30 March 2005

The Web

A bank and an economy in transition
New Bank of Valletta Chairman Roderick Chalmers has taken the helm of the largest Maltese bank during tumultuous times, on the heels of former chairman Joseph FX Zahra’s controversial resignation and as the bank moves ever closer to its final privatisation. In a wide-ranging interview, he speaks to David Lindsay about a number of issues affecting the bank and the Maltese economy itself

As the newly appointed chairman of Bank of Valletta, what background do you bring to the bank that will help it through the challenges of the coming years?
I am by profession a chartered accountant, and have a long-standing family and professional connection with Malta. As a professional accountant I worked in Malta in the 70s for nearly ten years, after which I specialised in the financial services market in Hong Kong for 17 years.
It was an amazing time to be there. When I arrived in 1983, Hong Kong was on its knees in deep recession, it then had 14 years of super-fuelled growth in the financial services sector, followed by a rocky time in 1997 with the Asian financial crisis.
Given my family and working connections with Malta, I believe that I know something about the culture and how Malta works. At the same time, I have international experience in the world of financial services, and I think and hope that this combination will be helpful for the role I’ve been asked to fill as Bank of Valletta chairman.

What is your strategic vision for the bank over the next year of operations and how do you see shareholder value being enhanced?
I should start by saying that I didn’t come here with a magic wand. There was a cohesive, coherent strategy already in place. That strategy is in the course of being implemented by management, and I fully support that and its implementation.
It is, however, critical that the management team, in its implementation of the strategy, does not allow itself to be distracted by the ‘privatisation’ we are undertaking. One of the cardinal matters we’ve established at the board level is that, despite this ongoing process, it is to be business as usual at the bank. Managerial, strategic and tactical decisions at the bank have to carry on irrespective of the fact that, in a couple months, or whatever the time span may be, we may wake up to find we have a new partner that might have a different strategic or tactical vision for the bank.
So we have to continue running the bank in the manner that we believe is good for the bank and for the community in which we work. If then we have a new and substantial shareholder that has a different view, a new direction would have to be taken at that time.
What we are not into is deferring, suspending or pushing aside important decisions while waiting for a new substantial shareholder to come in place.
At this point in time it is a matter of keeping our eye on the ball and carrying out business as usual.

While respecting the need for discretion at the present time, what are you comments on the actual progress of the bank’s privatisation process?
In banking there is a need for discretion at all times, and I’m not going to say anything which is not in the public domain. I can say that the privatisation process is in train. The government and Banca di Sicilia, who between then own close to 40 per cent of the bank, have taken the decision to jointly appoint Rothschild as the financial advisers to assist them in the process.
There is a well trodden path as to how these processes move along. We’ve started down that path and there should not be any surprises. Rothschild is collecting the information they require to be in a position to talk to prospective investors, we are co-operating with them and the Privatisation Unit in that process and have no concerns or issues at this time.

Can you elaborate on the bank’s involvement in the process?
We’ve always made it clear that one of the reasons we want to be involved in the process is that the board believes it has responsibilities, which we are obliged to discharge.
This involves all the bank’s stakeholders – its employees, its customers, its shareholders and the Maltese business community as a whole. We are very aware of our responsibilities toward these stakeholders and we will take our responsibilities to the table in any discussions related to the privatisation of the bank.

Obviously the bank’s performance is closely intertwined with the performance of the Maltese economy. What challenges do you see the economy facing over the short to medium term?
Firstly, the Maltese economy is in a period of transition. Secondly, I’ve found over the very many years in which I’ve either worked here or had connections with Malta that it’s a terrible mistake to underestimate the resilience of the Maltese economy and of the Maltese businessman. We are great prophets of imminent doom in Malta, but we seem to be very resilient and always come out okay and continue to prosper.
Our most important segment of the economy is tourism and there is no question that the industry, not just in Malta but also on an international level, is being restructured in a very radical fashion. It’s important that the industry in Malta responds to this reshaping of the sector. Some are doing this well and will succeed, while others are doing this badly, or not doing it at all. This latter group will fail and we’re seeing evidence of that happening.
Likewise, the entry of Malta into the European Union provides opportunities, and it provides stress. Those who have prepared for it are prospering as a result of their preparations. Others, however, have sheltered behind the artificiality of tariffs that enabled them to prosper notwithstanding the fact that they did not have a good product or service. If they have not responded to the changing environment, their businesses will suffer.
There is no question that the economy is going through a transitory period and there will be both winners and losers. I have confidence in the resilience and in the entrepreneurial zeal of the Maltese businessman, and that Malta’s overall economy will continue to prosper. But there will be some people who will struggle in this period of pronounced change, and, no question, there will be some victims.

BOV’s internationalisation drive has been instrumental in the forward planning of the Bank’s operations. What shape is this drive taking and what do you envisage for the future in this area?
I wouldn’t want to overstate or understate the bank’s internationalisation drive, but rather put it in the correct perspective. Essentially, Bank of Valletta is a big Maltese bank and it has been very successful in supporting its customers in Malta and Gozo. That is our key goal in life.
Although we are a big and successful local bank, if one were to measure us by international standards, we do not have a big balance sheet and, in these terms, we are a small to modest size bank. So what we are not going to do is throw our balance sheet around in overseas markets that we don’t understand. Many banks a lot bigger than Bank of Valletta have moved into markets they don’t understand, and have paid a price for doing that.
What we are going to do in this respect are two things. One is that we will support the customers we know as they move into other markets. The EU is a case in point, as are its open markets that hitherto might not have been available to Maltese entrepreneurs.
Secondly, North Africa is clearly in the first phase of opening up. The Maltese entrepreneur has long been active in those markets; we have long been active in supporting them, and we will continue to support them as they move toward wider horizons.
So we see our internationalisation as very much supporting our customer base that we know and with whom we have relationships as they move into new market opportunities.
In this sphere we also see opportunities opening for Malta’s human capital. We have a wonderful base of well educated bi- or tri-lingual professional people here in Malta. This is an asset with today’s telecommunications, technologies and business modus operandi, which is ready to be mobilised.
There are definitely going to be opportunities in the financial services field that do not involve not exposing our balance sheet to risks in markets that we don’t understand, but by mobilising our human capital assets, by offering our skills and our administrative and back office support functions. We are optimistic of growth prospects in this area.

