Twisting Words, Hidden Agendas and Bank Profits

The Malta Independent on Sunday

Twisting Words, Hidden Agendas and Bank Profits

With Budget measures hitting where it hurts the Government desperately needs to divert public attention` to other issues.` In doing so it is finding, as usual, the full cooperation of the print media and the public broadcasting which are trying to submerge it by pushing` other issues up the priority list of the national agenda.

Tuesday`s Pjazza 3 tried damn best to put One News journalist Joe Mifsud into a 3:1 disadvantage to discuss the April 1987 Rabat political violence. It` backfired only due to Mifsud`s journalistic prowess.` I was impressed by his` knowledge of the minutest detail of the recent court case involving a thirteen year long accusation against one individual against whom there was not the slightest whiff of evidence .

Friday`s Xarabank also sought` to discuss (this is being written before the programme was transmitted) what Alfred Sant has not said.

During the Labour Party general conference on 30th January 2000 Alfred Sant made a very calm and sober statement. He said that whereas he genuinely believes that as a small country any government should govern seriously` and should not dispense favours to its faithful, and whereas Labour had given ample proof of its willingness to do so during its 22 month tenure of government, considering that nobody is objecting about how the present government has discarded this mode of governing and has reverted to the system of tribal politics, than once one cannot tango alone,` the next Labour government will treat its faithful just the same way the government is doing. No more, no less.

The media which forms part of the nationalist network of power sharing twisted this to stress that a future labour government will castigate nationalist sympathisers with` vibrant discrimination and will be a government of `bazuzli`.

Forgive me for` asking, but if Alfred Sant has simply said we don`t like it but you will constrain us to behave just as you are behaving as otherwise labourites will remain out of government even when in government, why all this astonishment` Or are laws applied differently depending whose in government`

This twisting of words must be serving some hidden agenda, the same agenda which is trying to keep the real budget after-effects issue out of national discussion. Whoever is driving this agenda is miscalculating however that suffering in silence increases the pain and the pain brings with it resentment which will surface` at the appropriate time.

I make a small contribution to this hidden agenda by focussing on the results of HSBC Bank Malta plc, formerly Mid-Med Bank just announced this week for the 15 months to December 1999.

The Bank changed its financial year end from September 30th to December 31st to come in line with HSBC Group financial year end . The published results therefor cover a period of 15 months from 1st October 1998 till 31st December 1999.` For the first two and a half months of this period I was still chairing the Bank.

Reported operating profit before tax of Lm16.747million if reduced pro-rata to 12 months come down to Lm13.4 million down from the Lm14.6 million I had signed off the financial year before. This represents a reduction of` 8% at a time when the main competitor Bank of Valletta improved slightly on the previous year.

However the figures leading up to the profit contain three elements which have to be analysed if a meaningful comparison is to be made.

Firstly the Other Net Operating Income ( i.e. non-interest revenue) increased from Lm9.9 million to Lm18.7 million. Adjusting for the longer time span this represent an absolute increase of` some Lm6 million. Whilst partly this follows the bank`s strategy to diversify its revenue sources from the conventional interest revenues, the greater bulk of this represents exceptional transactions undertaken as part of the sale of government`s shares in Mid-Med Bank to HSBC.

In particular this relates to disposal of Mid-Med `s 21% in Middle Sea, 16% in Medigrain and 45% in Maltapost. All these disposals realised one-off profits which technically are however considered as normal revenue. This is a demonstration, to be noted by the accountancy profession,` that for all the complicated standards they continue to churn out with monotonous regularity,` form still wins over substance.` I would estimate that around Lm4 million to Lm5 million` can be explained by these one-off transcations.

To compensate for this exceptional increase in profits HSBC has increased provisioning` for bad debts` by nearly Lm 5million over the previous period.

A note to the accounts states that this reflects a revised assessment of asset quality of the book. In simple terms this means this is astronomical increase in bad debt provision is not the result of any new lending which turned bad but is an across the board re-assessment of risk in outstanding exposures.

Provisioning for bad debts is a highly subjective area. However considering that Mid-Med has a tradition of generous provisioning one cannot but suspect that this increase in provisioning has been purposely engineered to neutralise the exceptional profits aforementioned in order not to boost the bottom line artificially.` `A sort of two wrongs make a right.

There can be no justification for such a sharp increase in provisioning as if the loan book asset quality was re-assessed than certainly the generous general provisions ( i.e. provisions against debts which have not yet been identified as potentially irrecoverable but may` turn out to be so) should have been scaled back. If one is more rigorous in specific provisioning than one need not be also rigorous in general provisioning. I am positive that these provisions will in the course of time be written back to profits.

So if these two factors have broadly cancelled out each other what is the third factor which has caused a retreat in profits. This is a pro-rata 16% increase in operating expenses. Now the bank has not signed any collective agreement and is reported to be offering modest increases for the one being negotiated. Nowhere near 16%!

Private shareholders of the Bank should be` eagerly awaiting disclosure of the full details of the financial report to see what led to this astronomic increase in operating expenses. There should be no subjectivity here as in bad debts provisioning. This increase represents hard cash expenses paid or payable out.` One ought to particularly look out for charges which the parent company may be loading to its newly acquired subsidiary to the detriment of minority shareholders.

I have got much satisfaction in defending the rights of minority shareholders last year. In doing so I have reached all objectives of fending off attempts to force the minority shareholders hands to sell at the fire-sale price which our ministry of taxes has unscrupulously accepted. In so doing, together with my colleagues forming the Association representing minority shareholders, we` have added some Lm50 million liri value to the minority`s 30% shareholding.

Having achieved all objectives the Association will be disbanded as there is a limit beyond which voluntary work cannot be carried. Money donated to the Association is being spent to promote the election of fellow action committee member Mr John Borg Bartolo. Having him on elected on the Board of the Bank is the most effective way how the minority shareholders interest can continue to be defended. I have done my part, I did it with handsome results beyond my wildest expectations. It has given me much satisfaction but no` profit as regretfully I never was a shareholder. Over to you John!

Alfred Mifsud