The Malta Independent 13 November 2019, Wednesday

Overdue compensation to National Bank of Malta shareholders (part 4)

Sunday, 16 June 2019, 13:04 Last update: about 6 months ago

Anthony R Curmi

 

Part 3 (TMIS, 9 June) included Table 1 with 1973 and 1974 comparative figures of the Bank’s Profit & Loss account. Table 2 (below) shows comparative Balance Sheet figures. These figures were also extracted from the report prepared in April 1974 by the new auditors appointed by the government on the NBM’s accounts as at 31 December 1973.

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Table 2

 

 

 

 

1973

1972

 

 

 

 

 

Lm '000

Lm '000

Liabilities

 

 

 

 

 

 

a) Customers' funds & other liabilities

 

36,043

42,642

b) Shareholders' funds

 

 

1,482

2,857

c) Adverse balance on P&L a/c (1972 credit)

-1,735

29

d) Excess of liabilities over assets (1972 surplus)

-253

2,857

 

 

 

Total liabilities

35,790

45,499

Assets

 

 

 

 

 

 

e) Cash in hand and with CBM

 

 

1,800

2,778

f) Balances with other banks

 

 

2,319

3,050

g) Investments

 

 

 

6,397

9,027

 

 

Sub-total current assets

10,516

14,855

h) Advances & other accounts less   provisions for

 

 

doubtful debts

 

 

 

24,854

30,268

i) Investment in associated company

 

125

125

j) Bank premises & equipment

 

 

295

251

 

 

 

Total assets

35,790

45,499

 

Table 1 in my previous article showed how additional provisions an additional provision of Lm3.25 million for bad debts were was charged to the Profit & Loss account by the Council of Administration (COA)/Bank of Valletta (BOV) in the audited accounts as at 31 December 1973. This amount, together with extraordinary charges, resulted in an adverse balance on the P&L account of Lm1.73 million (c) and a net deficit of Lm253,000 as against a surplus of Lm2.86 million at the previous year-end (d).

The effect of the run on the Bank, starting early in December 1973, resulted in a fall in customers’ funds of Lm6.6 million (-15.5 per cent). However, this could have been stemmed had the Central Bank of Malta (CBM) acted as a ‘lender of last resort’ as provided for by the Banking Act. Much can be said as to the reasons for the sudden change of heart in this respect. Documentation produced in court confirmed that a decision – taken at the highest government level – that the CBM implement this discretion given by law to the Minister of Finance was suddenly, and without reason, reversed within 24 hours.

 Even without any support from the CBM (which could have been secured mainly by gilt-edged investments valued over Lm6 million held by the NBM) the Bank had over Lm4 million available in cash and balances with the CBM and other banks. Thus, this was far from being a failed bank. Indeed, although the ratio of current assets to customers’ funds fell from 34.9 per cent to 29 per cent, this was still over the 25 per cent statutory requirement.

The sharp reduction in the value of investments (g) was not caused so much by a fall in market value but because, on taking control of the Bank in March 1974, Bank of Valletta (BOV) decided to redeem, at the then depressed values, gilt-edged securities which were yielding 10 per cent at a time when the maximum interest rate charged on advances was subject to a legal maximum of 8 per cent (see part 3 of last Sunday’s article).

Bank premises and equipment (j) are also worth commenting on. It is to be noted that the book value of Lm295,000 (including equipment valued Lm74,000) was the historic and depreciated value of bank-owned premises. As there were then no statutory or accounting requirements for this to be done, it was not then the practice to revalue immovable property at regular intervals.

Some of these properties had been acquired decades earlier – even going back to the 20th century – at a fraction of the market value in 1972/73 and was still shown in the Bank’s books at their historic and depreciated value (Lm221,000). A revaluation at that time would have boosted the Bank’s reserves and most probably this alone would have more than made up for the alleged net deficit.

Indeed, in the course of the Court proceedings in March 2015, plaintiffs sought an independent architect’s valuation of merely the main (six) NBM-owned properties. These alone were given a current market value of Lm9.4 million and a market value in 1973 (payable in 2015) of close to Lm2 million!

Moreover, no consideration was given to the NBM’s goodwill value. This will be considered in Part 5 of this series.

 

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