In his first interview since the Lehman Brothers’ banking crisis erupted, Bank of Valletta Chief Executive Officer Tonio Depasquale spoke at length with Charlot Zahra about Lehman’s impact on BOV and the effect of the global financial crisis on the Maltese banking sector and the economy
These are not easy times for banks across the world after the Wall Street crash, which saw tumbling, in close succession, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, and AIG, showed that the era of investment banking without regulation is truly over. Banks in Malta are now exposed to a range of new challenges. Apart from being faced with the effects of a looming deep recession on the international front, increased competition must also be a matter of concern for the long-established local banks.
“It is likely that the new banks on our shores will be offering selected services, such as deposit-taking only, without the offer of the full range of banking services. They can offer such services without the need of a branch network.
“The interest margins have been reducing consistently for the past years and profits had to be maintained through an increase in the volume of business,” BOV CEO Tonio Depasquale started.
With regards to the international situation, Depasquale mentions that the day-to-day core business of the bank has so far been unaffected.
“We were affected mostly through mark-downs of our investments. The Bank has a debt portfolio that is well diversified into a number of blue chip names, mainly with a short duration,” he said
But since the securities portfolio is priced-to-market, fluctuations in the market prices of bonds do have an impact on the profitability of the bank.
He warned of consequences if the crisis that is unfolding across the financial sectors in the US, the UK, Europe and Asia spills over to the economies of these regions.
“As soon as the crisis in ‘Wall Street starts hitting Main Street’, then all economies around the world will be affected and the Maltese economy is no exception since we are operating in a global market,” Depasquale insisted. “For instance, if the UK is in a recession by the end on the year, our tourism will be adversely impacted since forty per cent of our tourism market comes from the UK.”
Indeed. NSO figures published yesterday indicate that everything points towards this direction. While tourists’ general spend per capita has taken a slump this year, so has the UK market.
“In a globalised world, nobody is immune to what happens in other countries,” Depasquale continued. “In fact, we are seeing governments adjusting their growth forecasts for this year and next year, particularly in the developed economies.
“Until now, the Maltese economy has been resilient enough to the international shocks. However, I believe that we will be affected by the negative effects of the global economic fall-out,” Depasquale stated.
Asked whether the bank had managed to improve on the profitability registered during the first half of the financial year, Depasquale had no choice but to reiterate the bank’s previous position. “In a company announcement published on 1 August covering the third quarter of this financial year, we explained that due to the international situation, the progress we were expecting to make during the second half of the year was not likely to materialise. The reasons for which we did not meet our expected profits during the first six months remained applicable to the second half of this financial year.”
He said that the bank’s core business remained strong during the second half of the year, with a sustained increase in the bank’s deposits as well as the loan book. This was complemented by an improvement in the quality of the loan-book.
“On the other hand, the bank’s investment book reflected the outcome of the financial markets. These did not register an improvement during the second half of this financial year,” he explained.
Under the shadow of Lehman however, confidence in investment banking has certainly gone down. Out of fear, many have seriously considered reverting to the more traditional method of using excess funds: the good old savings account. Is this justified?
“The assets in our financial portfolio are top-notch as the Bank invests only in blue chip securities. These investments are well diversified in order to minimise credit and market volatility.
“The Bank holds Senior Lehman paper, and as stated in our company announcement of 15 September, we will be registering some losses. It is believed however that any ultimate loss that may arise from this holding will be relatively modest.
“The Group gives high importance to Asset and Liability Management, that is, to the holistic management of Balance Sheet risks, especially solvency, liquidity and interest rate risks.
“We enjoy a very strong liquidity position which is being monitored on an on-going basis. The Bank is also strongly capitalised with a capital adequacy ratio, well above the statutory minimum.
“In our case, we only lend 60 per cent of the total amounts of deposits we have,” he said. “BOV’s robust capital and liquidity positions were major factors behind the confirmation by both Fitch and Moody’s Bank’s A-credit rating with a stable outlook, ” he explained.
He then proceeded to give a brief overview of how the international banking crisis came about, stating that banks started lending well beyond their available liquidity and borrowing the difference from the wholesale market.
“Money was cheap and credit risk was not being well priced. This led to excessive risks being undertaken and to the banks taking high leverage positions. The banking system is built on trust and when trust started to be questioned, the situation deteriorated rapidly, causing the liquidity crunch.”
A Deutsche Bank report on retail banking states that loyalty to retail banks in Malta is extremely high, taking an average of 10 years for a customer to switch from one bank to another. Now this seems a tad exaggerated. But if this is true, could it explain the substantial budgets major banks reserve for marketing? Apparently, BOV is also investing in retaining clients besides implementing strategies to recruit them.
“This statistic reflects a high level of customer satisfaction across the banking sector in Malta. We are very customer-oriented and everything we do is aimed at supporting our clients.
“Our philosophy is that we should never lose a client, at all levels of banking. The customer is at the centre of our activity. Even from the surveys that we carry out, it is clear that a vast majority of our clients are very satisfied with our services. During the last years, we have reviewed all our processes to align them with customers’ expectations,” he said. “During the past three years, BOV launched the ‘Brand Promise’ initiative. This is a promise that the Bank makes with every client to add value to the relationship building on mutuality, supportiveness and a long term commitment.”
BOV recently introduced a deposit system with which cheques may no longer be deposited at the cashier’s. Incidentally, the same Deutsche Bank quotes Malta as the European country to be most reliant on cheques as a method of payment. It is a known fact that the processing of cheques is tedious, inefficient and expensive for banks. But, whether banks like it or not, this method of payment is still well-ingrained in the Mediterranean mentality. Numerous Business Today readers had called in to accuse the bank of introducing this new policy to cut costs, and to place the burden onto the customer rather than retaining the banking practice of accepting cheques and cash deposits at one go.
But Depasquale insists on defending the decision, claiming that the system improves the efficiency of cheque processing thus freeing up queues at the branch tellers.
This newspaper had remained unanswered when the bank was asked what it did about the complaints it received after introducing this new policy. Well, here it goes: “We introduced this measure to reduce queues from our branches. Queues had been the major complaint the Bank had for many years from its customers.”
Banks in Malta are now exposed to a range of new challenges. Apart from being faced with the effects of a looming deep recession on the international front, increased competition must also be a matter of concern for the long-established local banks.
