A famous economist once described banking as being magic. He had not yet seen the last astonishing accounts of HSBC Bank Malta plc, as he would have gone one step further in expressing his wonder. He would have been surprised how such a profitable bank fails to attract other entrants into the local banking field.
There seems to be no lack of risk capital in Malta, for the island recently lost Lm80 million in Argentina. This money would have been better employed in promoting a new bank. Malta once had a banking class, but it has been destroyed along with the palatial villas they used to live in.
The new leaders of Malta's banking sector are even more successful than those of a generation ago. Let us study the reason behind their success, and seek not to be overwhelmed by envy, but by a realisation that there are still vast, unexplored tracts of banking activity in Malta that entrepreneurs with money and education can yet take up.
Banking requires a high level of knowledge of financial ratios. The person who reads the accounts of HSBC Bank Malta will get nowhere if he cannot compare its financial ratios with those of HSBC's worldwide operation and those of other international banks. It is meaningless to evaluate accounts in isolation.
Banking education
As we have already stated it is chiefly lack of banking education that prevents Malta's entrepreneurs from having their own bank. Such banking education extends not only to knowledge of financial ratios but to the stimulation of entrepreneurial need achievement.
There are ways to tackle this problem, and hard-working entrepreneurs can be helped to understand the significance of a bank's accounts by having their attention directed to strategic ratios. These would in turn be further highlighted by comparison with parallel strategic ratios of successful international banks. Every offensive must have a strategy.
It is highly taxing to know and seek to compare every singly ratio of HSBC Malta with that of other international banks. Modern banking analysis has however evolved techniques whereby a great bank can be analysed in a few paragraphs with the help of simple graphs.
These techniques are best seen in The Economist, which have made it the world's most reputable financial publication, with a worldwide circulation of half a million copies. An entrepreneur will go a long way in evaluating HSBC Malta's accounts if he focuses his attention on three strategic ratios.
One is the return on equity employed; the other the cost-income ratio; and the third the net interest margin. This is not to say that other bank ratios are useless compared to three quoted but they are enough to show that banking in these islands is probably more profitable than was the extraction of gold from the Klondike river.
Before we proceed with this banking analysis, we must pay tribute to the high seriousness of HSBC Bank Malta. Its accounts are not like those of certain banks in the Malta of 30 years ago, which were obviously trying to hide a financial situation which was under strain.
There is every attempt at transparency, including the publication of directors' salaries as full-time bank employees. This transparency will certainly have its impact in the local public remuneration field for there are employees in HSBC Bank Malta who are earning a multiple of what is being paid to a judge, who is expected to have the final word in any serious litigation involving the bank.
HSBC Bank Malta put forward their numbers without fear or favour. If we do not analyse them and draw our conclusions, it will be nobody's fault but ours.
Return on equity (RoE)
The first remarkable financial ratio of HSBC Bank Malta, we shall examine is return on equity (RoE), which I will first seek to define. This is the most important of the profitability ratios, as it encompasses all the other ratios.
As we all know, an adequate RoE employed is why people invested their money in a business in the first place. We must seek to remove the mystique surrounding financial statements, and evaluate an attitude of mind which will not be overawed by a slab of figures in small print.
Accounts make fascinating reading for those who are eager to delineate the greater picture, which they conceal. RoE is nothing more than the net profit taken as a percentage of the capital employed.
HSBC Bank Malta's net profit has been on a significantly rising scale in the past four years. It has risen from Lm9.9 million to Lm15.4 million. It would have been wonderful if all balance sheets in Malta expanded in this fashion over the same period.
One has to note that there could have been less use of the bank's profits to boost the bank's equity. Thus HSBC Bank Malta's RoE is understated, as the bank's profit and loss account magnitude has been allowed to expand in an unreasonable fashion.
On page 20 of the accounts, one sees that out of Lm15,364 million attributable to shareholders only Lm5,027 million have been paid in dividends. These have grown by 12.5% in one year. The rest went to boost shareholders' funds.
This has been done when the bank needed to pay out more money in dividends to boost a depressed share price. An advance in HSBC Bank Malta shares will not just help that bank, but will also boost the stock exchange where it is a local leader.
The profit after tax to HSBC Bank Malta equity is 13.1%. This is higher than that of its worldwide operation, which is 12%, as has been recently reported by Bloomberg News. The young bankers of HSBC Bank Malta were recently told that theirs is the most profitable HSBC banking operation in the world.
They have also been told that the average levels of their educational qualifications are double those to be found in a UK bank. This is an indication of the power of educational qualifications to produce wealth and that there is ample talent for a new bank in Malta.
