All smiles at BOV

At the start of a mild heatwave, the last thing islanders want to discuss are events concerning banking and investment tidings.

The 7 June 1919 feast reminds us of brave compatriots who protested (four died at the riots in Valletta) against the rising cost of bread and other injustices when the island was a British colony. Following the end of colonial rule, the island’s population grew from 390,000 in 2000 to 514,000 in 2019. Undoubtedly, stellar growth in the economy was also due to this explosion in the population.

Some ask, given our land limitations and high population density, if this phenomenal growth is sustainable. Still, following two years of a debilitating pandemic which saw the state borrow over €2 billion to maintain business stability and tackle unemployment, it is gratifying to observe that ratings agency Moody’s has confirmed Malta’s A2 negative rating.

In a recent report, it praised the country for the growth and diversification of its economy, adding that the negative outlook reflected a significant increase in the government’s debt burden, as well as uncertainties tied to the broader recovery, particularly the rebuilding of the tourism sector.

It also reflects on the addition of Malta to the “grey list” of the Financial ActionTask Force (FATF) over concerns related to anti-money laundering supervision.

Concurrently, Fitch ratings has affirmed Malta’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a stable outlook. This financial resilience clouds a turbulent banking maelstrom which was partly triggered by revelations of the Panama Papers, the unsolved assassination of a journalist and associated scandals which led to the resignation of a number of top ministers at Castille.

Both MFSA and FIAU had a busy time waking up to banking investigations starting with Bank of Valletta (the La Valette fund and Deiulemar trust), Satabank, Pilatus bank, Nemea bank and Settanta insurance. In absolute terms, BOV remains Malta’s largest bank with total assets exceeding €14 billion compared to €7.2 billion of HSBC, and in 2012/3 it faced an embarrassing string of censures over its botched property fund.

The case goes back to 2012, when the property fund - officially known as the La Valette Multi Manager Property Fund - was launched in 2005. The La Valette fund was mis-sold to investors who sadly lost their holdings. Many did not understand the volatility of their investment yet it was no secret that Bank of Valletta (BOV), acting as custodian of the botched fund¸ issued clean custodian certificates for three years in succession.

It all started when promoters of the fund¸ particularly at branches of Bank of Valletta¸ earned cool commissions selling the vehicle as a low risk property fund¸ which eventually lost €50 million. Its brochure described it as a multi-manager property fund¸ which as the name implies has all the fortitude of a diversified and well-managed vehicle.

It all started to go wrong when Insight as the managers decided to place a sizeable chunk of the invested monies in Belgravia European Property fund, which collapsed. Bank of Valletta had decided to appeal against the decision taken against them by the financial arbiter, which awarded €3.4 million plus interest to 400 investors.

Regulators pontificate that clients should not suffer a loss due to mismanagement. Two years later, BOV offered claimants €50 million in an attempt to settle the case. The offer was turned down and Finco Trust - representing a number of investors - put up a fight, first at a regulatory level and ultimately judicially in front of the Arbiter for Financial Services.

The arbiter reminded BoV not only of its legal responsibility but also of its social responsibilities to so many hundreds of  investors who had trusted the Bank and relied on its advice and management skills, and this most often when they were of pensionable age investing their life savings to supplement their pension.

The wheels of justice grind slowly and MFSA, following three investigations, fined BOV €200,000 for selling high-risk property fund shares to inexperienced investors. Surely, a slap on the wrists compared to the unprecedented collapse of investor confidence shattered with a €50 million loss. Nobody resigned and no apologies issued, certainly not by politically appointed stewards.

Now in 2022, the bank recently announced a settlement had been reached out of court on a claim for €370 million payment to Deiulemar shareholders arising out of a trust held by BOV. The case was lost by BOV after contestation before the Italian court.

Shareholders of the collapsed Deiulemar shipping giant were found guilty of fraud and seven members of the company’s founders were jailed by an Italian court in 2014. BOV had taken over a trust that held €363 million in the company’s assets in 2009. When the company went bankrupt, bondholders whose savings were wiped out, turned to BOV.

The bank said it had filed an appeal in March, and subsequently engaged with Deiulemar curators to explore the possibility of a “mutually satisfactory resolution to the dispute out of court”, and to mitigate the further litigation risk on appeal.

BOV had taken over a trust that held €363 million in the company’s assets in 2009. Bank of Valletta disputed the amount in compensation being claimed, saying the shares held were deemed worthless following the bankruptcy of Deiulemar Group. The bank said at the time that the out-of-court settlement offer was made in an attempt to find a “pragmatic, commercial solution” to a messy problem”.

An Italian court ordered Bank of Valletta to pay €370 million. In the 2017 judgement, the Italian Court stated that the Deiulemar Group had what is referred to as “un debito occulto”, which is basically a hidden liability, of €753 million, and therefore a liability that was not recorded in the financial statements of the company which, had it been properly recorded, would have shown that the Deiulemar Group had negative net assets as of 2004.

Then, last month, the bank’s board of directors announced an out of court settlement had been reached, without any admission of fault. BOV agreed to pay a full and final settlement in the sum of €182.5 million in respect of the €370 million judgement handed down by the Court of First Instance in Torre Annunziata.

Thus ends another saga in BOV, in which the State enjoys a  majority shareholding of 26%. It is all smiles and hung ho attitudes. The share price momentarily rallied and the management was showered with kudos that Deiulemar bond holders bowed to accept a lower figure notwithstanding that they had a final judgement in their favour of double that amount.

Another colourful chapter is closed and pensioners/minority shareholders, who for four years were starved of dividends, patiently wait to receive a decent return on their investment. Pennies from heaven.