PKF encourages a new dawn in banking

The editor of The Sunday Times of Malta in his editorial named “Economy banks on prudence” took the Prime Minister to task for his comments on bank lending (or the lack of it).  In his defence of the banks the editor quotes a Central Bank survey which contradicts the perception that banks are risk averse since this shows that 85% of SMEs applying for overdrafts get what they asked for.

In the editor’s opinion, it was thanks to the prudence of local banks that enabled the economy to avert a recession in 2008. He argues that banks need to protect entrepreneurs from their enthusiasm to expand and grow. In truth, local banks did better than others in Europe as they are over liquid and charge higher rates than recommended by the ECB.

Such facts were revealed in an ad hoc study commissioned by the MCCAA last year following insistence by PKF and the GRTU that the Midas touch of banks in Malta partly reflects higher charges. The plot thickens as Kristy Debono MP, shadow minister of finance, reported in parliament claims of lending malpractices according to her informants. These allegations were rebutted by the Bank of Valletta after compiling an internal audit and submitting a confidential report to banking supervisors which found no traces of malpractices.

The external auditors, PriceWaterhouse Coopers did not comment on such allegations.

In the midst of the Panama Papers controversy, Kristy Debono heaped more pressure on the BOV after she insisted (and published a full article in the Times of Malta) that she stands by allegations of bad lending practices. The qualified economist insisted that the internal investigation by BOV “left much to be desired”, as it had not probed individual files. When pressured to reveal details, she refused to provide information on the matter – stating she would not compromise her sources.

So far, no official probe has been undertaken by the MFSA or the banking supervisors or PWC. The BOV has in the past been subject to several infringement notices by the MFSA in its dealing with a subsidiary fund company which administered a failed La Valette multi-manager property fund.  In fact, it was in June 2012, that the MFSA (after a number of unit holders took the dispute against the fund to court) imposed an administrative penalty of €203,150 on BOV, which together with its subsidiary, was found negligent in relation to the selling of units in the La Valette Multi-Manager Property Fund to investors.

This fund lost about €50 million. It does not rain but it pours as the media discovered that a local online bank went into administration. Nemea was registered as a bank in 2008, with Niemelä and Mika Lehto as the founders. Maltatoday revealed in a scoop that Nemea had appointed ex-prime minister Lawrence Gonzi as a non-executive director in charge of finance although published Nemea accounts at the MFSA did not reveal him as a director.

The last available published accounts of 2012 show Joseph F.X. Zahra as a sole local director. Under the Gonzi administration Zahra was appointed in top positions of power, including the chairmanship of the task force involving the changeover from the old domestic currency to the euro. As a managing director of MISCO, itself a leading recruitment and respected producer of many confidential reports commissioned by the government, he was well regarded by the Gonzi administration and appointed chairman of the Middlesea Insurance company, and elected director on the BOV board.

Misco co-directors have all been highly regarded as political appointees by the Gonzi administration and enjoyed patronage as directors of major government-run institutions, including Air Malta, and act as consultants to an audit firm. But our home grown banking oddities are overshadowed by the turmoil in London post Brexit.

The Bank of England has cut interest rates for the first time in more than seven years and warned high-street lenders to pass on cheaper borrowing costs to customers.  Thus interest rates go down to 0.25% from 0.5%. Perhaps we can take a leaf from the bank governor’s book. He took a tough line with commercial banks, telling them they had no excuse not to pass the lower official borrowing costs onto customers.

Last March, the ECB also lowered the rate on the marginal lending facility to 0.25%, which it offers for overnight credit to banks within the eurosystem. Back home, PKF received complaints from SME’s that they pay far too much on overdrafts. Hence, it is not surprising that MIMCOL last month launched a scheme to provide seed capital by assisting investors and business angels in tax credits when lending to start-ups and SME’s.

The recent admission by the minister of finance that Malta’s banks are risk averse strikes a discordant chord in the efforts of FinanceMalta and Malta Enterprise, complemented by practitioners and firms such as PKF who tour the globe trying to attract foreign business. All this in context of Prime Minister Joseph Muscat’s recent call on banks to loosen their lending practices. With diplomacy, the finance minister can delve into what are the real reasons why the banks are so risk averse, particularly in lending to business associated with emerging economies such as Iran, and of course solve the mystery why they never geared up to process credit card volume generated in millions by over 500 iGaming companies.

Banks are making good profits. Starting with HSBC Malta, its overall profit rose by 13.8 per cent to reach €41.3m during the last six-month period, but that increase was due to a one-off €10.8m sale of investment in Visa Europe, which was bought by Visa Inc.

The adjusted performance was in line with the management’s forecasts, the bank said. Nostalgically we recall how 15 years ago amid much aplomb and fanfare John Dalli, then minister of finance in the PN administration, sold a majority of shares in MidMed bank to HSBC for the princely sum of Lm83 million. The bank’s total assets now reach €7,284m, the while customers’ reached €5,002m as of 30th June 2016.

However, the pressures on international banking such as low interest rates and increased risk from non-performing loans have culminated in tighter margins achieved by HSBC in London. The UK faces a ‘mild recession’ as its economy shrinks at the fastest rate since 2009 and sectors such as construction show a drop in the aftermath of Brexit. HSBC interim results in London show profit before tax drop by 29%, reflecting a US$3.5bn fall in revenue.

Perhaps as expected, the Royal Bank of Scotland has taken the biggest hit to its financial strength of any UK bank as its capital ratios fall by more than seven percentage points under the tests imposed by the European Banking Authority.

In conclusion, the banks in Malta are not guided by the lending rates suggested by the ECB – in fact the MCCAA study shows 5.16 per cent charged for loans up to €1 million and 3.75 per cent for loans over that amount.

This works out as the fourth highest in the eurozone, after Portugal, Cyprus and Slovenia.  All this seems to be leading to a conclusion that shareholders of banks are in a race to ratchet up more return on capital while in the long term they feel it is the government’s responsibility to see that the rest of the economy will grow and thrive. Too much prudence will dampen our future growth prospects following the adage … no risk… no gain.

George Mangion is a senior partner of PKF, an audit and consultancy firm. He can be contacted at [email protected] or on +356 2148 4373