21 - 27 June 2001

Strategy for the future

In spite of strong competition and lower financial results, Bank of Valletta has managed to weather the storm relatively well. The bank’s chairman, Joseph F.X. Zahra talks to David Kelleher about his plans to consolidate its local business and tap overseas markets

The banking sector has changed considerably over the past few years, even more so following the sale of Mid-Med Bank to HSBC. How has BOV been affected by HSBC?
There have been a lot of changes and developments in the financial services sector, such changes starting off in the early 1990s when BOV was the first bank to go out of the traditional banking sphere of deposits and advances and enter the areas of bancassurance and fund management, to give two examples. We have seen progress taking place in the financial services sector not only in Malta but also on an international level as banks restructured themselves.
The entry of HSBC in 1999 undoubtedly helped in escalating the process of change which had already begun. But it is a fact that a global player that started operating in what is relatively a small market would have its impact. BOV’s structures and the people’s attitudes were undoubtedly prepared. In fact, if one had to look at the results over the last few years, we have proved to be more than worthy competitors to a giant like this global bank.

The latest financial figures show a considerable decrease in profits compared to last year. Is this due to a negative performance or extraordinary items last year?
The question of lower profits during the first six months compared to the first six months of last year, is made up essentially because of exceptional gains made during the first six months of last year and a market situation that is very much dampened in comparison to 2000.
If one had to look at the profits last year, a number of components were exceptional items. Profits made from an actuarial revaluation of assets in one of our associate companies, Middle Sea Valletta were in the region of Lm2m. There was also a dealing profit made in the first half of last year in the region of Lm1m which was the result of an opportun-ity that existed to make this type of sale. If one had also to look at the estimated effect of the local stock market on profits for the first six months, this has been in the region of Lm800,000. So if you add all that, you’ll have Lm3.8m. We have continued with our provisioning policy and our intention is to bring the percentage of provisions to our advances as close as possible to the international benchmark. Our provisioning percentage is four per cent compared to our major competitor which stands at 4.5 per cent. The international benchmark is in the region of five per cent. This is a deliberate strategy on our part. We are doing this in the light of the reforms which are being recommended by the Basle Convention for a more prudent provisioning policy.
We have therefore increased our provisioning by Lm1m during the first six months. This was not done last year. Thus the total amount of what one can call exceptional factors last year which were not repeated this year, as well as our more prudent provisioning policy, are in the tune of around Lm4.8m.
This is why I have stated that the fundamentals of the business are very strong; interest margin has increased by five per cent and deposits increased by nearly eight per cent while advances increased by 11 per cent.
Has the increase in provisioning percentage been taken also due to a fear that the negative economic situation in Malta could lead to an increase in bad loans?
It is a deliberate policy on our side to increase our provisions to what is considered to be the international benchmark. In 1996, the BOV percentage was 2.7 per cent. In 1999 it was increased to three per cent and now to four per cent in March 2001. Why is this? Basically provisioning is measuring two elements – general provision on the whole portfolio (as advances grow, provisions also grow). It is also a fact that with restructuring taking place in a number of businesses and the current business environment, there would also be a component of specific provisioning which must be taken into consideration. This is normal and our provisions are still lower than international benchmarks.

Another factor is that in the past the bank gave out loans based simply on the business plan and projections. However, the bank is now making sure that there is always adequate collateral. Is this the case?
In fact, it would be more of the reverse situation. Although collateral is important, I must insist that, we are stressing more on the viability of the project as well as the sources of repayment to ensure a smooth flow of funds to repay that loan. Although we have always taken a holistic view on all projects, considering the business plan and viability of the proposal, the issue of collateral was important and still is. What we have to make sure is that the main focus is on the viability of the project and the ability to repay itself rather than having to depend on the value of the collateral.

