George M. Mangion | Wednesday, 06 May 2009

More credit

This is the catch phrase being used by a local bank to attract business. On the face of it the slogan is attractive to account holders who have for years being served by older institutions and are finding that less “credit” is on offer and at times under more stringent conditions. The root of this problem is not exclusive to us. It is currently the core of the US banking crisis which saw hundreds of banks creep to bankruptcies after earning superlative profits on dubious loans in particular the sub-prime sector.
The gigantic TARP fund set aside by the US taxpayer to bail out such banks is now of legendary proportions and it is a paradox how after receiving such unmerited aid the banks themselves are currently acting more risk-averse, particularly in the mortgage arena. But who can blame them? Once bitten by riding the apple cart with its extraordinary bounty they are now licking dirt and forced to unload their so called “toxic“ assets under tough conditions forced by US authorities. All this seems foreign to our banking scene since we were confident that the financial sector is resilient to tremors and was only slightly tarnished by the collapse of Lehman Brothers. Now we are starting to notice how the two major banks are reporting slashed profits even though they have not conceded the full rate reductions to borrowers as mandated by ECB. Certainly, the reduction of interest charged on loans and advances will and does reduce the margins banks are accustomed to make in the past prior to the onset of the credit crunch. But economists say that the deflation of costs to exporters can bear fruits only if monetary measures are adhered to scrupulously. In the context of inflation, the island is currently registering higher rates than the other EU members and this may partly be a consequence of the negative return on depositors monies and pension funds held with banks yielding relatively low rates, in some cases even below the rate of inflation. In this context, one reads the chairman’s dire comments on the last six months results of Bank of Valletta p.l.c. Its interim profits have nosedived by 54 per cent in six months to Q1. In his review, he categorically stated that the bank did not mirror all the rate cuts announced by the ECB but the cuts otherwise conceded resulted in a drop of €5.8 million in profits. But if the banks collectively restrain themselves from following the monetary guidance given by the ECB by not fully reducing rates then somebody on the regulatory side must show the yellow card. After all ECB policy is aimed to kick-start lack luster economies and help generate jobs. In the past six months it cut interest rates aggressively from 4.25 per cent to 1.5 per cent on euro currency. The dollar rate is currently close to zero whereas the Yen is in negative range. Again local banks have not reduced their local charges to help customers paddle up the creek in tumultuous waters because they owe it to nobody to do so. Their shareholder’s rights are paramount and if the government (read taxpayers) wish to bail out lame ducks then it is not the bank’s shareholders who are to carry the can.
Really and truly if banks only pay lip service to their corporate social responsibility they shall find their profits will continue to plummet as borrowers find it tough to service loans and advances especially when their international competitors are blessed with lower interest rates. But there is an analgesic dispensed in the medicine chest. In fact a task force has already been working overtime to identify the sick and downtrodden in the infirmary and patients are being drip fed with extra capital from funds made available under the auspices of Malta Enterprise and other agencies. Finance Minister Tonio Fenech has been doing the rounds in the sick bay with a proverbial stethoscope around his neck, busy checking in an unobtrusive way the health of various firms and exporters who are feeling the pinch. Jobs come first in his agenda. This is laudable and can go a long way to assist firms without the political stigma of rescue plans which unfortunately in some countries the party machine spins to broadcast the munificence of the party in power. Not surprising, statistics show that unemployment in the EU reached 20 million in the year to Q1 this year and is expected to reach higher levels.
Back to local banks, they have been spared the devastation in asset values suffered by major western banks associated with investments in CDO linked to secutarised assets in the sub-prime mortgages. Malta resisted the temptation which ruined Icelandic banks. This adds kudos to our astuteness and firm regulation. Yet they have not been spared the rigors of IFRS accounting which mandates their financial assets to be “fair valued”. This has slashed a formidable €32 million in Bank of Valletta but one hopes that such diminution will be recouped in the coming years if and when markets recover. The bank’s chairman observed that “any lasting recovery will inevitably be something of a gradual process, with set-backs occurring from time to time”.
Alan Keir, HSBC Group general manager stated at a recent business breakfast that “we do not yet fully understand the causes of the current crisis, nor how those factors will affect the future. “ Yet, in spite of the lack of focus, it is palpable that HSBC have reacted positively to requests by MHRA to seriously consider helping its account holders who are painstakingly running a hotel business. A 12-month moratorium plan was suggested by MHRA to help tidy up cash flow shortages from the slashed occupancy experienced this year. HSBC has denied accusations that the bank was being difficult during such turbulent times and proposed that more one to one meetings will held to clarify any mistaken views. Is there a solution in sight? The answer lies in being enduring while carefully nurturing the weak and disabled members in the commercial community. So the patient is taking medication but the cure needs time to heal the conundrum that is hitting markets. Certainly the patient’s condition is fragile and cannot withstand too much shocks.
On a positive note the stakeholders are being advised to be well poised for the recovery (it arrives as sure as day follows night).Thus, it is very important that the island restructures itself and stays nimble to exploit all and each opportunity. Regrettably, our number one inhibitor to growth is unnecessary bureaucracy. Just recall how the Middlesea Insurance Group , our largest indigenous insurer which announced a staggering pre-tax loss of €29 million and the drastic drop in profits registered by our main brewery. Farsons complained of losses suffered from parallel trading and increased manufacturing costs. Granted, we cannot indulge in creating unnecessary panic. Every one knows of the turmoil that is hitting the financial world with its unprecedented layoffs and a sustained drop in property prices. One need not name examples yet we know the difficult times facing Hungarian, Irish and Latvian economies. But what goes down must eventually go up. Some financial commentators are sensing grass shoots albeit not the very sturdy ones. A cohort of optimists is hoping that we have reached the bottom and we are not far from seeing a slow upswing. Others are saying this is the worst recession that hit the western world in fifty years and it will not be tamed so easily. So yes Malta’s open economy is not immune to the tidal waves that are buffeting the rest of the world.
To conclude, the slogan “more credit“ chosen by a local bank to advertise its new offering of credit cards and to entice customers to open accounts resonates beautifully. More credit and better assessment of banking risk is what helps cash-strapped firms currently facing uphill demands to penetrate export markets. More can be beautiful.

George Mangion
Partner at PKF – an audit and business advisory firm


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06 May 2009

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