The economy, BoV and beyond

Bank of Valletta Chairman Joseph F.X. Zahra has a distinguished past behind him and a bright future before him. DAVID LINDSAY speaks to the economist about a number of issues including pensions, the state of the economy and BoV’s recent successes in its drives for internationalisation, diversification and credit management. Malta’s potential as a financial services centre and Zahra’s recent appointment to the helm of Maltacom are also discussed in this wide-ranging interview

Malta’s economy still appears to be struggling to attain an even keel. The Central Bank is to downward revise its growth forecast for this year, interest rates have been lowered and government has so far been unable to harness expenditure. As an economist, how do you view these developments and how would you suggest these ailments be remedied?
Let’s start off with one very valid point - never has Malta’s openness as an economy been tested as it has over these last years. We now have a situation in which there are no longer any forms of protectionism in terms of trade although there are still a few restrictions in terms of capital movement.
What we have today is undoubtedly an open economy and this openness is being tested within a very difficult environment where the international economy is at a very low ebb and, for the first time after so many years, we are hearing talk of deflation, even in Germany – Europe’s major economy.
Knowing that Malta is highly reliant on the international scene, this type of international environment would definitely impact the Islands, which it has done over the last two years.
I believe, even within this challenging international context, that the economy has been pretty resilient in terms of trade, where we have seen slight improvements over these last months, and even in tourism, which one would have expected to have been hit much harder than it has been.
As to how these ailments could be remedied, answering this question would require an entire interview in its own right, but there are two very valid points that must be mentioned.
The first is that we need to think more and more of a strategic orientation for this country. We have been working very hard in acceding to Europe and with all its implications. Now, however, we need to have a stronger, clearer strategic orientation as to what form the Maltese economy will take in the coming five to ten years.
This strategic orientation will also have to be based on a diversification of sectors. We need to consider what the GDP contributions of sectors such as financial services, tourism and manufacturing will be in the future.
This diversification would definitely help in increasing our resilience while we face these changing international scenarios. I think we have to be more forthcoming in terms of what’s being expected from the various sectors and how these sectors would interrelate, ensuring that none of these sectors have a negative impact on any other sector.
What are your comments on the fact that businesses are continuously suffering from cash flow problems, while individual liquidity still runs very high? How has the Bank capitalised on this state of affairs?
There is a very obvious dichotomy in this particular sector of the economy. On the one hand you have a very cash rich personal sector, with bank deposits always growing and with this sector always seeking new opportunities for investing its funds in various areas.
On the other hand you have a cash starved businesses sector. The main point behind this is a cultural issue. A lot of these businesses either started out as or are still family businesses, with no particular demarcation between personal and business purses.
The Bank has created a number of opportunities in this respect, the most creative of which has been its move into the area of investment banking - in creating more opportunities apart from the traditional means of raising capital through the Bank. One of these alternative sources is in the area of Initial Public Offerings, which needs to be further encouraged.
I think the Bank’s decision to go into investment banking in an aggressive manner is giving businesses new opportunities to be able to capitalise themselves and to be able to raise finances in a responsible way reflective of what is happening on an international level.
The IPO aspect is very interesting, there can be no doubt that the local stock exchange needs to be both broadened and deepened.
I would say this is absolutely the case. So far we haven’t even scratched the surface. There is great potential for private businesses to start looking internally at their operations and finances and assessing their opportunities with a view to either entering the primary market or taking a secondary listing.
The Malta Stock Exchange, particularly now that it has lost its regulatory function, can apply greater focus to its business and marketing function to be able to promote its activities much better with businesses.
One of the largest debates taking place at the moment is that of pensions reform. What are your thoughts on this delicate issue?
The main point about pensions is that we have to demystify the whole issue. We’ve been talking about pensions for long now and I think it’s about time we start taking real, effective action immediately. This type of situation should be handled with urgency, obviously with a medium and long-term perspective.
