BoV - new money machine

A study oF the strategic financial ratios of Bank of Valletta plc reveals immediately that it is unfolding as a new money machine. This is not only because it has comparable though by no means equal ratios with the local operation of HSBC.

But also because, when one casts one's glance over the international banking scene, it is evident that the BoV operation is managed with exceptional integrity and success.

It takes a financial wizard to compete with the local HSBC operation, which is the most profitable of all that bank's worldwide operations. At present HSBC has achieved pole position in the world on currency forecasting. BoV is no mean player in this area, as is illustrated by its expanding clientele in the investment field.

BoV has inherited the entrepreneurial tradition of the National Bank of Malta, which helped turn the island's midget military services-based economy of the Sixties into the present considerable one depending on industry and tourism. BoV has indeed been a wizard house of moneymen.

In its bank museum one is overwhelmed by the justifiable pride demonstrated by a collection of memorabilia illustrating the multiplication of the bank's economic assets over the past 200 years. The roots of BoV have Rothschild connections, even before Rothschilds became a bank of world importance.

Tagliaferro's Bank was a constituent bank of the National Bank of Malta, and it acted as a Rothschild correspondent in the time of the Napoleonic wars, helping Britain fight Napoleon's blockade. Tagliaferro continued its close link to the Rothschild branch of the Naples bank right up to its suppression with Italian unification in 1860. There are bank documents to prove these connections.

The Tagliaferros came to Malta as Rothschild agents, and thus BoV can claim roots in international banking which are even more illustrious than those of HSBC. Banks and individuals connected with the National Bank of Malta must have been behind at least 80 per cent of all Maltese property development.

It is no wonder that BoV has the prospects of being a new money machine. It has inherited entrepreneurial talents and nourishes entrepreneurial banking ambitions.

BoV, however, is not a bank which rests on its laurels. New products and international initiatives are being developed constantly. A study of its financial ratios reveals that, although the present bank is still continuing with success its old development function, it is doing it while still maintaining a healthy balance sheet.

The Malta property boom of the late Sixties put the National Bank of Malta under strain, as revealed by that bank's balance sheet of early 1973. This does not mean that the National Bank of Malta was bankrupt. It was 25 per cent liquid, but it had taken on itself an economic development function which stretched its resources to the limit.

BoV as the successor bank of the National Bank of Malta, adopted a policy of strong financial ratios, while maintaining with prudence its old development function. This is why BoV has proved to be such a financial wizard. It has blended well the experience of the old with the ambitions of a new Malta.

Wizardry explained

Banking wizards do not operate by sleight of hand. They work hard to build their money machine. A great danger might crop up when they become too successful. BoV has known these dangers when it registered returns on equity that were indicative of a Malta banking market based on a duopoly and not on competition.

This is no longer the case. The present return on equity of BoV is not the highest ever registered, but it has been achieved against the strongest competition one can imagine. It is not only HSBC which has entered the banking field in Malta. There is also APS Bank, which is backed finally by a resource base that not even local entrepreneurs can hope to emulate.

APS does not grow faster because it has an obvious policy, which eschews rapid development. That bank cries out for, but rejects, a branch in the commercial centre of Sliema, which has become the island's financial hub. The Sliema market is not one of its targets.

The success of BoV's financial wizardry becomes even more remarkable when one sees how it is achieving an above average return on equity by European Union standards, while it holds off competition from HSBC in the upper reaches of the banking market, and that of APS in the lower areas of banking operations.

Return on equity (ROE)

A bank in Malta is a money machine if it surpasses by a comfortable margin the average return on equity of banks in the EU. It is no coincidence that Malta has been invited enthusiastically to join the EU. This is largely because it is underpinned by a sound banking system.

BoV's return on equity is a high 11.3% - a decline from the 13% of 2002. This compares well with the worldwide return on equity of HSBC, which stands at 12%, as reported by Bloomberg News. The return on equity of HSBC's Malta operation stands at 13.1%.

The fact that HSBC Malta is even more successful than the HSBC international operation may be to some bankers and politicians a matter of slight embarrassment. We should look for success but be cautious of immoderate success, even if it is not the fault of HSBC and BoV that Maltese entrepreneurs lack the willpower to create a new National Bank of Malta.

It is not money in Malta that is lacking, for more than Lm80 million have been lost in Argentina. The National Bank of Malta was created when most people in Malta went barefoot, and not like today, when most housemaids sport a mobile phone. The average return on equity of banks in the EU is only 7.6%. In Italy it is as low as 3.4%, while Finland registers the highest return of 17.5%.

One cannot overemphasise to the ordinary reader the importance of the return on equity (ROE) ratio. It is the most important of the profitability ratios, as it encompasses all the other ratios. The BoV's healthy ROE figure is also to be seen from the fact that a significant increase in retained earnings has been used to boost shareholders' funds.

It is evident that BoV has been for the last years strengthening its capital structure. There is no fiddling with capital, as is happening in Japan. We should have a look at this stage at what is happening in Japanese banks as regards their capital set-up and to realise how well run is Malta's banking system.

Japan is by no means a bankrupt country. It has ample foreign currency reserves, and it is classified as a creditor nation, occupying the 21st position out of 150 countries in the Institutional Investor schedule of country credit rating risk.

It is to be noted, however, that organised crime has crept into the Japanese banking system, and this has turned banks from being money machines into becoming mafia machinations centres. Maltese banks had organisational troubles in the Seventies and Eighties, but never on the scale of the present Japanese banking system.

