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National Bank Saga • January 25 2004

The National Bank Scandal - Part 8

Mathematics of deceit – draining profitability out of the National Bank

For thirty years since 1973, the shareholders of the National Bank of Malta have had justice denied. A calculated and premeditated attempt to take over one of Malta’s most thriving financial institutions was carried out with impunity by Labour Prime Minister Dom Mintoff, at the expense of the shareholders of the National Bank.
Since 1976, the shareholders who campaigned for what is rightfully theirs, have not yet been compensated for the robbery of the National Bank. What was to become the ‘bank of the people’ – the Bank of Valletta – would from its inception be a bank that had ploughed its initial profits and success out of the National Bank of Malta.
From Republic Street to Victory Square in Xaghra, Gozo, the National Bank had 25 branches including its head office and the Sciclunas Bank branches. When the BOV took over the business of the National Bank, the Sciclunas Bank and the Tagliaferro Bank, the premises and equipment were valued at Lm297,000 – less than Lm12,000 for each branch, a downwards valuation that sought to show the National Bank of Malta was facing bankruptcy.

Denying the strength of the National Bank
In 1972, the assets of the National Bank and the Sciclunas Bank totalled over Lm38 million. Coupled with its 90 per cent shareholding in the Tagliaferro Bank Ltd, the group’s asset base totalled over Lm45 million. Since 1968, the pre-tax profits of the National Bank increased from Lm465,000 to Lm722,000 in 1972. There were never any signs of impending failure before the ominous run of December 1973.
With a share capital of almost Lm3 million in 1972, the success of the National Bank saw more depositors joining as clients – deposits increased from over Lm15 million in 1968 to Lm23 million in 1972 – an increase of 47 percent over four years. How could such a rapid expansion meet instant doom in the space of weeks, as then premier Dom Mintoff had announced to the general public in 1973?
What the financial figures of the National Bank of Malta prove is that the bank’s cash liquidity never dipped to precarious levels, despite not having been aided by the Central Bank – supposedly the lender of last resort – with bridging finance to meet the run on its cash reserves.
The 1970 Banking Act demanded that banks had, at their disposition, in excess of 25 per cent of their paid-up share capital and reserves, as liquid cash, readily available for their depositors.
In 1972 the National Bank of Malta held over Lm42 million in customer deposits, and Lm14.7 million in liquid or quasi-liquid assets – a liquidity ratio of almost 35 per cent, well above the mandatory liquidity ratio. When the run hit the bank, cash started being withdrawn at breakneck speed but no bank, not even the Central Bank, was allowed to lend bridging finance to the National Bank. Mintoff was adamant that the National Bank be transferred to the government, without compensation for the shares.
Evidence that the National Bank was still in a position to meet the liquidity ratio was the fact that during the fatal December week that saw the run on the bank, not enough money was withdrawn to pitch the bank in trouble.
In four days, the run on the bank saw enormous withdrawals totalling at least Lm2.5 million. With a deposit base of over Lm42 million in 1972, the National Bank had to have at least Lm10.5 million in cash at its disposal. The bank had Lm14.7 million.
When the run came through, Lm2.5 million was withdrawn, never enough to put a strain on the liquid position of the National Bank. At the height of the run, the National Bank still had at least Lm2 million in liquid cash to meet client demands.
Maybe it was for that reason that Mintoff threatened to withdraw the millions of Liri that parastatal companies had deposited at the National Bank – one way or another, he would have seen the bank either transferred over to the government, or face a suspension of its licence for not meeting liquidity demands.
When the Council of Administration took the bank over in 1973, the final published accounts for the National Bank showed that total deposits had decreased to Lm36 million. With total cash liquidity at Lm10.3 million, the National Bank was well over the mandatory 25 per cent liquidity ratio – 28.6 per cent of its deposits, were liquid cash.

The bad debts that never were
One of the major features of the National Bank of Malta crisis was the deceitful design by the Council of Administration, to have the provisions for bad and doubtful debts increased exponentially to suggest the bank was never in a position to recoup the credit it had lent to major companies.
It is difficult to understand when in 1972, auditors Turquand Youngs and Co declared a provision of Lm2.3 million as money which would never be recovered from debt owed to the bank by its debtors. A year later, the new auditors Deloitte and Co completely altered the picture by providing for Lm5.9 million – the provision had increased by three times the amount it was a year before.
Adding insult to injury, the government-appointed administration that took over the National Bank at the apex of its profitability sought to present the bank as having been close to bankruptcy, in a bid to prove the worthlessness of the share capital. The notorious Property Index was the source of the exponential increase in bad debts. The index was a rushed affair drawn up by the Council of Administration, to evaluate the state of the real estate and property market on the Maltese Islands, and the National Bank of Malta was one of the prime lenders to the property market.
The major part of the provision was in fact calculated by applying the index of property price changes between 1969 and 1973, to the values of the properties on which loans had been secured. The final accounts for 1973 released by the Council of Administration showed that the provision for bad and doubtful debts was based on the Valuation of the Property Index.
The objective of the Index was to establish which loans advanced by the National Bank needed to be deemed as irrecoverable, due to the perceived notion that since the property market was facing a slowdown, surely these loans would not be repaid. But the Council’s logic defied rationality because it assumed that the slump in the property market since the election of Labour to government, meant that many of the property-secure loans had lost their value, and were therefore to be declared as bad or doubtful debts.
This was even aggravated by the fact that the authors of the Index stated that the register gave a "rough indication of the direction in which the value of property in the Maltese Islands is moving. It does not present itself as being a precise figure but rather as a guide in the general trend."
The data was collected at random from the files of the Public Registry from the actual sales deeds registered during the years 1969 and 1973. A sample of just 163 items were taken for 1969 and 198 for 1973, the Index quoted.
The information proved scant. These were the official sales prices as quoted on various official contracts. No mention was made of the nature of the property (controlled or decontrolled) or whether the sale or purchase had been made between Maltese citizens or foreign citizens, in the case of the latter suggesting the price of the property would have been expected to be higher than normal.
Other mishaps featured in the desultory Index. Being based on official sales deeds, these were unable to give a precise indication of the actual price of the property, since deeds are always visibly affected by factors such as stamp duty and indirect taxation. Values on contracts do not always give a true indication of actual property value.
Despite being drawn up as a guideline for the Council, the three-man administration of the National Bank used the Index as the main guideline to proportionally reduce property values, creating a shortfall between the loan and its collateral. The shortfall was transmuted into a bad debt.
A major shortcoming of the Index was that no weight in property price fluctuation had been given to hotels and related property, of which the National Bank was substantially a main creditor. Additionally, the National Bank of Malta shareholders were never able to collect the relevant information from the Council of Administration to establish the names of those companies and debtors which had lost credit-worthiness according to the Property Index.
By 1978, Bank of Valletta’s final accounting report revealed how the remaining part of the original Lm5,972,000 in bad debts which had not yet been recovered were either recovered and collected or reinstated as normal debts over a period of four years.
The drastic reductions proved that the over-inflated provisions for bad debts were collected in due course in a relatively short span of time, proof of the National Bank of Malta’s prudent banking strategy. The dramatic decrease in the provision for bad debts to 72 percent of the original amount of Lm5,972,000, showed that the amount originally provided for did not reflect the reality of the Bank’s financial situation.


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