HSBC Malta CEO Andrew Beane speaks to Anthony Manduca after the bank announced its reported profit before tax for 2018 had decreased by 23 per cent.

Andrew Beane believes HSBC Malta’s latest financial results – which saw income and lending declining and expenses increasing, with the cost-to-income ratio escalating to 73 per cent – “reflect the significant progress HSBC Malta has made to implement its stated strategy, and notably to embed the highest global standards of compliance throughout our business”.

He tells this newspaper: “To­day’s economy is a global one, and providing surety of access for Malta’s businesses to international trade and capital flows requires banks to operate to the required standards, and HSBC is proud to offer this certainty to our clients.”

The HSBC CEO says that as expected and planned for, in the short term this has increased costs and reduced revenues, “but the investments we have made support a sustainable, high-quality level of profitability which secures the long-term sustainability of our business, serving our cus­tomers, being a significant employer, paying taxes and generating a dividend for shareholders.”

He adds: “We are also in an economic cycle which locally is charac­terised by high headline GDP growth, but equally is juxtaposed with negative European interest rates. In simple terms, this means that for a bank, the business of holding deposits for customers no longer generates revenue and this is a significant factor in revenue reduction.” 

This, he says, is a cyclical factor, and should interest rates return to normalised levels in future, this would restore the revenue generation associated with the costs of gathering deposits.

Mr Beane points out that all economies pass through cycles and HSBC’s conservative credit discipline means “we are also thoughtful to ensure we take the right lending decisions that will sustain themselves through the down cycle as well as during the present context”.

He adds: “The credit quality of our book continues to improve with a further reduction in non-performing loans (NPLs), which have reduced by €70 million since 2016.”

He says that the bank’s direct costs, namely those not associa­ted with strategic change, have been well controlled over the period and have more than fully absorbed the effects of inflation.

“More broadly it is important to see HSBC Malta as emerging from a period of strategic change which now will enable the bank to focus on growing revenue. For example, since we started this next phase in our development towards the end of last year, new personal customers are up some 40 per cent and new home loans sanctioned are up more than 10 per cent.

“We have also seen encouraging performance from key divisions such as global markets and international banking. We expect more of our divisions to return to a growth phase in 2019 and are confident in our ability to grow the bank in a measured way over time while remaining within our high standards of risk management.”

It is essential that the rules of doing business within the global financial system are not only well written but also robustly enforced

When announcing the bank’s financial results earlier in the week Mr Beane highlighted the fact that in 2018 the financial services sector in Mala suffered from reputational risk internationally.

Has this phenomenon affected the flow of international business to Malta in general and to HSBC in particular in 2018?

What would he recommend should be done to reverse this trend apart from tightening anti-money laundering processes? 

“Banking is a business that is built on trust, both with clients and across the international network of payments, trade and capital flows which are regulated within the global financial system to agreed standards. Where these standards are not fully met it becomes more difficult to access these flows and costs increase,” he says.

Mr Beane stresses that this year Moneyval – the Council of Europe’s monitoring body en­trusted with assessing compliance with international standards to counter money laundering and the financing of terrorism – will publish its assessment of compliance controls in Malta and “this will be an important independent assessment and from which any recommendations will need to be fully implemented without delay”.

He adds: “We welcome the new financial crime compliance plan announced by the MFSA as it is essential that the rules of doing business within the global financial system are not only well written but also robustly enforced.”

Most bank lending in Malta is secured by property, and Mr Beane had remarked in his pre­sentation that the legal process to realise security to repay non-performing loans is too complex and time consuming.

What should be done to speed up the recovery of security?

He says it is important to recognise that security is a secondary form of repayment and that a bank will only ever want to realise that security as a last resort.

“We work diligently with all borrowers experiencing difficulty to avoid that situation. The principal challenge relates to lending to companies where, on rare occasions, there is a need to repay a loan from an asset pledged as security rather than from the cash flow of the business.

“Today it can take several years to complete this process, which has a number of negative effects.

“Firstly, it reduces the supply of credit as banks are understandably more conservative in granting loans due to the difficulty in recovering the security in the rare event there is a default.

“Secondly, it means that assets pledged as security can become tied up for several years rather than being re-used to benefit society; for example a commercial property could remain vacant and undeveloped.

“Thirdly, following new European Central Bank rules, banks will need to raise capital against these facilities where the recovery process is exceptionally long. This means that the capital cannot be used to support new loans or to be paid to investors as dividends.” 

He says reform would further enhance Malta’s attractiveness to investors as the current outcome in the internationally regarded World Bank ‘Doing Business’ index is nega­tively affected as the existing mechanism for corporate insolvency does not perform well when benchmarked internationally.