• APS in negotiations since January 2023
• HSBC ‘shopped around’ but found no international buyer so far
• Fate of deal relies on regulator
• Minister wants international name

HSBC’s global shareholders and APS Bank were in potential takeover talks as early as January 2023, but negotiations came to an abrupt halt that July when APS stepped back from the deal, according to sources.

While the deal was off the table for seven months, the international banking giant is believed to have shopped around for an international buyer to take over its Malta operations but failed to secure a name.

The bombshell news of the potential deal between HSBC and APS, first revealed on Wednesday, has raised questions in Malta’s financial world, with some experts telling Times of Malta they find it difficult how this deal would overcome the regulatory hurdles it is likely to face.

HSBC’s decision to leave Malta is believed to be driven by its global push to focus on corporate banking in Asia, at the cost of cutting down on retail banking within Europe.

Sources say that the pause in negotiations left both HSBC and APS free to sound out other options, with HSBC believed to be eager to find a buyer that would allow it to pack its bags and leave Malta.

There was no further contact between HSBC and APS for some seven months, with the deal believed to be off the table, until talks tentatively resumed in late February 2024.

Talks intensified in recent months, with both parties now agreeing on a number of key elements of the deal, including the price, the possibility of HSBC retaining a small share in the new bank and to offer assistance with the transition, according to sources.

But the government is believed to be unsure of the deal with APS, with finance minister Clyde Caruana, especially, insisting on HSBC finding an international buyer to take over its Malta operations.

‘A small fish swallowing a shark’

One financial expert likened the deal to “a small fish trying to swallow a shark”, saying that the suggestion that APS can muster the capital needed to go through with the acquisition is “hard to believe at face value”.

A glance at the two banks’ financial declarations reveals that, in many respects, HSBC Malta is twice the size of APS. HSBC holds twice as many deposits, has roughly double the equity and reports almost twice as many funds in its balance sheet.

The only area where the two report similar figures is in their loan portfolio, with some analysts believing that HSBC has been deliberately cutting down on its loans in order to facilitate a quicker exit from Malta when the time was ripe.

One analyst suggested that HSBC could look to make the deal more realistic by shifting some of its assets to its other international partners, but admits that even this seems “far-fetched”.

Stockbrocker Paul Bonello agrees: “This isn’t just the small fish eating the big fish, it’s more than that. The difference in size between the two is just too big”.

But, inside sources say APS is unlikely to have entered into negotiations without guarantees that it can finance the deal. The bank is believed to have combed through the deal’s financial workings with the help of several top local and international financial advisers.

Did HSBC shop around?

Experts agree that APS is unlikely to have been HSBC’s first port of call when putting the bank up for sale, with the bank likely to have first searched for international buyers.

“HSBC must have been trying to shop around internationally for ages,” Bonello says, arguing that the bank’s eventual departure from Malta had been an open secret for some time.

Whether the bank was ever likely to succeed in finding a foreign buyer is another matter entirely. Experts who spoke to Times of Malta all agreed that the country is hardly an irresistible proposition to major international banks.

“Don’t think that major banks are lining up to invest in Malta,” one analyst said.

“Malta is a tiny market and the administrative costs to meet regulatory demands are high. Combine that with the reputational damage Malta has suffered over the years and you can see why big banks wouldn’t bother with Malta”.

One observer said Malta’s greylisting would have had a major impact on its reputation, meaning that big, reputable banks would prefer to steer away.

Malta is made even less attractive by what one analyst described as “ridiculous” one-size-fits-all European Central Bank regulations, which state that the ECB must oversee the operation of the largest three banks in each EU country.

In practice, this means that several larger banks across Europe are free of the level of scrutiny, and related administrative costs, that Malta’s top three banks face, despite

Maltese banks being a fraction of their size.

“With Malta’s relatively small profit margins, investing in Malta only to have to go through that hassle is simply not worth the trouble.”

Go local or go global?

Opinions over whether Malta should be fishing for an international player to take HSBC’s place are split.

The Nationalist Party has already staked its flag, with shadow finance minister Graham Bencini telling Times of Malta that, if HSBC does leave, the government should try to attract another major international bank of the same stature to take its place.

Analysts are less categorical.

Some, such as Bonello, say that the loss of a top-tier banking presence could spell bad news.

“HSBC leaving will make it more difficult to attract serious investment – not gaming or crypto. Malta’s foreign direct investment will suffer and we’ll struggle to diversify our industries,” he said.

But, Bonello admits, Malta’s track record at attracting foreign banks has often resulted in unmitigated disaster, with the likes of Satabank, Nemea Bank and Pilatus Bank all leaving calamity in their wake.

Other experts echo Bonello’s fears, warning that HSBC’s departure would essentially “unplug Malta from the international network”.

Some others are less convinced, saying that similar arguments were bandied about when HSBC was being introduced to Malta in the first place.

“HSBC came with the promise of connecting Malta to the international grid but, when push came to shove, such as when Malta was struggling to find correspondent banks, they barely raised a finger to help.”

Ultimately what really matters, some argue, is that HSBC’s place is taken by a reputable bank, “and there is no denying that APS is a good bank”.

What’s more, they say, recent history suggests that HSBC’s departures from several countries around the world proved to be smoothest when a local bank stepped in to take its place.

In Greece, for instance, HSBC’s operations were taken over by Pancreta Bank, a bank even smaller than APS, while the bank’s departure from Canada saw the Royal Bank of Canada’s taking over.

By contrast, when HSBC quit French retail banking, it did so by selling its assets there to a group controlled by a US private equity firm, Cerberus.

Will the regulators step in?

Even if HSBC and APS can agree on a deal, it will be sectoral regulators that determine whether or not it goes ahead, experts say.

Since the deal involves systemically important banks (meaning banks large enough that their collapse could wreak havoc on a country’s economy), the deal would need to be approved by the ECB, not just the Malta Financial Services Authority, the local regulator.

This means that the ECB could well veto an eventual deal, if it believes it to be unrealistic or harmful.

Bonello believes that this is likely to be the case, for several reasons.

For a start, he says, the ECB will be worried about what this would mean for competition across the banking sector, with the deal “likely to raise anti-trust issues”.

Even more problematic, he believes, would be the concerns over APS’ ability to finance the deal in the first place.

MFSA ‘vigilant’, union seeking clarification

Reports of the deal saw the share prices of both banks sharply shift, with HSBC’s shares plunging 18% while those of APS surged by almost 12% on the same day, raising questions over why trading for shares of both banks was not temporarily suspended.

A spokesperson for the Malta Financial Services Authority (MFSA) declined to comment on the matter, simply telling Times of Malta that while discussions with licence holders are “confidential”, the authority “remains vigilant in overseeing any developments within the industry and will take appropriate measures when and if necessary, in line with its obligations at law”.

Meanwhile, the Malta Union of Bank Employees (MUBE) told Times of Malta that it is “concerned” over what a potential deal could mean for employees at both banks, particularly those currently holding similar roles in each respective bank, with reports of the deal leaving many employees “in limbo”.

A spokesperson for the union said that MUBE had written to APS Bank “seeking clarification and/or confirmation to media reports”.