Anthony R. Curmi

Following part 2 (TMIS 2 June) of this series of articles, Table 1 below shows figures relating to the Bank’s Profit & Loss account extracted from the report produced in April 1974 by the government-appointed auditors on the NBM’s accounts as at 31 December 1973. For comparative purposes, I include the relative figures as at the previous year’s end prepared by the Bank’s long-standing auditors.

The Central Bank of Malta (CBM) saw no reason to question the latter audited accounts. Indeed, in March 1972 and again, in July 1973 (a mere five months before the commencement of the run on the Bank) the CBM’s own inspectors, after having carried out their periodical inspections of the Bank, reported that the provisions against bad and doubtful debts (NPLs) “could be considered satisfactory and adequate”.  

Table 1				1973	1972
				Lm '000	Lm '000
a) Profit before taxation & provisions				795	827
b) Taxation				216	384
c) Profit before taxation & provisions &
extraordinary items				579	443
d) Provision for doubtful debts				3,246	71
e) Transfer to investment reserve				-	123
f) Loss before extraordinary items				2,667	249
g) Extraordinary items				517	-
h) Loss for the year (1972 profit)				3,184	249

 

In this article I comment mainly on (d) as the 1973 increase in the Provision for Bad Debts is the most significant item. This reflects a massive increase (+ Lm3.17 million). Even if it is argued that the 1972 provision was on the low side, a rise of such magnitude merits further examination.

In my affidavit to the Court of January 2015 I included a table listing the outstanding advances to 18 customers whose hefty debts to the NBM were then considered to be non-performing and necessitated a provision covering any perceived shortfall in the value of security held there against.

These particular advances totalled Lm9.5 million and specific provisions, ranging between a low of 9.88 per cent and a high of 100 per cent, totalled Lm3.32 million i.e. an average of 35 per cent. Significantly, except in the case of a textile manufacturing company that eventually went bust and so deserved the 34 per cent provision made against an exposure at the time of Lm1 million, all the other large non-performing loans (NPLs) on the list were in respect of companies that are still in business to this day and where the provisions were recouped in full as the debts were fully repaid over time.

Even a debt of Lm1.62 million then due by B. Tagliaferro & Sons Ltd (for which a provision of just 9.88 per cent was considered necessary) was eventually fully repaid from property sales. Incidentally, this 10-year loan had the approval of the CBM in terms of the law not only because it was repayable over an extended period but also due to the fact that the amount exceeded 25 per cent of the NBM’s paid up capital and reserves.

In addition to the above-mentioned specific provisions of Lm3.32 million, the Council of Administration (COA)/Bank of Valletta (BOV) and their auditors thought fit to create other specific provisions totalling Lm1.55 million plus a general provision of Lm1.1 million. The latter was to cover any other possible NPLs that were not evident at the time.

It should also be noted that total provisions made by the NBM at about 8 per cent of total advances were already considerably higher than the norm of 1 per cent made by its banking competitors. Such percentages were closely monitored by the CBM and yet the COA/BOV thought fit to raise the level to just below 20 per cent!

For the reasons given in my affidavit to the court, the sudden rise in provisions was indeed excessive and, if this factor was taken into account (besides others which will be dealt with in future articles), the assertion that the NBM had a negative asset value as at 31 December 1973 had no foundation.

Indeed, even the experts appointed by the court (KPMG Malta), after examining the files of the main accounts for which BOV had made much higher provisions, concluded that out of total specific provisions of Lm1.63 million, 84.6 per cent (Lm1.37 million) had been recovered. This amount alone shows the fallacy of a negative NAV of Lm253,000! Moreover, it is significant that the total provisions of Lm5.97 million made by the COA (and inherited by BOV on assuming ownership in March 1974) were reduced to Lm1.65 million by 1978,00 ie a reduction of Lm4.2 million (70 per cent) in five years.

The other unusual charge to the 1973 Profit & Loss account was (g) Extraordinary Items for Lm517,000. This was due mainly to the premature sale of prime foreign securities which were yielding 10 per cent and would have been better retained until redemption on maturity: more about that in the next article.

In part 4, I will produce Table 2 with comparative 1972 and 1973 Balance Sheet figures showing how the NBM’s positive net asset value of Lm2.86 million was turned into a deficit of Lm253,000 through quite a bit of financial engineering.