HSBC Bank Malta's RoE is further highlighted by Eurostat, the central statistics agency of the European Union, in comparing European banks' RoE. The Italian banking system is at the bottom on the RoE yield, with 3.4%. The top country is Finland with 17.5%, and the EU average is 7.6%.
Banks in Malta, and not just HSBC Bank Malta, are much above this average. Our banks are earning supernormal profits, which can take a lot of competing away by new entrants into the field. This is not to say, however, that everybody has the credentials to be granted a banking licence.
Cost-income ratio (CIR)
In the last HSBC Bank Malta accounts we read that the cost-income ratio (CIR) improved to 55.4% from 57.3% in 2001. This ratio has to be compared with that of Deutsche Bank, which is a flabby 83%.
This is indeed a dramatic contrast, but Deutsche Bank, along with the rest of the German economy, is in serious trouble, and there is no quick way out of the quagmire for that country's banks. Can Malta's banks and its economy be said to be in the same quagmire?
The answer is: far from it. The healthy financial ratios of our banks are there to prove it, and this is in spite of the fact that so much of Malta's industry is obsolescent. There are obviously some sections of economic productivity like tourism and STMicroelectronics, which are making up for any deficiency, the economy might have.
So if Malta gets rid of obsolescent industry there can be a dramatic improvement in banks' financial ratios, which are at present by no means unsatisfactory. This does not exclude Bank of Valletta, which although not underpinned by a name of world fame is holding well against the HSBC Bank Malta competition.
Net interest margin (NIM)
The net interest margin (NIM) ratio is another major indicator of a bank's profitability. HSBC Bank Malta's NIM is in the region of 2.25%. This would put it far above Germany, where it is less than 1%, about equal to that of banks in Britain and Italy, and considerably less than in the United States, where it is slightly less than 4%.
Malta's position as regards NIM is satisfactory. It allows room for more players in the banking game. A commercial bank can hardly survive with a net interest rate ratio of less than 1%, while one of 2.25% is comfortable indeed.
An interest rate margin ratio of 4% is exorbitant, and is indicative of oligopolistic collusion in the banking sector, which is bound to affect negatively the working of competitive forces on a stock exchange.
Another way to express NIM in popular terminology is to say that if banks become too wealthy because of lack of competition they can put everybody in their pocket, including a country's lawmakers.
If we want to serve democracy we have to be brutal about certain facts. The banking power amassed by Weill and his friend Frank Zarb in the US was the envy of most politicians, and it had its nemesis in the present downturn in that country's stock exchange. Oligopolistic collusion makes economic organisations careless about their accounting.
Need achievement
Anyone examining HSBC Bank Malta's accounts realises the enormous banking need achievement. These accounts would help put Malta in a very high position in the Berlin-based transparency index, which measures corruption perceptions around the world.
There is every attempt in those accounts to represent a transparent operation, and a foreign direct investor cannot fail to be impressed. HSBC Bank Malta has yet to capture some of the banking need achievement that Mid-Med Bank had under the chairmanship of Norman Mifsud.
It is easily within the power of HSBC Bank Malta to reactivate such a profitable financial organisation, like the Malta Development Fund. It is obvious that venture capital does not fall within the range of policies which HSBC Bank Malta has at present.
This is indeed a pity for, although HSBC Bank Malta has perfected an already successful commercial bank operation, namely that of Mid-Med Bank, it has not done much in the field of economic development.
It must be possible for us to point out which particular project owed its success primarily to HSBC Bank Malta. There are promising projects in the Tigné area, which would benefit from the attentions of a banker who would like to satisfy his urgings of need achievement.
The strength of HSBC Bank Malta's accounts would allow it to play the role which the Renaissance Medici bankers played to Florentine art. The brilliant Turner watercolour exhibition at the National Museum of Fine Arts was greeted with enthusiasm. That Turner was obtained by Mid-Med Bank when it was under the chairmanship of Mr Mifsud.
We are happy to see HSBC Bank Malta continuing the fine arts policy of that successful banker. The promotion of fine arts is the best underpinning of a tourist industry, which is close to being 25% of Malta's economy. HSBC Bank Malta feeds on tourism so it should help to sustain it.
A financial estimate of the HSBC Bank Malta art collection would make an appropriate small print entry in the banks accounts. Mid-Med Bank has been acquiring art over a large number of years. It is time someone makes a financial estimate of that treasure.
HSBC's Malta banking magic should extend into building a significant art collection.
John Azzopardi Vella has advised S&P and been the promoter of the Malta Development fund. E-mail: johnazzopardivella@hotmail.com.