The economy, BoV and beyond
Bank of Valletta Chairman Joseph F.X. Zahra
has a distinguished past behind him and a bright future before him.
DAVID LINDSAY speaks to the economist about a number of issues including
pensions, the state of the economy and BoVs recent successes in
its drives for internationalisation, diversification and credit management.
Maltas potential as a financial services centre and Zahras
recent appointment to the helm of Maltacom are also discussed in this
Maltas economy still appears to be struggling to
attain an even keel. The Central Bank is to downward revise its growth
forecast for this year, interest rates have been lowered and government
has so far been unable to harness expenditure. As an economist, how
do you view these developments and how would you suggest these ailments
Lets start off with one very valid point - never has Maltas
openness as an economy been tested as it has over these last years.
We now have a situation in which there are no longer any forms of protectionism
in terms of trade although there are still a few restrictions in terms
of capital movement.
What we have today is undoubtedly an open economy and this openness
is being tested within a very difficult environment where the international
economy is at a very low ebb and, for the first time after so many years,
we are hearing talk of deflation, even in Germany Europes
Knowing that Malta is highly reliant on the international scene, this
type of international environment would definitely impact the Islands,
which it has done over the last two years.
I believe, even within this challenging international context, that
the economy has been pretty resilient in terms of trade, where we have
seen slight improvements over these last months, and even in tourism,
which one would have expected to have been hit much harder than it has
As to how these ailments could be remedied, answering this question
would require an entire interview in its own right, but there are two
very valid points that must be mentioned.
The first is that we need to think more and more of a strategic orientation
for this country. We have been working very hard in acceding to Europe
and with all its implications. Now, however, we need to have a stronger,
clearer strategic orientation as to what form the Maltese economy will
take in the coming five to ten years.
This strategic orientation will also have to be based on a diversification
of sectors. We need to consider what the GDP contributions of sectors
such as financial services, tourism and manufacturing will be in the
This diversification would definitely help in increasing our resilience
while we face these changing international scenarios. I think we have
to be more forthcoming in terms of whats being expected from the
various sectors and how these sectors would interrelate, ensuring that
none of these sectors have a negative impact on any other sector.
What are your comments on the fact that businesses are continuously
suffering from cash flow problems, while individual liquidity still
runs very high? How has the Bank capitalised on this state of affairs?
There is a very obvious dichotomy in this particular sector of the economy.
On the one hand you have a very cash rich personal sector, with bank
deposits always growing and with this sector always seeking new opportunities
for investing its funds in various areas.
On the other hand you have a cash starved businesses sector. The main
point behind this is a cultural issue. A lot of these businesses either
started out as or are still family businesses, with no particular demarcation
between personal and business purses.
The Bank has created a number of opportunities in this respect, the
most creative of which has been its move into the area of investment
banking - in creating more opportunities apart from the traditional
means of raising capital through the Bank. One of these alternative
sources is in the area of Initial Public Offerings, which needs to be
I think the Banks decision to go into investment banking in an
aggressive manner is giving businesses new opportunities to be able
to capitalise themselves and to be able to raise finances in a responsible
way reflective of what is happening on an international level.
The IPO aspect is very interesting, there can be no doubt that the local
stock exchange needs to be both broadened and deepened.
I would say this is absolutely the case. So far we havent even
scratched the surface. There is great potential for private businesses
to start looking internally at their operations and finances and assessing
their opportunities with a view to either entering the primary market
or taking a secondary listing.
The Malta Stock Exchange, particularly now that it has lost its regulatory
function, can apply greater focus to its business and marketing function
to be able to promote its activities much better with businesses.
One of the largest debates taking place at the moment is that of pensions
reform. What are your thoughts on this delicate issue?
The main point about pensions is that we have to demystify the whole
issue. Weve been talking about pensions for long now and I think
its about time we start taking real, effective action immediately.
This type of situation should be handled with urgency, obviously with
a medium and long-term perspective.
