The Malta Independent 22 July 2019, Monday

Overdue compensation to National Bank of Malta shareholders (part 5)

Sunday, 23 June 2019, 09:44 Last update: about 30 days ago

In parts 3 and 4 (TMIS 9 and 16 June) I produced tables and commented on the comparative figures for 1973 and 1974 of the NBM’s Profit & Loss Account and Balance Sheet.

I now come to the all-important question of goodwill. Firstly, it will be recalled that both the Court of First Instance, as well as the Constitutional Court (Civil Appeal) had stated unequivocally that value had passed from NBM’s shareholders, without compensation, to the advantage of the Council of Administration (COA) and eventually to the Bank of Valletta (BOV).

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Although no specific mention of goodwill was made by the courts, it is logical to assume that the courts did not accept the contention that, in December 1973, the NBM had a negative value of Lm253,000 as there must have been some element of goodwill value that had not been taken into account by the COA/BOV and the new auditors.

Indeed, before submission of my affidavit to court in January 2015, a certified accountant, as well as a licensed stockbroker, had given sworn testimony in court of their opinion as to what they considered to have been the Bank’s goodwill value. The two amounts indicated substantially exceeded the amount of the alleged deficit, so I was not alone in expressing such a conviction.

My own calculations in my affidavit went much further as I did not go along with the very simple basis of assessing goodwill as being the average of the Bank’s post-tax profits for the previous five years. I accept that this yardstick is often used as an indicator but, in my opinion, a service industry such as banking should not be treated in the same way as a company based in a sole location producing or importing cans of baked beans or tomato paste!

I considered that there were at least two very important elements in the case of a bank, ie the staff and also the well-established network of bank branches. It is indisputable that, in 1973, the NBM was Malta’s second largest bank with 27 branches and agencies spread all over Malta and Gozo. From my knowledge of the level of customers’ deposits with that bank and Barclays Malta I can say that NBM’s share of business was certainly not less than 40 per cent.

I put forward strong reasons for basing calculations for arriving at the NBM’s approximate goodwill value on the extent of their network compared with that of Banif Bank Malta in January 2015 (when I submitted my affidavit to the court) thus using a factual case as a yardstick and comparing like with like. This is because when Banif announced their launch in Malta they made it clear that they were out to compete with the other retail banks by establishing a network of branches.

Indeed, by 2015 Banif had opened nine offices or reached one-third of NBM’s network in 1973. In the process, Banif had run up accumulated losses of €11.2 million (Lm4.8 million) in its first five years of operations up to 2013 and was even obliged to recapitalise. By then, Banif had gained only a small slice of Malta’s retail banking business. This is a clear example of the cost of establishing a branch network and thus I maintained – as I still do – that this should reasonably be used as a basis for estimating the goodwill value of NBM in 1973.

My own assumptions and calculations were given in my affidavit to the court. I will come back to these in a later article when I assess NBM’s 1973 overall net asset value – taking account of not only its goodwill and excess provisions for bad and doubtful debts etc., but also other factors.

Suffice it to mention at this stage that, in its first period of operations of just over nine months from 20 March 1974,BOV  made a pre-tax profit of Lm1.1 million and this with the same branch network and virtually the same staff inherited from the NBM! Surely, the infusion of Lm3 million by government as new capital was not the sole reason for turning a ‘failed bank’ (as alleged by the foreign experts) into a highly profitable one with a 37 per cent return on capital in well under one year!

It was an open secret that, before the appeal court’s decision in favour of NBM shareholders in October 2014, the government was harbouring fears of an unfavourable decision. Indeed, a Minister of the then Nationalist-led government called a meeting with representatives of the shareholders and offered an out-of-court settlement of Lm8 million (€18.6 million). This was flatly refused there and then as being totally inadequate. Thereupon the Minister reduced the offer to LM7 million and the meeting ended abruptly.

Certainly, such tactics do not do credit to the then government but it does show an admission by the government that the NBM shareholders did deserve some form of compensation. Eventually, of course, the appeal court’s decision strengthened the shareholders’ case as it proved that the government did not have a solid case against the plaintiffs’ claim for compensation.

 

Part 6 will cover events following my January 2015 affidavit

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