27 Jan Interview with Kenneth Farrugia, CEO, Bank of Valletta, Malta
Malta’s financial services sector is the fastest growing segment in the country’s economy, accounting for about 12 percent of its GDP. The sector is currently viewed by the government as a key segment in the country’s economic redevelopment. For what reasons is Malta’s financial services sector booming, and what specific policies have made the sector an attractive market in which to do business?
The financial sector in Malta goes back to 1994. In fact, in November 1994, the Government of Malta, in preparation for eventual membership in the European Union, decided that it needed to review its legal and regulatory architecture for the financial services. The legislative package was approved unanimously by Parliament and paved the way for the development of a predominantly domestic financial sector to reach out to international financial services operators.
Over the years that followed, we have witnessed the development of several financial services clusters, particularly in the banking, asset management and the insurance sectors. Once Malta became a member of the European Union in 2004, and eventually even adopted the Euro in 2008, we started seeing traction in the number of foreign financial services operators that decided to set up financial services operations in Malta.
Over these years, this aforementioned evolution brought about the development of a sound financial services ecosystem, with the industry growing from very humble beginnings of around 3-4 percent of the GDP, to a strong contribution of 11-12 percent, positioning the sector as one of the strong economic enablers. Malta’s economy is somewhat unique in nature, as traditionally island economies are very much driven by one or two key sectors. Evidently this is not the case in Malta. The economy is in fact driven by various sectors such as tourism, financial services, aviation, maritime, high-end manufacturing, and gaming. This diversification has shielded us from the challenges that world economies have faced over the past few years, and it has contributed to sustaining our employment in the country because it has created quite a number of jobs in Malta.
Bank of Valletta recorded a rise in profits before taxes to €80.7 million euro in 2021 from €15.2 million in 2020. Although 2022 results have seen a drop, the future looks stable. How does Bank of Valletta position itself in regard to other banks in Malta, and what major milestones has the company passed that reflect its recent success?
We have just announced our nine-month results for 2022, where we have managed to register growth in revenue which has exceeded the growth in our operating costs of the bank. This is a reflection of the sound business fundamentals of the bank driven by our market position, where we command 50 percent of the market servicing 365.000 customers out of a population of just over half a million.
Clearly, the dynamics around competition are fast changing, and we’re seeing a number of technology companies that are entering the market with very focused propositions in the traditional core banking arenas such as the payments business.
That means that Bank of Valletta, being the largest player bank in Malta, is invariably at risk of losing its market share. This requires the bank to be agile in a sustained manner to meet the exacting expectations of its customers. In fact, we are continuing to invest in our digital platforms and optimize our branch network to provide a bold mix of service channels to our customers, ensuring that we meet their banking and financial service requirements as they progress through the different stages of their lifecycle.
The rise of green investment has recently picked up significantly. The bank has positioned itself alongside the movement by increasing its move away from industries with high climate and environmental risks this year. What impact has the drive for sustainability had on the financial services sector, and how has it affected the banks investments?
I believe that the banking sector in Malta is at the stage of embracing ESG principles within the organisation. Clearly, we have already come a long way, and today, ESG is being gradually embedded into our business and operational model. There are a number of initiatives that the bank has taken forward and will be taking forward to manage its carbon footprint, aiming to gradually decarbonize its business.
The decarbonization targets are evidently for everyone to see. Banks are striving, not only to embed this in their organization, but as gatekeeper of thousands of clients, to really provide its clients with a suite of credit financing and investment products. It is my view that the ESG journey will also see a myriad of our clients, whether they are in the hospitality, construction, maritime or the aviation sector, increase their investments in new energy efficient solutions.
New digital technologies such as AI, big data and fintech have changed the game for financial services. What impact has the rise of fintech had on Malta’s banking sector, and what kind of key technologies is the bank implementing to improve its services?
I call them techfins, actually, because I believe that we are the fintechs of this world. Banks are financial services organizations trying to deploy technology to better service their various customer segments. On the other hand, techfins are technology companies trying to enter the financial services world.
In my view there is strong potential for the development of a symbiotic relationship between technology companies and banks. Banks still have the upper hand when it comes to consumer trust. So while technology companies have a strong value proposition on the CX/UX angle, they are struggling to scale up in a meaningful manner. I firmly believe that banks and techfins can coexist, and we are in fact seeing stronger collaboration between banks and technology companies.
From the bank’s perspective, clearly, digital is a very important enabler for us. We have invested massively in our technological foundational platforms as we have just changed our core banking system in 2020. Currently we’re taking forward the replacement of our digital channels, both internet and mobile banking. However, digitalization transcends channels. It is all about the digital experience that you deliver to the customers, whether its through the suite of functionality across digital channels as well as the digital experience that can be equally delivered across our branch footprint and customer service center. Digitalization of the operational model is also another strategic thrust, as this enables us to operate our business more efficiently and, in the process improve our service delivery to the customers.