I think if we start seriously talking about the issue, particularly
if this is done on the basis of non-emotive dialogue between government,
business and the unions, we would realise that the issue is not as fearsome
as one would have thought. I think we need to address the problem with
a business-like approach but also with a strong social conscience.
Its easy to talk about the situation as it stands today, but it
is very difficult to visualise the type of socio-economic structure
we will have in 10 to 15 years time. So it does also need an element
of visionary thinking and the will to take these decisions immediately,
knowing they are going to impact the social conditions and lifestyles
of a great number of people in the future.
One thing we are seeing in more advanced economies is that more and
more people over and above what is deemed the retirement age are still
working and are still very active in the economy. I think this is a
very positive development, not only because work is an essential element
of the human dimension, but because these people with all the experience
they have gained over the years would still go on contributing to the
social and economic development of the country.
How do you view Maltas potential as a regional centre for financial
services and how has the confirmation of EU membership boosted the countrys
potential in this respect?
I think that Maltas entry into the European Union has enhanced
its potential as a financial services centre. Any financial centres
success is based on its reputation, its credibility and to which international
forum it attaches its name.
Maltas major advantage as a financial services centre, and I want
to emphasise this, would not be any fiscal incentives offered but would
instead come from the inherent advantages the country has. One advantage
is its strategic location on a geographical basis, but there is also
the Maltese human resources element. Were dealing with people
who have been living in an environment in which financial services are
already at an advanced stage. Going back in the past we can cite the
contribution Barclays gave when it had occupied a strong position in
Malta in the 50s and 60s. This had also created a cadre of people who
have inherited a strong tradition in the financial services sector.
Of course there is also the language issue and I must stress that we
shouldnt simply be looking at the English language, which is of
course the business worlds lingua franca, but we have to also
ensure we improve our skills in other languages as well. Using our fluency
in the Italian language would particularly help to attract the Italian
market and fluency in French, German or Arabic would also help in giving
the Islands a competitive advantage as a financial services centre.
I must of course also mention the countrys information and communications
infrastructure. I think the large investments that have been made by
corporations, particularly by Maltacom, over the past years in ensuring
a state-of-the-art infrastructure is an important ingredient that contributes
largely to Maltas development in this respect.
Turning to Bank of Valletta, how successful has the Banks diversification
strategy been? What factors have led to this success?
I think the results show that we have been successful here. When one
considers that 33 per cent of the Banks operating income as at
the end of March has come from what we term non-traditional banking
products bancassurance, fund management, investment banking and
card services this says a lot about how the Bank has been diversifying
its operations over the last ten years.
Of course we are still dependent on our core business but we have completely
changed our line of business from that of ten years ago, when we were
predominantly in the banking services sector, into what we term as the
financial services sector.
This redefinition of our line of business from bank to financial services
has proved that we are capable not only of coming up with new business
concepts within the financial sector, but also of taking advantage of
the situation and making inroads by being the first to go into these
We were the first, as Bank of Valletta, to go into the bancassurance
and fund management fields. We have been the leaders in the area of
investment banking, being the managers and underwriters of the largest
number of IPOs on the Islands, and we were also the first to go into
the stockbroking business. This is all part and parcel of the Banks
As is the Banks internationalisation process, which has been underway
for some time now. How would you quantify BoVs success in expanding
its services overseas and what does the Bank envisage for the future?
We have been doing two main things in the internationalisation process.
One was to audit our business activities in what were the Banks
traditional overseas outposts, Canada and Australia. We felt we had
to rationalise our activities there, particularly since we are today
dealing with second and third generation Maltese who, naturally, would
have lost a lot of there traditional links with Malta. This meant that
while we had to retain our presence there, we did have to reduce in
terms of physical staff in our businesses. We still give a lot of importance
to these outposts, but we have obviously had to put them into the perspective
of new realities.
New realities exist in the Euro-Mediterranean region. We feel there
is a pre-emerging market in the North African periphery and we feel
our presence there, even if it is at the moment in the form of a representative
office, is important as it contributes toward making us understand the
mechanisms of these markets and the way the potential customers look
at an international banking operation.