Competition. Privatisation. Internationalisation. At what stage is the privatisation process vis-à-vis BOV and how will it affect the bank’s positioning and strategy?
Government is committed to sell off its remaining 25 per cent in the bank and I believe this is a move in the right direction. This move would give more space for foreign and Maltese investors to participate in a local institution that has an important role in the market, with over 43 per cent of the market share. It will be important to have a strategic investor who will add value to the bank by means of strengthening the areas of, for example, product development, and possible expansion within a Mediterranean perspective. At the same time, democratising equity participation would give an increased opportunity to Maltese to take part in the success of this local institution. It is also essential that this process will further strengthen our competitive-edge, namely a bank which has a clear understanding of the local market and a professional manner to deliver its services.

The latest Moody’s report also comments on the banking sector and its outlook has been relatively positive. It mentions the fact that local banks depend on the authorities for support. Will the departure of this shareholder affect BOV’s position?
The Central Bank would still regulate the local banking sector be it a “local” or a “foreign” bank operating in Malta. It will also
provide the usual guarantees that any Central Bank in a civilised country would give. Moody’s has often asked whether there is still depth in the market. Yes, my reply is a definite “yes”. There is still big potential. There are a number of products such as pension schemes that still have to be introduced, as well as leasing and general insurance. There will be a stage when banking institutions will be going into this sector of insurance as well. However, we also have to look at the width of the market and this is where the international partner will come into play. That is why we have set up representative offices in Tunisia and in Libya. All I can say at this stage is that the results from both representative offices are encouraging. The Southern Mediterranean makes part of our hinterland. We feel that the Mediterranean forms part of our destiny and we are keen in seeking partnerships on an international level to develop business in this area.

Competition. Brokers and other financial intermediaries have been ‘grumbling’ that banks are now eating into their own market share, as the banks push their own products. What are your comments?
It is true and we were the first to do so when we opened our stockbroking arm and when we opened our financial services arms in the 1990s. However, the result is that rather than eating into other intermediaries’ share, we have increased awareness among the public, generating more business. We have seen this in a number of areas, such as life assurance. We will undoubtedly see the positive effects of our involvement in the stockbroking business once the sentiment in the stock market has improved. There is no doubt that the process of deregulation will go on and Malta will have to participate in the changes that are happening abroad in this field.

You mentioned Libya and Tunisia. What is the bank looking for in these two countries?
All we have at the moment is a rep office. We believe that this exercise could develop over the coming years with BOV looking at particular market niches in these countries and thus position itself in those market segments. There are a number of areas such as trade finance and investment banking, as well as private banking that could be explored.

The bank’s future plans. Do you see banking moving more into investment banking?
Investment banking is an area which is very exciting and we have started off by assisting a number of companies in their public offers on the stock exchange. We have also been appointed as advisers on a number of state- owned companies that are being privatised, in particular Malta International Airport. We have partnered with BNP Paribas on the MIA privatisation and this is proving to be a perfect venture, one which will allow us to examine other areas of investment banking, not only in Malta, but overseas.

And new banking products?
Since the beginning of our financial year last September, we have introduced seven new products. There are other products that are being developed either in-house or along with third parties.

Will BOV be venturing into cyberspace and internet banking, offering the full range of
services?
In April this year we signed an agreement with BROKAT, a German company internationally-renowned for the development of e-commerce software, to develop for us multi-channel delivery software. This is the first time we are announcing this project. We will start off with an upgrading of our telebanking services but then move into internet banking and the setting up of a sophisticated call centre. We strongly believe that we cannot be kept out of what is happening on the e-commerce front. This is a big investment, and like most investments one cannot easily measure the type of return one can get in the short-term. Yet, it is an investment that must be made at the right time. It is a fact that most young people spend up to two hours on the Internet every day and this means that having an internet banking facility will provide a practical, virtual delivery channel to this emerging market segment. This is a sphere specifically targeting the young people’s market and business.

What is the bank’s future strategy for the coming years?
I would talk about the immediate future. We are working on a two-pronged policy. The first part is that of increasing our non-interest income and there is a lot of scope in the areas of bancassurance, stockbroking and investment banking. We believe we can do much more in these areas. A substantial and structured sales process is directed towards this objective. There is a lot of potential. The second part of our strategy is cost-containment and to ensure that all decisions taken will result in the highest value possible by increasing business efficiency and eliminating waste.