I think if we start seriously talking about the issue, particularly if this is done on the basis of non-emotive dialogue between government, business and the unions, we would realise that the issue is not as fearsome as one would have thought. I think we need to address the problem with a business-like approach but also with a strong social conscience.
It’s easy to talk about the situation as it stands today, but it is very difficult to visualise the type of socio-economic structure we will have in 10 to 15 years’ time. So it does also need an element of visionary thinking and the will to take these decisions immediately, knowing they are going to impact the social conditions and lifestyles of a great number of people in the future.
One thing we are seeing in more advanced economies is that more and more people over and above what is deemed the retirement age are still working and are still very active in the economy. I think this is a very positive development, not only because work is an essential element of the human dimension, but because these people with all the experience they have gained over the years would still go on contributing to the social and economic development of the country.
How do you view Malta’s potential as a regional centre for financial services and how has the confirmation of EU membership boosted the country’s potential in this respect?
I think that Malta’s entry into the European Union has enhanced its potential as a financial services centre. Any financial centre’s success is based on its reputation, its credibility and to which international forum it attaches its name.
Malta’s major advantage as a financial services centre, and I want to emphasise this, would not be any fiscal incentives offered but would instead come from the inherent advantages the country has. One advantage is its strategic location on a geographical basis, but there is also the Maltese human resources element. We’re dealing with people who have been living in an environment in which financial services are already at an advanced stage. Going back in the past we can cite the contribution Barclays gave when it had occupied a strong position in Malta in the 50s and 60s. This had also created a cadre of people who have inherited a strong tradition in the financial services sector. Of course there is also the language issue and I must stress that we shouldn’t simply be looking at the English language, which is of course the business world’s lingua franca, but we have to also ensure we improve our skills in other languages as well. Using our fluency in the Italian language would particularly help to attract the Italian market and fluency in French, German or Arabic would also help in giving the Islands a competitive advantage as a financial services centre.
I must of course also mention the country’s information and communications infrastructure. I think the large investments that have been made by corporations, particularly by Maltacom, over the past years in ensuring a state-of-the-art infrastructure is an important ingredient that contributes largely to Malta’s development in this respect.
Turning to Bank of Valletta, how successful has the Bank’s diversification strategy been? What factors have led to this success?
I think the results show that we have been successful here. When one considers that 33 per cent of the Bank’s operating income as at the end of March has come from what we term non-traditional banking products – bancassurance, fund management, investment banking and card services – this says a lot about how the Bank has been diversifying its operations over the last ten years.
Of course we are still dependent on our core business but we have completely changed our line of business from that of ten years ago, when we were predominantly in the banking services sector, into what we term as the financial services sector.
This redefinition of our line of business from bank to financial services has proved that we are capable not only of coming up with new business concepts within the financial sector, but also of taking advantage of the situation and making inroads by being the first to go into these various markets.
We were the first, as Bank of Valletta, to go into the bancassurance and fund management fields. We have been the leaders in the area of investment banking, being the managers and underwriters of the largest number of IPOs on the Islands, and we were also the first to go into the stockbroking business. This is all part and parcel of the Bank’s diversification strategy.
As is the Bank’s internationalisation process, which has been underway for some time now. How would you quantify BoV’s success in expanding its services overseas and what does the Bank envisage for the future?
We have been doing two main things in the internationalisation process. One was to audit our business activities in what were the Bank’s traditional overseas outposts, Canada and Australia. We felt we had to rationalise our activities there, particularly since we are today dealing with second and third generation Maltese who, naturally, would have lost a lot of there traditional links with Malta. This meant that while we had to retain our presence there, we did have to reduce in terms of physical staff in our businesses. We still give a lot of importance to these outposts, but we have obviously had to put them into the perspective of new realities.
New realities exist in the Euro-Mediterranean region. We feel there is a pre-emerging market in the North African periphery and we feel our presence there, even if it is at the moment in the form of a representative office, is important as it contributes toward making us understand the mechanisms of these markets and the way the potential customers look at an international banking operation.
