Tamal Bandyopadhyay: How to judge a bank CEO

There is nothing wrong in showing the door to non-performers. At the same time, the RBI must reward performance.

The CEOs of five public sector banks are retiring on Friday. How have they performed as heads of institutions? The Reserve Bank of India (RBI) follows certain benchmarks to analyse a bank's performance but there is no set pattern to judge a bank chief's performance.

S C Basu possibly has one of the longest stints that any chairman can have at one bank. Bank of Maharastra's net profit as a percentage of total assets was 0.59 per cent in 1999-2000, against the industry average of 0.66 per cent. In 2004-05, its net profit as a percentage of total assets actually dipped to 0.54 per cent while the industry average rose to 0.91 per cent.

As far as interest income as a percentage of total assets goes, Bank of Maharashtra was ahead of the industry average in 1999-2000 "" 9.64 per cent versus 8.97 per cent. It maintained the edge in 2004-05, too, (7.20 per cent versus 6.73 per cent) but the gap narrowed. In terms of interest expended as a percentage of total assets, in 1999-2000, Bank of Maharashtra was behind the industry average "" 6.57 per cent versus 6.25 per cent. In 2004-05, its interest expenses continued to be higher than the industry average (4.52 per cent versus 3.81 per cent) but the gap substantially widened. All these show that the Pune-based bank has not been able to compete with its peers.

Now, turn the focus on Vijaya Bank where the CEO has spent over three-and-a-half years. In 1999-2000, the Bangalore-based bank's net profit as percentage of total assets was 0.41 per cent, well below the industry average. However, in 2004-05, it overtook the industry average by a wide margin (1.30 per cent versus 0.91 per cent). Its interest income as a percentage of total assets in 1999-2000 was 9.36 per cent, higher than the industry average.

In 2004-05, it came down to 7.14 per cent but remained ahead of the industry average with virtually no change in the difference. Vijaya Bank's interest expense as a percentage of total assets in 1999-2000 was 6.33 per cent, marginally higher than the industry average. In 2004-05, it came down to 3.78 per cent, marginally lower than the industry average.

These numbers will not be relevant for the other three banks as their CEOs have had much shorter stints at the helm. In 2004-05, Vijaya Bank's return on net worth was the highest among the five banks "" 23.95 per cent "" and that of Bank of Maharashtra the lowest "" 11.48 per cent. Vijaya Bank's return on assets also was the highest at 1.30 per cent and that of Bank of Maharashtra the lowest 0.54 per cent.

In two other parameters "" business per employee and profit per employee, too "" Bank of Maharashtra has not done well. Its business per employee is Rs 2.95 crore (marginally better than Syndicate Bank's Rs 2.80 crore) and profit per employee Rs 1.25 lakh. In contrast, Corporation Bank's business per employee is Rs 4.38 crore and profit per employee is Rs 3.95 lakh. Union Bank's business per employee is Rs 3.47 crore and profit per employee Rs 2.81 lakh. In case of Vijaya Bank, the comparative figures are Rs 3.13 crore and Rs 3.48 lakh.

Three-year compounded annual growth rate (CAGR) of net profit for Bank of Maharashtra is 5.06 per cent, Corporation Bank 6.89 per cent, Syndicate Bank 12.61 per cent, Union Bank 23 per cent and Vijaya Bank 30.58 per cent.

Finally, out of these five banks, only Bank of Maharashtra is trading on the bourses at a discount to its book value. The Vijaya Bank stock's market value is over 30 per cent higher than its book value while Union Bank and Corporation Bank are trading at about 80 per cent premium to their book value. Syndicate Bank's market value is more than double its book value.

However, all these parameters "" growth in relation to industry, efficiency indices and capital market indices "" may mislead analysts in judging a bank and its leader as the risk factors to the balance sheets are often hidden. They come out few years after the CEOs retire. For instance, the quantum of non-performing assets (NPA) can be brought down through various ways "" write-offs, aggressive recovery and higher provisioning. Similarly, huge loan growth often sow the seeds of future NPAs. An opaque bank balance sheet "" which does not require to disclose market risk, credit risk and operational risk "" never tells the real story.

In recent times, the RBI has sacked three bank CEOs "" in east, north and west. There is nothing wrong in showing the door to those who have not performed and/or lack integrity. At the same time, it must reward the performers.