment. Malta's largest financial institution plays a pivotal part in the economy. Most importantly, throughout the international crisis, the bank had consistently pledged that it would continue to provide credit to the economy. The financial results reported on Friday were testimony to this pledge being fulfilled.

"New loans to the home mortgage sector totalled over €200 million and loans to the business sector are also up by €200 million," Mr Chalmers pointed out. "We have continued to provide liquidity to the market in a responsible manner. Fortunately, we have not suffered the fate of many, many other banks internationally in having rapidly to shrink our balance sheet and withhold credit to business, and this is because we have taken a deliberately prudent approach to the running of the business."

The chairman emphatically dismissed suggestions that the bank's profits stemmed from overcharging. He cited a recent independent European Union survey which ranked Malta's banking system 23rd out of the 27 member states for its comparatively low charge rates. The survey also rated Malta's banks as "above average" in terms of the transparency and simplicity of its charge structure.

"There can be no suggestion that BoV is involved in overcharging," he emphasised. "We look at the rates of interest we pay our depositors and the rates of interest we charge our customers: both are well within EU banking norms. Bank of Valletta has made home loans readily available - they are not so available in all markets overseas - and at rates well below those being charged elsewhere in Europe. The bank's profits have not come about because there is overcharging of interest or otherwise and there is independent verification to demonstrate that.

"What would people rather have: A bank which is profitable, making loans available to the business community, paying dividends to shareholders and taxes to government, and still adding people to its payroll? Or would they rather have no dividends, no taxes but instead banks having to be rescued at vast expense to the taxpayer, a shrinking balance sheet, no credit available to the economy and significant job losses?

"The fact that Bank of Valletta has come in with a decent profit is a little bit of good news, and should be regarded as such. We would discourage people trying to convert a good news story into a bad news story. That doesn't help anybody. If there is any lesson to be learned from the events of the past 18 months, it is that sound banks are in the best general interest of all."

Despite the surge in local bond issuance throughout the year, which saw major local organisations raise over €220 million - Bank of Valletta was involved in most issues as registrar and manager - BoV's customers' deposits in 2009 increased by €141 million to €4.8 billion. The increase is thanks, in part, to a series of campaigns which aimed to attract deposits in different currencies on different terms; typically, 20 to 30 per cent of the deposits attracted by these campaigns come from new customers.

"We have increased our market share in part on our deposits, and we have been very conscious that we have two sides of our balance sheet to manage," Mr Chalmers explained. "We have to look after our borrowers and our depositors. That was the biggest single factor in our not passing on the last ECB rate cuts. We wanted to reward our depositors and pay decent rates on deposits.

"For all the vigorous debate that is currently taking place, the truth is that, to date, the Maltese economy has not been as badly affected as the rest of Europe - and thank goodness for that. People are still employed and companies are still operating at a profit. The economy is ticking over. Sure, government finances are under pressure - but that is the case in all countries in the current economic environment, as the demand for government stimulus packages comes against a backdrop of contracting tax revenues. Sure, times are tough and there are some issues which still need to be addressed, but there is economic activity. There are deposits around and we are winning our fair share of these."

Mr Chalmers said the bank had no plans to raise interest rates in the short term. On a case by case basis, he said, the bank constantly reviewed its book of business and made sure that rates were appropriate, matching them with the bank's view of risk.

Asked whether it was time for the European Central Bank to begin to consider raising interest rates, Mr Chalmers said the "strong medicine" could not be withdrawn while the European economy ran the risk of relapsing. Central bankers, he conceded, were walking a tightrope.

"There is a very interesting debate taking place: Now that the economic recovery is showing signs of green shoots, do central banks start to withdraw some of the stimulus and surplus liquidity?" Mr Chalmers explained.

"The difficulty is deciding to do it in what degrees, getting the balance right.

"One side of the debate is that if the stimulus is taken away too early, there is the risk of a 'W'-shaped recession with the economy tipping back into crisis. If that sea of cash is left out there, there is the risk of stimulating inflation, and that brings problems in the future... so the consensus that is emerging seems to favour not taking the patient off the drip too early in case there is a relapse. If that means that, in the future, there is a need to increase interest rates more rapidly than might normally be the case, we will deal with it then."

Mr Chalmers cautioned last Friday that the expectation in Malta must be that the situation could be more challenging in the short to medium term. Extensive research by Gordon Cordina, who sits on the bank's board, has shown a regular pattern of Malta's economy entering into and emerging from a recessionary environment later than most European economies.

"Europe went into a recession about this time last year. If we allow for a lag effect, that is where Malta is heading," the chairman explained. "Our expectation is that the situation may get tougher. In the banking world, things might get a bit more difficult. As Malta's economy lags other economies, in terms of any recessionary impact, the banking system likewise won't feel the effect of a downturn immediately, because there is also something of a lag effect in terms of seeing distress in the economy manifesting itself in troubled loans.

"Our view is that we will see things becoming more challenging. We expect some deterioration in the quality of our credit book over the next 12 months, and we will be managing that situation very carefully."