Curmi & Partners

BOV – annus horribilis!

By David Curmi 

It has been an annus horribilis for Bank of Valletta. The list of mishaps has been quite astounding. From the Torre Annunziato legal case, to the cyber security breach, to the loss of its last remaining correspondent bank, ING, the bank seems to be bouncing from one problem to another. 

The latest development is more of an internal one where the bank’s regulator, the MFSA, and in this case read the ECB since BOV is defined as a systemically important bank and therefore ‘enjoys’ direct supervision by the ECB, has written to it making a number of recommendations on the way that it manages the operations of the bank. Reading the extracts from the leaked letter in this newspaper, the recommendations focus specifically on improving the overall risk management of the bank and embedding this as part of the everyday operational culture.

Essentially the regulator wants the bank to be more risk aware and to ultimately, I believe, pick less risky business. This is no bad thing in the long run. In some ways, HSBC went through a similar exercise, of its ‘own’ volition a few years back. Today it is a stronger cleaner, and yes, less profitable bank. But it is a safer one and from a financial system perspective this is key.

It is important to stress however that despite all the issues, BOV remains a strong and fundamentally sound bank. Even assuming that it loses the Italian case and has to fork out the full €363 million, something which I think is unlikely, from a capital protection perspective its Tier 1 capital will still remain substantially above the minimum requirements laid down by the regulator. It is also a highly liquid bank meaning that it has plenty, in fact too much, cash in its system. There is little need therefore to be concerned about BOV from a viability perspective.

Are there areas that can be changed and improved? Most certainly there are. To my mind one of the challenges that the bank faces is its relationship with its largest single shareholder, the government of Malta who still own 25 per cent and crucially still appoints its chairman. I am firmly of the opinion that governments generally should not have such interests. They lead to conflicts which are extremely difficult to avoid.

As the largest bank in Malta, BOV has been an instrument of the growth we have seen in the local economy and its financials indicate the important role that the bank has played. Yet this part of the business has been managed prudently. Its loan book (customers) grew 2.8 per cent every year over the past seven years (despite the booming economy), with 50 per cent of its loan book relating to loans and advances to households, which is probably one of the lowest risk type of lending domestically.

Moreover, its direct exposure to the construction industry is just four per cent, with an additional nine per cent classified as real estate activities. Electricity, gas, air conditioning (possibly Electrogas) accounts for just two per cent of total loans and advances to customers.

Non Interest Margin is reasonable compared to the other local banks while non performing loans have been contained.  From this perspective the bank’s loan book looks prudent. Why the emphasis on derisking as indicated in the leaked letter to The Sunday Times of Malta?

This perhaps may be referring to the security breach the bank experienced in February. It could also be due to the bank’s exposure to the gaming industry and its international business. Here BOV needs to undertake a delicate balancing act. On the one hand its largest shareholder, is promoting these industries heavily. Yet it is common knowledge that once these businesses are attracted to the island they find it nigh on impossible to open bank accounts. And without a bank account you cannot operate. It is also true that these businesses do bring with them a higher risk of money laundering so there is a need to balance out undertaking such business with strong compliance and AML controls.

The transformation of the bank, to strengthen its business lines has also started. Decisions to exit areas such as the trust and custody business have been taken and are being implemented. Can progress be quicker and perhaps more draconian?  If needed yes but to be fair, if one looks at HSBC, it went through the derisking process only once their US arm was caught up in a Mexican money laundering scandal and the group was put under a Deferred Prosecution Order by the US Department of Justice. Perhaps this is BOV’s moment. 

Moving to remove some risk areas from BOV, or strengthening the management and controls surrounding these areas should therefore be seen as a positive development. Perhaps the way that this has come to the surface was messy. Yet how much of this is also about Malta rather than BOV should also be assessed. 

The loss of BOV’s US correspondent bank is another blow that reflects a derisking environment, not just in Malta but the world over. But why should BOV have over the last few years lost all its correspondent bank capabilities? This needs to be properly analysed. The role of a correspondent bank (US in this case) is critical to the success of any bank that wants to transact outside its home currency.

Without it, BOV will not be able to transfer US dollars, and Malta, as an aspiring financial centre will be relegated to the lower divisions. Perhaps this is where our authorities want us to play. Yet we as an industry should aspire for better. Not because we can make more money, but because we are fully capable of operating at the highest levels in the industry.

The collective impact of the various mishaps has certainly dented BOV’s reputation, though not its profitability. This may come later as the transformation that the CEO has referred to, takes hold and reflects in lower business volumes and higher costs as investment in IT systems, stronger structures and greater compliance takes effect. Meanwhile the bank continues to strengthen its capital base further. Investors and depositors should take heart from this. 


The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.