So, whilst it is true that techfins are encroaching on traditional banking domains, there is a strong opportunity for these tech companies to deploy their solutions on a B2B base, through banks as their partners.
The bank is highly involved in the Maltese community, from helping people afford homes to green initiatives and supporting culture and the arts. What initiatives has the bank recently embarked on to improve the Maltese community?
As I stated earlier, when it comes to ESG, over the years we have introduced a number of products to facilitate the financing of energy efficient projects applicable to both residential homes and commercial developments. Banks have an important role to play to develop products aiming to finance retrofitting, apertures, installation of solar panels, solar water heaters, and other energy efficient projects of this ilk. Banks have an important catalytic role to play in this ESG journey. As Malta’s largest bank, we are shouldered with the responsibility to catalyze and change behaviors. To do so, we should provide our customers with a suite of sustainable financing and investment products.
We want to ensure that even our operational model, when you look at, for example, simple things like the fleet of cars used by the bank (where we are currently migrating this to to electric cars going forward), when you look at the refurbishment to the bank’s branches ensuring we use recyclable material and energy efficient lighting among other things. These are all ESG principles which our bank is today not only embracing but embedding in its business and operations.
The European economy has been hit hard in the last few years with the pandemic, followed by the conflict in Ukraine. While traditional value chains have been disrupted, this is also a time of opportunity for investors to fill in the gaps. How have the recent crises affected Malta’s investment climate, and what new areas of opportunity are we seeing that Japanese investors might be interested in?
Intrinsically, the Russian-Ukrainian war had a global impact in terms of the disruption to the global supply chain. Clearly, directly or indirectly, it was the cause for the inflationary pressures that many countries are experiencing today, equally Malta. We’re seeing the impact of inflation on the price of goods and products as a result of that.
Undoubtedly inflation is high on the agenda of global central banks where monetary policy is being used to contain the impact of inflation.
Looking ahead, our bank base rate may be shaped by the overall size and pace of the ECB’s interest rate decisions going forward, especially if interest rates remain high over the medium to long term. BOV will continue to carefully monitor the situation, as well as the actions of the other major banks in Malta, with the aim of striking the right balance among its stakeholders, both depositors and borrowers, when setting its interest rate structure. The strong liquidity situation will help to ensure that any future changes would be well-managed, gradual and, to a large extent, without surprises.
From a Malta perspective, if you look at our economic fundamentals, unemployment is hitting new lows, and GDP growth is respectable. In fact, Malta is currently one of the best performing economies in Europe. When investors are considering a jurisdiction from where to base their operations, they look at political and economic stability to the extent that inflation is contained in the country and the history over the years, the quality of the workforce in the jurisdiction. Malta ticks a number of these boxes today.
I feel that Malta still has a very strong proposition for those operators or Japanese clients that are seeking to penetrate the European market. We already have a degree of trade between Malta and Japan. Clearly Malta has always had an open-door policy for foreign direct investment, and absolutely, Japanese investors would be welcome to the country to explore the business opportunities, both in so far as Europe is concerned, because Malta is a member of the EU, but more than that, we are the closest EU member state to the African continent. There is this sort of dual opportunity, by basing an operation in Malta, looking towards being able to pass products and services to Europe, but, obviously, considering also the proximity of Malta to the North African region and Sub-Saharan Africa.
You stepped up as CEO of Bank of Valletta in October but have been with the bank in various roles since 1985. You’ve had a long career in supporting investments in Malta through your seat on the board of governors for FinanceMalta and your recent position as director and chairman of Malita Investments. What are your top three priorities as the new CEO of the bank, and what kind of future do you see for the institution in the next five to ten years?
Data and digital will have an important role to play within the context of the bank’s strategy going forward. Data is very foundational from a strategic context, both in so far as the value of data from an operational perspective, but equally the importance of the use of data to ensure that we are meeting the service expectations of our customers. My key focus areas will be on people, customers, governance and operations of the bank. ESG will be an overarching theme, ensuring that we embed this within the organization, at operational level, but equally ensuring that we provide a suite of products to service the investment and financing requirements of our customers.
What would your final message for the readers of Japan Times be?
As Malta’s leading banking institutions, we would welcome the opportunity to service Japanese companies setting up their operations in Malta and establish ourselves as their banking partner in Malta.
Setting up an operation in Malta will allow Japanese companies the ability to penetrate the European market. However, at the same time, as Malta is the closest EU member to the African continent, there are clearly opportunities to tap into both the north and Sub-Saharan Africa.