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26 July 2014

Proud To be conservative – Lombard Bank

 - Sunday, 29 April 2012, 00:00 , by Noel Grima

“I would be glad to be called a conservative,” said Lombard Bank Malta chairman Christian Lemmerich, replying to a question by a shareholder at the bank’s annual general meeting last Tuesday.

In fact, the bank’s results for the year ended 31 December, in such a turmoil-filled year, fully bear him out.

At a time of subdued business sentiment and reduced interest margins, the group performed reasonably well, he said, with profit before tax of €11.3 million, 19 per cent down from the previous year.

Net Interest Income was down by 12 per cent to €14.2 million as a result of intense market competition on interest rates combined with rationalisation of the advances portfolio.

Customer deposits were managed so as to maintain a healthy level of liquidity commensurate with business requirements. Notwithstanding, fluctuations of customer deposit balances during the year resulted in a higher interest charge than in the previous year.

Early in 2011, the bank took a view, based on financial market sentiment at the time, and decided to divest itself of certain investment portfolio assets. MaltaPost also liquidated some of its financial investments, with proceeds being invested in long-term fixed assets.

Loans and advances to customers contracted by seven per cent to €310.4 million. This reflects subdued sentiment especially in the property development and construction sector, as well as continuation of implementation of a policy aimed at maintaining a high quality customer advances portfolio.

Specific Impairment Allowances increased by €1.8 million so as to provide a suitably prudent hedge against potential shortfalls in valuations of underlying collateral. Moreover, an additional €479,000 from this year’s profits was put aside to the Collective Impairment Allowances increasing this to €1.9 million.

As at year-end the bank’s Loan to Deposit ratio stood at a prudent 67 per cent. This was the result of a careful decision, given the prevailing uncertain climate.

For many years the bank has pursued the policy of prudence in all aspects of its business strategy – namely:

A solid capital base. The bank’s shareholders’ funds as at the end of 2011 stood at €73.3 million.

Capital Adequacy ratio now stands at 20 per cent compared to the required minimum of 8 per cent and this at a time when many banks in Europe struggle to improve the capital ratio in a hostile environment. This strong capital base gives the bank the opportunity to grow its business further without having to ask shareholders to make fresh capital available. At the same time it signals its robust foundations.

A prudent Loan to Deposit ratio. In 2011 this stood at 67 per cent. While this high level of liquidity contributed significantly to the reduced interest margin it has enabled the bank to finance its entire lending through customer deposits.

A cautious approach to its treasury operations. Even before the eruption of the eurozone debt crisis the bank had followed the principle of employing excess funds only with first class counterparties and on a short-term basis. In the eyes of many, this might not have been the most profitable way. The bank’s responsibility to shareholders and to depositors has stopped it from following an aggressive approach. And as a result, the bank is pleased that it has no exposure whatsoever to countries affected by the sovereign debt crisis.

Considering the challenging market conditions, the board and management of the bank feel that earnings per share of 18.3 cents and a post tax Return on Equity of 9.3 per cent indicate an overall positive performance. The board is therefore recommending a Gross Dividend of €0.115 per share – the same as for 2010 when the dividend had been increased by 15 per cent. The board does not recommend the option of a scrip dividend as the bank has very adequate shareholders’ funds at its disposal.

A year ago the bank had expressed some optimism in respect of the euro at a time when a number of politicians and economists had predicted its demise. The bank believes that the situation of the euro has since improved considerably and it could well come out of this crisis stronger than before.

It has to be remembered that this is not a euro crisis but a European sovereign debt crisis. Since inception of the euro, the eurozone has experienced lower inflation rates than the Deutschemark before and the exchange rate of the euro against the US dollar has strengthened since its introduction 10 years ago. The crisis we still face came about by a number of countries overspending, highlighting the fact that the original Maastricht treaty had certain shortcomings.

These are now gradually being rectified by the introduction of drastic austerity programmes and, perhaps more importantly, by the “Fiscal Compact” which will ensure that most EU member states follow financial discipline. Over time, this should bring back international confidence in the eurozone.

Realistically speaking, it may take years before the eurozone sovereign debt crisis is over and the austerity measures will be painful not just for the countries concerned but could well affect the world economy. It is precisely for this reason that the bank believes in exercising prudence in its business approach.

The bank feels well equipped to cope with the present challenges and to participate in the improvement of overall conditions as and when these come about.

One of its main strengths is that it is an independent bank with a very strong Maltese identity. Its policy and business strategy are fully geared to the Maltese customer base. It believes that its understanding of local market conditions is unparalleled.

In replies to questions from shareholders, the bank’s officials said the bank does not have holdings in other currencies, except for transaction purposes. 99.9 per cent of its funds are employed in Malta.

Mr Lemmerich, replying to a question, said it is difficult for the bank to plan five years ahead, seeing how the market has developed in the past year and how even international banks are not planning that ahead. Nor is retail banking its main focus. The bank wants to service business in Malta but it cannot get involved in small personal loans. The bank is determined to grow as a business and funding has to grow from lending.

Bank CEO Joseph Said said the bank has created another vehicle for growth: it currently has five branches as it needs real physical presence but through MaltaPost the bank now has a further 34 outlets through which certain financial services can be handled. These branches are being used for people to cash their cheques and thousands of cheques are cashed each week in some areas. Over the coming weeks, MaltaPost will be coming up with yet another product related to financial services.

Most of the rest of the AGM then became a series of questions and reactions between a shareholder, Joseph Bonnett, and the bank’s officials. Mr Bonnett, long a gadfly of most AGMs, had been, it was said, among the few who had turned the HSBC recent AGM into a screaming battle.

In this case, Mr Bonnett was first told the points he was making showed he had not distinguished between bank and group results. Then he urged a share split for a bigger dividend to shareholders, only to be told this was a populist suggestion and would not benefit the bank.

Then, when Resolution 1 was about to be put to vote, Mr Bonnett proposed a secret ballot. He was told he should have informed the bank beforehand so that the necessary preparations could be made. When Mr Bonnett insisted, he was asked how many shares he represented.

This alarmed Mr Bonnett very much, who steadfastly refused to give this information then said he would give it only in private. Mr Said argued that there were around 150 people at the AGM and if each had just one share, and Mr Bonnett had more, he could outweigh all of them. Mr Said also pointed out that share ownership is public knowledge.

One shareholder, however, stood up to defend Mr Bonnett saying that the request made to him was ‘not ethical’. The chairman, Mr Lemmerich, who had meanwhile stood by while this argument went on in Maltese, said he had understood nothing of what was said and moved to other business.

Replying to other questions, the bank officials said the bank had not gone to ECB for funds. A shareholder complimented the bank, saying it was the antithesis of casino banking.

At the end of the AGM, Mr Lemmerich said he had been chairman for the past 14 years and that very day he had told the board that he was considering retiring this year.

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