Issue link: https://maltatoday.uberflip.com/i/1276031
06.08.2020 6 OPINION I n a wave of bad reports on bank profit statements, one realises that the drop in profits caused by the COVID-19 pandemic, encouraged overseas bank di- rectors to trim their salaries/bonuses in sympathy with their suffering depositors. In the first quarter of this year, HS- BC's chief executive said he would do- nate a quarter of his base salary, about £160,000, to charity for six months. He will also not take his annual cash bo- nus, which would have been as high as £1.2m. is gesture was copied by the CFO who is donating £93,000 and for- going £706,000, while chairman Mark Tucker will donate his entire 2020 fee to charity, about £1.5m. HSBC is not the only top global bank to show solidarity with the community. Its example, is followed by other direc- tors of major UK banks, including RBS and Lloyds, who agreed to give up their bonuses for this year. Due to the dire fi- nancial position of UK banks, the Bank of England recommended a restriction of bonuses during the pandemic. Why this sudden drop of profits by banks - a sector which perennially beats the trend and sails through any rough weather? In the last 2007/8 financial crisis, many bankers were blamed for triggering the global recession due to light touch reg- ulation - particularly over risky invest- ment banking adventures. Most global banks were bailed out by their respec- tive governments as they were consid- ered too big to fail. Financial stability was gradually restored at a heavy cost to taxpayers. Barclays, the darling bank that spon- sors UK Premier football league, has taken a further £1.6 billion hit from the coronavirus crisis in the second quarter of the year. It posts a pre-tax profit of £1.27 billion in the first half of the fi- nancial year, down from £3 billion the year before. e badly bitten wolf has reported that the impairment charge will reach a little over £1.4 billion as the bank prepared for a slew of bad loans. As expected, it is citing the impact of coronavirus. But how did the local banks fare? At this juncture, both BOV and HSBC in Malta reported disastrous results over the first six months of this year. Not to worry, say the pundits as there is nothing fundamentally wrong in the prowess of management. All is well, they reply in unison, since one can re- ally and truly conveniently blame COV- ID-19, for the shameful results. Sadly, for the first six months of 2020, the Bank of Valletta Group is reporting a profit before tax of €13.8 million, a se- vere drop from the previous year when it posted a respectable €54.3 million. Employing thousands and having a sub- stantial slice of the local business, BOV humbly reports that its annualised re- turn on equity (pre-tax) is just 2.6%. e acting chairman blamed COV- ID-19 and its gremlins for the disas- trous show. e bank blames de-risk- ing exercises which partly contributed to a drop in results. In the first place, commentators ask why the recent Brus- sels-led regulation of BOV resulted in such a costly pruning exercise. Apart from the coronavirus-induced business shrinkage, BOV has a number of skele- tons in its cupboard. One salubrious case is the trust it holds on behalf of the Deiulemar group - a defunct Italian shipping company. is group is claiming €363 million from BOV to which recently it pledged an out-of- court settlement of €50 mil- lion. is was rejected. e offer also comes two years after BOV appealed an Italian court's order for a precaution- ary warrant that requested it to hive off €363 million, as a provision for damages requested by foreign bondholders. e Italian court in Torre d'Annunziata, a province of Naples, upheld the claim back in March 2018 after it was brought by liquidators of the Deiulemar group. Yes, Malta had its fair share of bad ap- ples and one cannot always blame the virus. No heads rolled but the MFSA is investing a cool €12 million and recruit- ing more experts to fine tune its filtering prowess. e government is gung-ho that the final report by Moneyval over money laundering and terrorist financ- ing shortfalls will see us sail through un- scathed early next year. Malta as a financial jurisdiction is to be saved the dreaded fate of becoming a grey listed domicile. e prime minister is hopeful that we shall be spared this poisoned chalice. Back to the BOV, one is encouraged to hear the words of its newly appoint- ed CEO, Rick Hunkin. is bank, with a majority investment by the state, re- ported that its pre-tax profit dropped by 75 per cent in the first six months of this year. Commenting on the results, Hunkin said: "In line with the rest of the world, these are trying times for Malta and for Bank of Valletta and we are ris- ing to the occasion by supporting busi- nesses, customers and the wider com- munity". But wait a minute, who is to blame and bear the brunt of shortfall? None other than the shareholders who for the fourth year will not receive a dividend. Take heart, because Hunkin assures us that BOV's self-induced reforms will result in a more efficient, more digital- ly-focused and more customer-oriented bank. Does this mean that in the past the bank was rather too generous in gauging its risk appetite? e CEO is assuring shareholders that the current de-risking programme is proceeding at an acceler- ated pace. is comes at a cost. Pruning dead trees from your garden means a lower harvest next time around. By the way, there was no appetite by manage- ment to donate part of their salaries to charity in recognition to the suffering caused to the community. HSBC Malta said the economic im- pact of the COVID-19 pandemic has been the main driver of the change in financial performance in the first half of 2020. e bank (which locally closed nine branches and internationally seeks to lay off 35,000 workers) issued the following data: Profit before tax down €19.1m to €1.8m due to higher than ex- pected credit losses and lower revenue reflecting the impact of the COVID-19 outbreak. It comes as a stark pointer that during the first six months, lending increased by a mere 1% and deposits grew by just 3%. e sad news for shareholders is that the profit of €1.2m resulted in earn- ings per share of a miserable 0.3 cents compared with 3.8 cents in the same period in 2019. Does this mean that banks need a bailout to help them sharpen a blunted profit edge and to reinvigorate man- agement to think outside the box at a time when most borrowers complain about the risk averse attitude of banks? Needless to say, the generous collateral afforded by Malta Development Bank (a state-owned credit institution) to all local banks should in theory lead to expanded lending - not the reverse. So what went wrong? We're now seeing, for example, un- precedented levels of government sup- port for a Keynesian intervention into the economy (such as wage supple- ments, free cash vouchers and extensive road repairs). If this medicine works, party apologists predict that the patient may soon be up and running (provided a second lockdown is avoided). One hopes that sanity prevails and a branch and root reform is undertaken in local banks to help them seek new opportunities for growth among the cash strapped local business commu- nity. After bailing out the hospitality sector, should banks follow? George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island