These are what I would call ‘footholds’ in the market. We do not carry out banking operations in the region as yet, but we do have these representative offices to assist and facilitate investment and trade between Malta and these countries.
Bank of Valletta has an international destiny, which is in the Euro-Mediterranean. We already have offices in Tunis and Tripoli, while we are working to have our third North African office in Egypt. These developments are integral to the way we view our destiny in the medium term.
Bank of Valletta recently set up Cost Efficiency and a Credit Risk Monitoring Units. What are the primary scopes of these units and how would you gauge their success to date?
We have been very successful here. First of all, notwithstanding our increased awareness on risk issues, which reflect international banking accords such as the Basel II Accord, and all the reforms we have made within the Bank - such as the setting up of the credit risk monitoring unit, the changes we have made in our credit policy, with the setting up of a new credit committee - we have consolidated our market share in the process. This means these measures did not in any way deteriorate our market positioning, which was, in fact, actually strengthened. In actual fact, there is still growth in the advances and credit side of our business.
Over the past years more concentration was given to the Bank’s revenue streams and I think the cost issues weren’t being tackled assertively. This is one of the reasons the Cost Effectiveness Unit was set up - to establish increased cost awareness throughout the Bank, while also ensuring all the Bank’s expenditure is carried out in such a way as to add value to our operations.
The March results, again, speak for themselves. In the last financial statement we published the rate of increase in costs was 1.6 per cent, lower than the rate of inflation, which is considered the best signal of cost containment.
This has been a big challenge considering we have also been restructuring our operations in the process. This means that, particularly due to early retirement schemes and the way these have to be accounted for, many costs have an immediate impact on the income statement.
You have served as Bank of Valletta Chairman since 1998, what do you consider the main achievements of your tenure?
In terms of personal achievements, I would prefer those to be stated by others rather than myself.
The Bank has faced a great deal of increased and aggressive competition not only with the likes of HSBC, but also with smaller banks and the international banks that decided, rather than moving away from the Islands when they lost their offshore licences, to instead continue operating in the market. There has also been the deregulation of the market and the restraining external environment in which we have been working. The local and international scenarios have obviously not been booming, in fact the local economy over these last years has slowed down substantially, again reflecting the international scene. Despite these adversities, we have managed to not only sustain, but actually increase our market share. We have also been able to improve our ratios in the market, a reflection of an improvement in the fundamentals of our business.
In light of your recent appointment as Maltacom’s next chairman, how do you view the future of the telecoms sector?
Maltacom is another big challenge, considering that its operating environment is highly dynamic in view of deregulation and the ensuing increased competition. The first test for what has been considered a monopoly over the years will be its ability to compete with important international and with smaller carriers that are operating within the local telecommunications market.
You are also getting a much more discerning customer than ever, of course as Maltacom is positioning itself as a commercial player in contrast to the original idea of being a social monopoly. Due consideration must also be given to Maltacom’s social obligations, such as those implied by being the owner of the Islands’ telecommunications infrastructure, and to the huge and fast rate of technological advances taking place in the world today, which sees us not only talking of a 3G environment, but of a 4G environment.
These considerations mean we have to look at Maltacom’s strategy and to continuously test and review it, particularly so in an industry as fast moving as telecommunications. This train of thought implies that the first initial exercise will be to take stock of the situation and to establish a stronger strategic orientation for the organisation within this changing environment.
However, one extremely worthy aspect of Maltacom is the professionalism of its management. We are dealing with people in Maltacom who are not only competent and experienced, but who also have a lot of enthusiasm and a strong sense of determination and commitment with which to face these challenges.
As at the Bank, the Chairman and the Board of Directors wouldn’t be able to operate unless this professionalism and commitment exists at an executive level. Notwithstanding the challenges of the sector, I am very optimistic in facing these challenges because of the strong capabilities of Maltacom’s fundamentals.