Last week I published a brief analysis of Bank of Valletta, took a look at its numbers and concluded that BOV is hoarding shareholder’s capital and is making an ever lower return on its increasing assets. A separate analysis by Fitch also pointed out the problem of low profitability despite increasing assets. Fitch decreased the bank’s credit rating of the bank from BBB to -BBB. In BOV’s statements, there is nothing which says how it is planning to increase profitability once again. The chairman of the bank, Gordon Cordina is putting the bank’s woes mostly on the legacy court cases which have now been resolved. He also says that the Deiulemar case posed an existential risk to BOV. Strange, because Gordon Cordina’s latest statements on BOV seem to contradict the bank’s previous statements arguing that the Deiulemar case did not pose any risks for the bank. Bizarre how the MFSA didn’t ask BOV why it blatantly lied to its shareholders. Capital markets are ultimately based on trust. By blatantly misleading shareholders BOV betrayed that trust. In a normal European jurisdiction, the regulator would step in and make an example out of this to ensure it does not happen again.
Gordon Cordina is new to the banking scene. He is an academic who has no experience in banking, except for his experience working as a risk manager. Cordina has no experience in running a financial organisation and has no track record with profit and loss activities, and this may be the reason why he is not aware of the fact that a company listed on the stock exchange which lies to its shareholders is committing a crime. Some shareholders of the bank are not accepting BOV’s current versions. Arnold Cassola, an independent Maltese politician who owns around 10,000 BOV shares, more than one of the only three directors who own BOV shares, is challenging the bank to hold its annual general meeting at a physical location so that bank directors could answer shareholder questions. Gordon Cordina doesn’t want to take shareholders’ questions. The only questions Cordina is taking are from journalists who give him a friendly interview as they ask easy questions and don’t press him on his answers (Cordina did not reply to my email with several questions including why doesn’t he own any shares of the bank he is supposedly running).
Cordina thinks he is running a government department, and therefore thinks he can spin the bank’s issues like a ONE journalist, but this should be no surprise because that is why the Labour government appointed him in the first place. This is why there is literally no talk about increasing future profitability by the current bank’s administration. Cordina and other directors who are paid hefty fees yet hold little or no shares of the bank, view their job as bureaucrats running a subsidized bank with public money, in this case from shareholders’ capital. No wonder why BOV’s employee headcount under a Labour administration increased by as nearly as a third, increasing from 1536 employees in 2013 to 1922 employees in 2021. It’s literally like a government department and Air Malta where sons and daughters of prominent Labour politicians and Labour activists can get free and easy jobs without the need of being productive. Meanwhile, Malta’s second-largest bank, HSBC decreased its headcount from 1414 in 2013 to 971 in 2021.
There are other risks the bank is hiding from its shareholders and this is the risk that BOV remains informally black-listed by the Western financial system. There’s a serious problem when the biggest bank in your country can’t find a correspondent bank which provides it with access to US Dollars and instead has to make use of Western Union. No foreign bank likes taking the risk of servicing a small bank with such high risk. BOV’s problems don’t just stem from legal cases, but it also has a reputation for hosting, abetting and servicing corrupt activities, most recently, Joseph Muscat’s alleged corrupt payments he received from the same people he sold Malta’s public hospitals. BOV claims that it has gone through a de-risking exercise but somehow it seems that only ordinary customers are facing the brunt of this increased supervision while corrupt players keep using the bank’s services unencumbered. It makes sense, after all. If the bank is run by a government department answering to the whims of the Maltese government, the least the bank can do is service the Maltese government and its friends with its services.
There is another serious problem to BOV’s future prospects if the current bank’s philosophy is not changed. The bank may blame its low profitability on low-interest rates and will get a reprieve as interest rates in Europe potentially increase in the near future. Even if they do, interest rates will go down as they will probably keep following the historic and secular trend. Indeed, some speculators are even discussing the prospect of banks entering a peak-earning stage in the next couple of years as interest rates rise and then fall down again. The bank’s problems are structural, and everyone is saying this except for the government and BOV’s board of directors.
Surely, in order for the bank to dissociate itself from the Labour government’s criminal and corrupt past and the rent-seeking boom during its administration, a de-risking exercise would mean also translate into willing coordinated collaboration with the police to weed out bad players who used or are still using its services. But de-risking and turning over a new leaf is not enough. BOV also needs to think about its future prospects and work towards profitability. The success of the banking industry is based on scalability and BOV’s home market limits this potential. As time passes, bigger banks are taking more market share from smaller banks and the banking industry is becoming more concentrated. Partnering with an international bank to scale abroad could be a future solution but Unicredit’s 10% shareholding of BOV has to lead to no such results. Financial technology will also drain the bank’s core customer base as customers find cheaper and more efficient banking solutions with companies like Revolut. The reality is that BOV is going against the trend by focusing on its traditional practices and adding employees while being subsidised by its shareholders.
BOV is currently facing a multitude of challenges. Gordon Cordina should step in and answer shareholders’ concerns and re-build investors’ trust apart from providing a solid plan for the future. So far, we are seeing nothing of this.