Digital era growth to balance reduced cash handling

In the first of a two-part report on progress of the jurisdiction’s banking sector, Ray Spencer finds availability of mortgages and to some extent other business finance has improved with the arrival of the government-owned Gibraltar International Bank

Moves to digital and internet transactions across the board are being fuelled by rising operational and financing costs that have put pressure on banking profits. In this report, we look at retail and full service banking, whilst in the following issue we look at how private investment and other banking on The Rock is expanding.
“The banking situation locally is healthy, with some competition, but also it is a difficult financial operating environment, because of negative interest rates in some of the main currencies”, explains Christian Bjørløw, chief executive in Gibraltar for 14 years of the Danish-owned Jyske Bank that handles some £1bn of assets locally and employs 100 staff.
“All of our currency exchange rates in Europe are with negative interest – currently minus 0.43% – and some corporate clients are paying more for this situation, although we take some of the hit”, he reveals, adding:  “There is no light at the end of the tunnel to see positive interest rates in the foreseeable future – it is not a problem for private clients for the time being, but for corporate clients it is an issue.  We can’t place their money on a 5-year basis, I have to pay them on demand, and even in Euros the 7-year Bond interest rate is negative.

Main income hit

Bjørløw points out: “These are areas where we make our main income.  It will hit the bottom line for all banks in Gibraltar, because we will have assets that are Euro-based, and even the base rate in Sterling has been reduced after the Brexit referendum.”
This stark warning comes at a time when both retail and private banks are showing signs of making progress locally, despite a significant reduction in the number of Gibraltar Financial Services Commission (GFSC) banking licences.  There were 21 banks ten years ago and 12 today, including foreign exchange specialist, Moneycorps, that opened locally last summer.
Some 30 years ago Jyske Bank took over the jurisdiction’s oldest bank, the family-owned retail Galliano Bank which was founded in 1855. Four years ago Jyske took the strategic decision to extend beyond private client business to become a full service bank.
Whereas private clients accounted for 60-70% of the total, today around 95% is local business split to 40% corporate, 40% private accounts and 20% in retail banking – current accounts, mortgages, etc.
Jyske’s expansion decision pre-dated by six months that taken by Barclays to withdraw from retail banking, leaving individuals and businesses with some 17,000 accounts to find an alternative home.
The initial fall-out from the surge of people seeking bank accounts was borne most acutely by the 116 staff at NatWest, which after a short while had to stop taking applications for new accounts and banking services due to the unprecedented demand in the personal and business sectors and the impact it was having on NatWest operations.
Now claiming to be the largest holder of banking deposits locally, NatWest has taken on some 5,000, mostly personal accounts from former Barclays customers.  Amanda Eccleston, NatWest [Gibraltar] country head since July, says only now is the bank considering lifting its applications pause on a staged basis.
“We are a local retail, corporate and commercial bank and do not provide services to customers in other EU member states, because we have no [financial services] passporting rights, being a branch of RBSI in Jersey, a non-EU country”, she points out.
Lloyds Banking Group with 30 staff has a reduced Gibraltar presence, but still services “several thousand UK expatriate or international customers in Europe with current and savings accounts, foreign exchange and investments advice services”.
Barclays is “in the process of winding down its physical presence within Gibraltar, but will continue to provide a relationship managed service to some of our local current Gibraltar clients from several divisions of the Barclays Group on a remote basis, meaning those clients that have bank accounts in other jurisdictions”, as a Group spokesman explains.
Its decision was part of much wider restructuring by the UK bank parent and led members of Gibraltar Bankers’ Association to support government delivery of a long-promised locally-owned retail bank, the Gibraltar International Bank (GIB), which opened in mid-May 2015 after just a year’s planning.
The initial idea was that there would be an automatic seamless transfer to GIB of the Barclays accounts, but IT issues caused delays and most migrated to other banks. “The corporate entities in particular, such as traders in Main Street, could not, understandably, wait a year for us to open”, Lawrence Podesta, GIB chief executive, says.  Even so, GIB opened with 60 staff and 3,500 mainly personal on-line accounts that has since grown to 8,600 accounts.

More proactive

For the past year, GIB has been more proactive.  “We now are more in line with what is expected of a retail bank and we have time to dedicate to clients and market ourselves to business.  We are encouraged by the results – the number and stature – with enquiries coming from top corporate entities in Gibraltar as well as individuals,” declares Podesta, who has experience of working in private and retail banking and originally trained with Barclays locally.
Deposit balances are above expectation at £300m, which gives GIB leeway for lending, an initial area of concern.  As Podesta reveals: “The lending book has grown at a steady pace, which is fine by us, because we still haven’t reached the 50% loan-to-deposit ratio.  We did, initially, cater for the government housing scheme projects; we committed to assist with mortgage lending for half of the overall housing schemes, about 450 flats involving some £22m in mortgages, and that was comfortably financed.”  But the bank has also provided another £27m in mortgages for other customers.
Eccleston concludes that NatWest still has high levels of concentration risk, because of a shortage of local mortgage providers. “We are running at a very high level. In the UK you would never have any one bank having a 40+% concentration risk, but we have in housing.” However, there are limited loan defaults: “Gibraltar is a well-performing jurisdiction in terms of the mortgage book and credit side.”