In an increasingly competitive sector, where there are a number of small banks opening up and with the Bank’s main competitor posting record profits, what do you see as the bank’s main attributes that set it apart from the competition on the local front?
The banking market has always been competitive. Our main competitor is a big, successful, competitive bank and we respect them for that. I think our edge, and all the market research that we do backs this up, is that the customer sees us as a local bank that understands local business, is professional but sympathetic, it understands the Maltese culture and how business works. This personal relationship with the customer is a very important asset in the banking business and it is one we count as our real strength.
We’ve also invested a great deal in technology over the last three to five years. I’ve said it before and I’ll say it again that there is no question that in the Maltese market Bank of Valletta is, from a technological perspective, ahead of the competition. Customers react in different ways to technology being made available and we are catering for both the customer that likes to deal across the counter and for those who like to do it from home or the workplace. There is no question that the investment we’ve made in technology is bringing benefits to our customer base and we are seeking to take advantage of the investment we’ve made.
I think we’re ahead of the market in this respect. However, we are still dealing with huge quantities of paper and high volumes of cheques. As I said, we’re catering for both our client profiles and clearly if we are to get full advantage of the investment we’ve made in technology, we’d like to see a greater migration toward the use of that technology but we will do that in tandem with our customers.

Many argue that an increased availability of venture capital funding could spark an economic renewal for the country by further empowering the start-up entrepreneur. What are your thoughts on such funding?
Banks are in the business of providing capital to entrepreneurs and one of the bank’s strengths is that it has never been hesitant to support entrepreneurs’ ideas that might have been bigger than the capital or the financial clout they had behind them. Sometimes we’ve been successful and sometimes we’ve come unstuck. That’s been the business of banking for many years and a part of that is the new buzzword - venture capital.
So, are we going to put money up for anyone who believes that they have a bright idea? The answer is no. Are we going to continue to put money up for entrepreneurs who have good ideas that we believe in? The answer is yes.
I know government is talking about this issue and clearly there is a lot more work to be done.

Most financial institutions are analysing their future roles vis-à-vis Malta’s pending pension reform. What provisions is the bank making in terms of forward planning for the development?
There is no question that pension reform is required. I’ll say it as I’ve said elsewhere, it would be a mistake to regard this as an issue peculiar to Malta.
The need for reform has been brought on by changes in demographics, longevity, lifestyle, which mean that current pension arrangements, not only in Malta but also across most of Europe, have to change structurally as they are unsustainable at this point in time. Therefore, self-help and self-funding for pension arrangements have to come into place.
There is no question that we see a role for ourselves, as a bank, in that process. One of the things that has happened at the bank over the past five years or so is that from merely being a bank that takes deposits and provides loans it has become a financial services organisation involved in bringing financial products to an increasingly sophisticated market.
We see pension reform as a natural extension of that. We are already well placed in terms of our branch network, which is servicing the demand for access to financial services products and this would serve as the natural distribution network together with a structured corporate side. We have already established a working group within the bank with a view to preparing ourselves before the new legislation comes into place.
We will be there to assist our market, both corporate and individual, to deal with the new pensions environment. It is not a question of if, but of when this new legislation is introduced. The sooner this is done the better.

We touched upon the bank’s diversification strategy in terms of financial services, could you expand on that? How successful has the bank’s diversification strategy been? What factors have led to this success?
As I said, Maltese banks were once limited in their scope of services, and that has changed. We have the Valletta Fund Management company dealing with the fund management side and we distribute a lot of financial products through the branch network, which are the lungs of the bank if you like.
We are seeing, on a daily basis, a growing sophistication from the market. This market used to be content with a savings or deposit account, and now it wants to have, at this stage, pretty plain vanilla financial products - but we are meeting with an increasingly growing sophistication out there.

It was recently stated that the Bank is looking to further consolidate it culture of cost efficiency while also introducing performance-based incentives for staff to increase motivation. Could you expand on these aspects?
I would firstly state that we are not into a culture of cost cutting, what we are driving at is a culture of cost efficiency. The bank is prepared to spend money as long as it is money well spent and as long as it benefits the institution and the stakeholders.
Certainly, the recently appointed chief executive and I haven’t come into our positions with a US cost cutting culture. The approach instead is to see where we’re spending our money and then to ensure that we’re spending it wisely.
Recently within the bank there has been a move from a seniority based system to one based on meritocracy. This has not, it has to be said, been an easy transition, but there is acceptance within the bank on all levels that it should be run on a basis of merit.
The implementation of a merit based performance and reward system is, however, not without its complications. There is always a debate on the question between implementing a team based merit system, by rewarding the bank as a whole, segregating that on a branch or departmental level, and actually taking it down to the individual level.
The transition is from a system based on seniority, which is uncomplicated but unfair, to a merit based system, which tries to be fair but is complicated. When you implement these systems you tend to hear a lot of noise, and what I constantly remind those who react in such a way is that what we are trying to do is a good thing and that, at the end of the day, everybody, even the underperformer, has benefited from the process.
Such a transition is not without its complications and the noise will never go away because in any merit based system you are always going to have a percentage you deem below par, and they don’t like being told as much. That’s the static you hear in the system and if you don’t hear any static, chances are you don’t have it right.

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