The London Sunday Times at one time reported prominently a shareholders' meeting of a Japanese bank disrupted by gangsters toting machine-guns. The prestigious American magazine Business Week reported in June that Japan was still in dreamland about the bank crisis. It stated: "Japan's global banks - Mizuho Financial Group, UFJ Holding and Sumitomo Mitsui Financial Group - must maintain an 8% capital-adequacy ratio. But guess what? A big percentage of the capital base of those banks is also in deferred tax assets.

"In fact, if you stripped out all these paper credits from the capital bases of these banks, the ratios would plummet to 5.5%. That disturbing calculation comes courtesy of the FSA - the same agency that says a crisis is not imminent."

Cost-income ratio (CIR)

If the BoV's capital underpinning is superior to the best of Japan's banks, being as it is far more solid, its cost-income ratio (CIR) should be a matter of envy to the greatest of Germany's banks - Deutsche Bank. The cost-income ratio of Deutsche Bank is a flabby 83%.

It is no wonder that the German economy is in trouble, when what should be its major money machine is registering proof of hopeless management. Germany has the highest labour costs in the world, and this is reflected disastrously on its major bank's costs.

In the last HSBC Bank Malta accounts we read that its cost-income ratio (CIR) improved to 55.4% from 57.3% in 2001. The BoV's cost-income ratio is not a carbon copy of that of HSBC Bank Malta, but it travels in the same healthy direction.

BoV has registered a cost-income ratio of 58.4% (2001: 56.3%). This might reflect the fact that BoV's labour force is less docile than that of HSBC Bank Malta, as it carries far more political clout. One of the benefits HSBC has brought to Malta, as the world's largest local bank, is the belief that the business of banking is banking.

This proposition might sound simple, but it is one which even Deutsche Bank finds it difficult to implement. A bank can hardly be a bank in a country like Germany where socialist-inspired laws create an environment that is hostile to banking.

The cost base of Deutsche Bank will never recover before socialism gets out of the German banking system. Its share price is at present half what it was two years ago. If BoV were to get back to the employment practices prevalent in Maltese banking in the Seventies, then its present income-cost structure would collapse.

Net interest margin (NIM)

The net interest margin (NIM) ratio is another major indicator of a bank's profitability. BoV's ratio is in the region of 1.74% while that of HSBC Bank Malta is about 2.25%. The BoV NIM ratio is more than satisfactory for it is far above that of Germany, where it is a measly 1%.

Banks in Italy and the UK are above the 2% range, but in the United States we have the figure of 4%. American banks' NIM might suffer modifications once the massive corruption cleaning exercise is over in Wall Street. Since the Enron accountancy scandal exploded, Wall Street has been regaling us daily with tales of financial malfeasance.

Wall Street, unlike Japan, is taking its corruption cleaning exercise very seriously, and much is to be learned by Maltese moneymen from the unfolding of the various financial investigations.

Credit rating

BoV's international credit rating by both Fitch IBCA and Moody's is ripe for reappraisal. Malta is close to becoming an EU member. Malta's credit rating should now come to reflect the economic soundness of the organisation to which, for practical purposes, it now belongs.

It is well known that no bank in the world gets a higher credit rating than that of its parent country. There have been significant changes over the past year of Malta's international credit position, even before the outcome of the last general election.

International Investor now places Malta 28th out of 150 countries. It formerly occupied the 29th position for a very long time. The Institutional Investor rating is now exactly equivalent to that of Fitch and Moody's, which measures in particular a country's ability to pay its international debts, but it is a certain indication that the Fitch IBCA and Moody's ratings of BoV are due for a massive upgrading exercise.

No one paid Institutional Investor to upgrade the Malta rating. This is the freely supplied average opinion of 500 banks.

It is ridiculous for a bank like BoV, which demonstrably has some of the best financial ratios in the world, to have the comparatively poor credit rating that both Fitch IBCA and Moody's chose to give it. The 2002 BoV financial statement has this to say:

"Both Fitch IBCA and Moody's have maintained their ratings for the Group following a comprehensive annual review carried out earlier this year. Fitch reaffirmed the Group's short and long term rating of F2 and A- respectively while it changed the outlook from stable to negative. Moody's Investors' Services confirmed both the long-term and short-term ratings including the Financial Strength Rating at DX."

BoV's character as a money machine will not receive due recognition both locally and internationally before there is input and expertise in the local rating game. This is accepted by Moody's themselves, who have long ago admitted that it is impossible to arrive at a correct estimate of the credit rating of an enterprise without the full co-operation of the host country.

Mr O'Neill, the chief ratings officer of Moody's, stated in Institutional Investor in 1995: "Our network has largely been developed from scratch - France is an exception. But going forward, alliances with other agencies will grow in importance.

"We do not believe we can fully understand or rate credits, especially in emerging markets, without having local input and expertise. In these markets we find agencies that want the experience and resources of a major partner."

These words are an incontestable reminder that unless Malta does something for itself as regards its credit rating process, Moody's BoV work will remain by its own admission highly unsatisfactory.

Foreign interest

Is BoV giving HSBC Bank Malta the right type of competition? HSBC Bank Malta certainly have all employees from the highest to the lowest on their toes. BoV can give HSBC Bank Malta the stimulation of competition when it has the participation in its shareholding of a famous international bank.

We all know how hard the great French bank BNP tried to enter the banking field in Malta. International interest in BoV as a new money machine is always on the increase and it is not only French banks that are interested.

The facts in this article are ones which all BoV shareholders should seek to evaluate and, if they find them lacking, they should pose their objections. Malta has yet to learn about such a thing as shareholder power.

Mr Azzopardi Vella has advised Standard & Poor's. He has been a promoter of the Malta Development Fund. E-mail: johnazzopardivella@hotmail.com.