Insight

Increasingly stringent regulations are reducing banks’ risk appetite, says IIG Bank’s CEO

While new regulations are affecting banks’ bottom lines, Raymond Busuttil of IIG Bank urges smaller players to remain niche in their approach and not to emulate larger institutions with a full package of consumer services.

Can you give an overview of IIG Bank, its core business segments and key markets?

IIG Bank (Malta) Limited was incorporated in January 2010 and was licensed to operate as a credit institution in March of the same year. The bank forms part of a New York based trade finance group managed by IIG Capital LLC specialising in the global commodity export sector with a focus on agri-products in emerging markets, particularly those of Latin America. IIG Bank embraces the same group concept by focusing on relationship-based international trade finance but with a wider scope of activity. While the bank sources its business from hubs that have traditionally attracted a concentration of trading activity, such as Geneva, Dubai and London, the trading activity of its clients has a much wider reach. Today, the Bank is involved in financing import and export, hence the movement of goods in all parts of the world.

Each year you are registering record growth. What would you say are the main reasons for this and do you think this growth is sustainable in the coming years?

IIG has been profitable from day one. In the initial two years, the bank had the relative advantage of applying its funding to trade finance transactions offered in the form of trade loan participations through the group. However, by the third year of operations, funding from domestic customer deposits was growing faster than anticipated, and the bank decided to accelerate its plans, investing in a business development team that would market the bank with direct lending relationships. We have been very successful in building this business, so much so that our balance sheet has registered around 40% growth, year-on-year for the past 3 years while keeping tight control on our administrative expenditure.

We are very service driven and relationship based in our approach. The personal attention and our quick execution of business transactions gives us that competitive edge that is so important to clients. The IIG brand is growing fast and will continue to do so through our existing client base and other business introducers. We strongly believe that our business model works as we receive proof of this every day through very positive feedback from satisfied customers. 

Malta’s banking industry has performed well in recent years and has suffered no systemic shocks or banking failures. How would you assess the current state of Malta’s banking sector?

The Maltese banks have always been prudent in their approach to business, retaining themselves well within the parameters of prudent liquidity and capital adequacy ratios while applying sound principles in managing their respective credit exposures. Despite the lure of extraordinary profits that could be generated through leverage in the international securities market, which was prevalent for some years, the banks remained cautious in their approach, hence well insulated from the systemic wave that badly hurt so many large and established banks. The Maltese banks continue to embrace such a prudent approach while adopting the more stringent directives aimed at an even more controlled environment within which the sector must comply. While such increased regulation dampens profitability, it gives the sector a more robust model that can withstand economic shocks. The Maltese banks are in a good position to adapt and pass the test. 

How has the face of Malta’s banking sector changed over the previous 10 years?

During the past 10 years, the banks have experienced some of the most severe shocks in modern economic history. While not immune, as we have indeed seen some banks suffer losses in the 2008 crises, no bank in Malta was incapacitated or needed administrative intervention. However, the sector has been affected negatively as more stringent regulation has made banks more risk averse in their approach to business. Banks also might need to shrink their balance sheets and cut costs to become more profitable.

How does the Maltese banking sector today, compare to other countries in terms of product innovation?

Due to the size of the sector and the limited sophistication of the customer base of domestic service providers, Maltese banks are really on par with those banks abroad that similarly cater for their domestic and regional client needs. The product innovation that one finds in the large multinational clearing banks and other large specialist institutions that are market makers in the respective fields, are in a league of their own and Maltese banks cannot afford the resources to ever reach such levels. 

What are the challenges you see laying ahead for the banking sector both globally and in Malta?

