Interview | Wednesday, 25 March 2009

Small is beautiful

Volksbank Malta Managing Director Herbert Skok spoke to CHARLOT ZAHRA on how the bank developed from an offshore-based bank to a fully-blown retail bank during the 14 years that it has been operating in Malta. However, its strategy has always remained targeted at serving niche markets rather than the mass market

What led Volksbank to invest in Malta?
Volksbank in Malta was founded in 1995. The major reason for it was a close cooperation between Malta and Austria as there is a long-lasting relationship between the two countries.
Moreover, there was a very early double-taxation agreement between the two countries, which made it very interesting for Austrian institutions and Austrian banks to be present in Malta and vice-versa.
In the first few years, we were only operating on the international offshore banking market, until we got our full banking licence in November 2002.
We then continued with our international banking business, but while adding local business too.
From the very beginning, we always saw there was a certain need and appreciation from retail Maltese customers as well as corporate customers for a new foreign bank in Malta.
Volksbank is a cooperative bank based in Vienna with several outlets in Central and Eastern European countries. Following strong growth over the past few years, we are now present in 12 different countries.
The Austrian market is serviced by our head office, Volksbank AG in Vienna, while the Central and Eastern European network falls under the remit of Volksbank International.
Our foreign network has increased so much over the years that Volksbank now has more employees in its foreign subsidiaries than in the home market in Austria.
We currently have a total of 7,700 employees with Volksbank, of which 5,400 are in foreign countries while the rest are in Austria.
In Malta, the bank currently employs 37 staff with total assets of more than €1 billion, which includes Volksbank Malta subsidiaries.

How has the adoption of the euro currency affected your operations?
Joining the euro has affected our operations very positively. It is a very big advantage for Malta to form part of the eurozone as well as to facilitate the work of international businessmen when they want to invest in foreign countries.
This advantage was indeed taken up by our group. We have a lot of well-known Maltese families who are investing in other countries, and many of them are active in those countries where Volksbank is active.
Our retail network in Central and Eastern Europe became more and more interesting as it grew bigger. Forming part of the eurozone has been an advantage for Malta, for Maltese businessmen as well as for Maltese banks.

How do you describe the latest financial results of your operations in Malta? Are you satisfied?
First of all, being Catholic, let’s thank God for the crisis not having affected us very much. We know that nowadays no financial institution can say that it has not been affected, but the impact on Volksbank Malta has been limited.
We have reached all the budgetary targets we had set. Even profit wise, we have been more successful than expected.
On the costs side, we have met our targets. Last year was an important year because we made some major IT investments to strengthen the Bank’s infrastructure. Probably, at present we are the only bank locally using the state-of the-art IBM AS 400 machines. Moreover, we have upgraded the PCs used by Volksbank Malta employees, as well as the bank’s network infrastructure.

Which are those areas in which Volksbank Malta has performed well during the last financial year?
We have performed very well on our local business, which we increased by more than 60 per cent over the previous financial year. This was really phenomenal growth – we didn’t expect an increase so big. We are truly confident that the Maltese customers really trust us.
Volksbank has been on the Maltese islands for the past 14 years, and businessmen now know our name, our brand and how to deal with us.

On the other hand, which are those areas where you would like to see an improvement in your performance during the last financial year?
I think that at the moment, every international active bank hopes to improve the international deals it makes, not necessarily to increase the number of deals it makes, but rather to improve them in quality.
Over the past months we have seen many international financial institutions performing badly. Many of the banks working on the international market have some deals with such banks on their books.
Luckily, we did not have the very risky ones, so overall we have not been hit too much.

What effective measures has Volksbank taken to bring forward this improvement?
We have excellent rating tools which have been set up by our head office. We have implemented them in all our systems and at any time we can monitor every kind of risk that the bank is handling. These tools serve us well, both at the credit approval stage and during the term of the deal as an early warning system. They enable us to react immediately when we see a negative trend, without having to rely on the annual review. This helps us to avoid additional transaction risks among others.

There is talk that Austrian banks and the economy are experiencing difficulties. What is your evaluation of the problems facing your country’s financial sector?
In the international press, we read more and more about some additional problems for some Austrian banks which are engaged in the Central and Eastern European markets.
Our biggest competitors in Austria invested in the purchase of existing banks in such countries, but Volksbank didn’t. We always preferred organic growth, building up our network in these countries from scratch, so we do not have to carry any burden on our shoulders coming from previous management decisions.
We build lean branch networks, so we had good growth and assumed only those risks we wanted to take – but we only took that on our books.
For instance, when we opened a new bank in the Czech Republic over 10 years ago, Volksbank gradually covered the whole country with branches from West to East.

Was that a strategic decision?
It was a strategic decision which we were aware of early enough. We are the fourth Austrian bank present in Central and Eastern Europe. We are not as big as many of our competitors and for sure we do not have the same kind of risk and volumes of other banks. The international press frequently reports that “some” Austrian banks are facing difficulties but fortunately we are not one of these banks.