Easier home loans

Bjørløw submits: “Mortgage availability has eased; it is not difficult to get a mortgage.  There is no new huge development coming along, so most demand is coming from people moving on, but now only within Gibraltar.”  However, he agrees there is some concern at business loan availability.
“For a big project generally amongst Gibraltar banks there is a probably a shortage of funds and there is also the possibility of limits on lending for certain types of business (housing, for example) and even locations (individual developments) as a result of concentration risk for some banks at some times,” Bjørløw suggests.  “We have financed some small housing projects; we as a bank don’t want to get involved with a project that is only half finished, so we are quite conservative on credit risk.”
Being Danish-owned, Jyske says it has a different approach to business than typical British banks, which means 95% of decisions being taken locally rather than by teams external to the jurisdiction.
Using a network of 29 approved local intermediary introducers – accountants, lawyers and company managers – GIB has attracted accounts from mainly international clients not based in Gibraltar.
“Historically it has been a huge market and it gives an extra edge to the retail operation, even though we are here logically to service the local community of around 30,000 people –a considerable, but limited market”, observes Podesta, whose staffing has reached 78. “There is a necessity to engage in international business for the extended growth of the bank.”
Loan enquiries have come from the UK, “which we are looking at carefully, although it is a side-step to our main operation”, Podesta states, emphasising: “GIB will not engage in any loan proposition for Spain or elsewhere in Europe, because we would need to understand fully the complexities of a different regulatory environment.”

Cash use problematic

One of the biggest problems for local retail banks is that “Gibraltar is very much a cash-based society and many customers want to cash cheques – we are probably the only part of Europe that issues so many cheques and there is a cost to that”, relates Eccleston.
Until 2015, there was a local clearing system, but rising costs and improving operational efficiencies led to each bank arranging for its cheques to be processed on their behalf by a correspondent UK clearing bank, a process that takes seven days!
“All NatWest customers are being encouraged to use electronic means – Automatic Teller Machines (ATMs) if necessary, and also on-line banking and mobile apps.  For younger people, using cheques and cash is not the way things are done today”, she observes. “Going digital and using the internet is the way forward.”
There are 12  ATMs on The Rock.  As Bjørløw makes clear: “Cash handling and cash points are an enormous cost; Jyske has only two ATMs.  If I go to Denmark, I don’t use any cash and instead I use a VISA card or mobile app for payments.  I hope we soon will go more and more electronic for banking.”
GIB aims to be a digital bank, with ATMs in its banking hall for cash and cheques can also be deposited.  In April, the State-owned, but independently-run bank opened a cash centre in central Main Street with eight staff so businesses can deposit money and also arrange collection from shop premises.  With five ATMs in three locations, GIB is planning two more.  “Whilst not a significant revenue earner, provision of ATMs is a convenient service for clients,” Podesta acknowledges.
To ease things further, NatWest, Jyske and GIB agree there is scope in the territory for another retail bank, but consider it unlikely to happen.  Eccleston illustrates the issue: “One of the obstacles for newcomers is the Deposit Guarantee Scheme (DGS),which protects up to €100,000 per person on an aggregated basis, and the requirements for it.

Deposit guarantee obstacle

“In the UK if you are a member of the Financial Services compensation scheme, you are one of hundreds of banks, so your pre-funding in line with the EU Directive is minimal, but here in Gibraltar when you are one of few participants that is quite an obstacle in terms of set-up cost and pre-funding.”
Eleven authorised credit institutions contribute to the Gibraltar DGS that requires pre-funding to reach 0.8% of deposits by 3 July 2024 via nine annual contributions and GFSC’s Resolutions Unit reports: “We are on target.”
Costs have been hit in other areas too, Bjørløw emphasises: “We need more volume today to run a bank because of extra costs of compliance and regulation that have a huge impact on the whole business. In 2002 Jyske had one compliance officer in Gibraltar; today we have a department of ten people, with risk control and compliance capability.”
Despite rising costs in a competitive environment, the retail banks all say they remain committed to Gibraltar. GIB declared a £6m loss in its launch year, but plans for profitability by early 2019.
Podesta warns that EU Basle 3 regulations mean there is a need to keep a close watch on asset-to-loan and capital adequacy ratios. “The more successful we are, the more capital we have to put to one side as assets are capital weighted.  In all probability, there will come a time when we will have to ask the shareholder [the government] for more capital, not because the business has physically eroded, rather the contrary, and reserves would, by necessity and regulation, have to be increased.”