The challenges are aplenty as uncertainty about almost everything that has an economic impact of global dimensions remains prevalent. From a macro perspective one can name the prolonged decision to hike the US interest rate, the uncertainties about growth in China, the low price of oil, which combined with the China factor is having such a negative effect on other basic commodities and the emerging market economies that produce these products. Then there is the stretched political climate effecting Russia, Ukraine, Turkey, Iran, Iraq and all other countries bordering Syria. In Europe, there is the Greek crisis and unprecedented migrant flows that are escalating political tensions across the region. All of this, and the fear factor that deters new investment is hurting banks. In their effort to protect consumers, regulators are badgering banks with endless forms of restraints through new directives. The Maltese banks, while faring quite well because the domestic economy has proved resilient to the external environment, are still bound by regulation that discourages risk.

Size and scale are becoming increasingly important these days, with many industries experiencing a phase of consolidation. How do you view the future for smaller banks, and what is your investment/growth strategy?

I agree with your statement because the heavy regulations create a hefty cost burden to banks and reaching the initial breakeven point is not easy. The future of smaller banks is one that invariably needs to follow specialisation in a particular area and not try to emulate larger banks with a full package of consumer services. IIG Bank’s growth strategy is to remain focused on our particular field of business and do more of what we do while remaining a niche player. By retaining such a linear approach to business, we can retain control on overhead expenditure by employing the additional resources we need, keeping pace with growth in business and profitability.

What are the chief strengths specialised niche banks offer prospective clients that the larger banks do not?

Primarily it is the ability to retain a close relationship with each individual client, understanding their business or investment perspective and offering solutions that really work for them. To do this, one needs to be selective. This is not impossible for larger banks to do but it is much more difficult and expensive to implement.

Technology is one of the greatest drivers of the financial industry. How is IIG Bank embracing technology?

Technology is key in all modern business. The communication technology of today allows us to do a lot much more than one could ever imagine 20 years ago. The bank employs the best tools that suit its business model with backup systems to ensure that there is no failure or breach of our security protocols. In our measure of critical factors of strategic importance, technology and systems are only second to our human resources. With those two elements in place, we could run our business virtually from practically anywhere.

What are your personal expectations for Malta’s economic prospects over the next five years?

Malta’s economy is sound and has been outperforming that of our neighbouring countries for quite some time now. Provided sound administrative decisions persist, there is no reason why this process would derail. However we remain heavily reliant on one industry, which is tourism, hence we are somewhat vulnerable to factors beyond our control. What is within our control – the tourism product, needs to be consistently improved. I believe that Malta will remain on course over the next five years, benefitting from a multiplier that emanates from the real estate sector and tourism. The financial services industry is also doing its part.    

Malta has had great success in attracting FDI. Apart from the banking and financial services sector, what other business areas do you believe offer opportunities for foreign investors, and why?

The specialist educational and medical sectors should become additional pillars of our economy. Malta has one huge resource, its people. Successive governments have invested heavily in education that encourages students to reach the highest level of specialisation. The country should harvest these resources by offering opportunities at the specialist level for the two sectors or risk losing these valuable resources through migration elsewhere, should FDI not attract such elements.

On a personal level what message would you like to share with the international investment community about Malta?

I meet a lot of potential foreign investors who arrive at our shores, sceptical about what they will find. What strikes me in their general reaction; after they have experienced the shock of our chaotic traffic situation and the smallness of our island, is their surprise about our strong work ethic and that so much goes here, and at quite a fast pace. Scepticism evaporates quickly, as they shift gear into serious business proposition. My message is simple: visit the island and experience it.

Raymond Busuttil serves as the Managing Director and CEO of IIG Bank (Malta) Ltd. Prior to joining IIG Bank (Malta) Ltd., Mr. Busuttil served in several key managerial positions with various financial institutions, including FIMBank plc, where he spent 13 years as a Chief Operations Manager, General Manager and Executive Vice President. He was responsible for various aspects of that bank's global operation and assisted in FIMBank's transition to a public entity, including overseeing the IPO and listing on the MSE. He was also a member of the Risk Management Committee, which was responsible for approving all Credit facilities. Mr. Busuttil is an associate of the Institute of Financial Services, London.

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