How has this affected your operations in Malta?
Any crisis, wherever it happens, does impinge on our operations. There are those who will have major losses and those who will make fewer losses.
Even those who make fewer losses will be affected, because the customer base is going to be more cautious. Banks will be more cautious on financial decisions though, and this will help in a certain way.
The main impact on Volksbank Malta is to make sure that it takes on its books only the less risky transactions even if it means a slower increase in volume of deals.
We aim that by the end of 2009 we will have a small increase in our portfolio of assets and, even more importantly - that we will experience a qualitative leap in terms of our portfolio. In times of crisis it is best that one aims at controlled stability rather than growth. You can call this controlled stagnation if you will.

What are your views on the economic recession that has hit Malta and the other eurozone countries? Which are those areas that are being mostly hit in Malta?
My view is that Malta has not been hit much by the crisis yet. I’m not a forecaster or a fortune-teller. I hope we will remain in this status long enough. For the moment, Malta hasn’t been hit too much and maybe it is being felt mostly in two sectors of the economy – tourism and real estate.
Where do people in Central Europe start saving when faced with an economic crisis? They start saving on going on holidays. They may stay home and not go abroad.
With regard to real estate, statistics show that prices of real estate are going down. We hope that the prices do not fall as much and as rapidly as they already did in the UK, Spain and other Continental European countries.

So how is this affecting your operations locally?
There is not so much increase in the demand of financing new properties in the real estate market sector. Concerning tourism, there is a certain degree of stagnation in building new hotels or refurbishing existing ones.
This brings us back to the controlled stagnation on which I spoke earlier.

Do you think that the economic recession in Malta will be a long one or a short one? Why?
I hope it will short, but looking at the history of the previous crises, I believe we have not seen the bottom of the crisis yet in Malta, Continental Europe and worldwide. Until the major problems are solved by the G7, we won’t see the bottom of it.

When do you expect the Maltese economy to start coming out of the trough?
Hopefully it should start this summer because until now, we have seen declines in airport arrivals from traditional routes. However, it is expected that Malta International Airport (MIA) deals with low-cost carriers will result in replacing some of the losses on traditional routes and legacy carriers. They might not be the high-quality tourists, but the larger volumes should make good for this factor.

Volksbank is one of those banks that does not base itself on a fixed base rate and adopts a variable base rate from EURIBOR. How does this differ from the fixed base rate adopted by the other main Maltese banks?
The EURIBOR is the rate published by Reuters on behalf of the European Banking Federation. Volksbank’s interest rate structure is very fair and transparent.
The interest rate is not fixed unilaterally by the Bank, but rather the Bank and the customer agree at the outset on a fixed margin that will be charged on top of the EURIBOR interest rate as determined by the international markets.
The Euro Interbank Offered Rate (Euribor) is an interest rate based on the average interest rates at which a panel of European banks lend money to one another. If there is a hike, or there is a decrease in interest rates, Volksbank passes on to the customer in full these changes in the market rate.
Probably there is no other bank locally that makes its pricing more transparent than we do, and at times of falling rates, we pass on the savings in full to our borrowing customers immediately.
The final interest rate actually paid or received by the customer depends on the margin on top or below the EURIBOR as agreed.
The higher the risk, the higher the margin the borrowing customer has to pay for a loan. The lower the risk, the lower the customer has to pay for a loan.
When the ECB lowers its interest rates, the market should normally follow suit, however, the decision always remains at the discretion of the banks.
In our case, we immediately follow the EURIBOR and the European market, so the conditions in the inter-bank market are immediately passed on to our customers.
For instance, in the last cut, the EURIBOR was anticipating the cut, therefore it went below the ECB benchmark rate even before the actual ECB cut. Our borrowing customers started benefiting from a lower rate even before the ECB decision.

Unlike other banks, Volksbank has kept a very low profile in advertising its products locally. Is there a reason behind this policy?
Volksbank is not going for the mass market. It is not necessary to build up such a huge campaign promoting the name. The customers with whom Volksbank needs to work already know the bank very well.

You were involved in the financing of a major project like Fort Cambridge. Is Volksbank currently involved in other similar financial deals?
Due to data protection, I cannot give you names, but we are involved in huge projects in Malta as well as in Gozo. We do have among our best customers the larger corporate names. We are mainly involved in the real estate sector.

Which are those sectors in which you are financing?
We are involved with a number of builders and contactors who are developers as well. Sometimes the projects are huge, other times the projects are smaller.

Where do you see Volksbank positioned in the Maltese market in five years’ time, both in terms of branch network as well as market share?
Regarding the branch network, we have recently opened our Gozo agency and at the moment we do not intend to open more branches. In terms of asset growth, in the next five years we will see another significant increase since I’m sure that our strategy will deliver the desired results.
We have strong support from our parent in Austria, and Volksbank group is quite large – at the moment it has more than €90 billion in assets, and VB Malta has a portfolio in excess of €1 billion.
We will still be interested in big projects and we hope we can support Maltese customers in the near future as well.

Do you want to see Volksbank becoming the third bank in Malta, as Banif Bank has already publicly declared, or would you like to concentrate on niche markets?
I don’t know what other banks are stating, but at the moment Volksbank’s asset of over €1 billion assets in Malta for sure places us with the top banks.

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25 March 2009

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