These are what I would call footholds in the market. We
do not carry out banking operations in the region as yet, but we do
have these representative offices to assist and facilitate investment
and trade between Malta and these countries.
Bank of Valletta has an international destiny, which is in the Euro-Mediterranean.
We already have offices in Tunis and Tripoli, while we are working to
have our third North African office in Egypt. These developments are
integral to the way we view our destiny in the medium term.
Bank of Valletta recently set up Cost Efficiency and a Credit Risk Monitoring
Units. What are the primary scopes of these units and how would you
gauge their success to date?
We have been very successful here. First of all, notwithstanding our
increased awareness on risk issues, which reflect international banking
accords such as the Basel II Accord, and all the reforms we have made
within the Bank - such as the setting up of the credit risk monitoring
unit, the changes we have made in our credit policy, with the setting
up of a new credit committee - we have consolidated our market share
in the process. This means these measures did not in any way deteriorate
our market positioning, which was, in fact, actually strengthened. In
actual fact, there is still growth in the advances and credit side of
Over the past years more concentration was given to the Banks
revenue streams and I think the cost issues werent being tackled
assertively. This is one of the reasons the Cost Effectiveness Unit
was set up - to establish increased cost awareness throughout the Bank,
while also ensuring all the Banks expenditure is carried out in
such a way as to add value to our operations.
The March results, again, speak for themselves. In the last financial
statement we published the rate of increase in costs was 1.6 per cent,
lower than the rate of inflation, which is considered the best signal
of cost containment.
This has been a big challenge considering we have also been restructuring
our operations in the process. This means that, particularly due to
early retirement schemes and the way these have to be accounted for,
many costs have an immediate impact on the income statement.
You have served as Bank of Valletta Chairman since 1998, what do you
consider the main achievements of your tenure?
In terms of personal achievements, I would prefer those to be stated
by others rather than myself.
The Bank has faced a great deal of increased and aggressive competition
not only with the likes of HSBC, but also with smaller banks and the
international banks that decided, rather than moving away from the Islands
when they lost their offshore licences, to instead continue operating
in the market. There has also been the deregulation of the market and
the restraining external environment in which we have been working.
The local and international scenarios have obviously not been booming,
in fact the local economy over these last years has slowed down substantially,
again reflecting the international scene. Despite these adversities,
we have managed to not only sustain, but actually increase our market
share. We have also been able to improve our ratios in the market, a
reflection of an improvement in the fundamentals of our business.
In light of your recent appointment as Maltacoms next chairman,
how do you view the future of the telecoms sector?
Maltacom is another big challenge, considering that its operating environment
is highly dynamic in view of deregulation and the ensuing increased
competition. The first test for what has been considered a monopoly
over the years will be its ability to compete with important international
and with smaller carriers that are operating within the local telecommunications
You are also getting a much more discerning customer than ever, of course
as Maltacom is positioning itself as a commercial player in contrast
to the original idea of being a social monopoly. Due consideration must
also be given to Maltacoms social obligations, such as those implied
by being the owner of the Islands telecommunications infrastructure,
and to the huge and fast rate of technological advances taking place
in the world today, which sees us not only talking of a 3G environment,
but of a 4G environment.
These considerations mean we have to look at Maltacoms strategy
and to continuously test and review it, particularly so in an industry
as fast moving as telecommunications. This train of thought implies
that the first initial exercise will be to take stock of the situation
and to establish a stronger strategic orientation for the organisation
within this changing environment.
However, one extremely worthy aspect of Maltacom is the professionalism
of its management. We are dealing with people in Maltacom who are not
only competent and experienced, but who also have a lot of enthusiasm
and a strong sense of determination and commitment with which to face
As at the Bank, the Chairman and the Board of Directors wouldnt
be able to operate unless this professionalism and commitment exists
at an executive level. Notwithstanding the challenges of the sector,
I am very optimistic in facing these challenges because of the strong
capabilities of Maltacoms fundamentals.