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Judging a bank CEO's performance

Tamal Bandyopadhyay

What exactly is required of a bank CEO and how can you judge him? Should he be a hands-on chief executive with a finely tuned business sense who can make money with every basis point change in interest rates?

Or should he stick to HRD and get the best out of his thousands of employees? Or should the CEO play the role of an army general, roll up his sleeves and lead his army from bunker to bunker (read: home loans to working capital loans to project finance) to combat competition?

When it comes to an ordinary employee, productivity can be measured in terms of vouchers signed and possibly business generated but what could be the qualitative and quantitative parameters for a CEO's performance appraisal?

Let's take a close look at the possible parameters:

Profit and loss account: The easiest, and possibly the laziest way, of looking at a public sector bank CEO's performance could be the profit and loss account. If the profit is healthy, the CEO is perceived to be doing well and if his bank has made a net loss, he is messing around.

But this may not be the right tool for appraisal, particularly in the public sector, where the average tenure of a CEO is around two years.

The first year of this is usually invested in cleaning up the balance sheet (as the incumbent CEO wants to show the world that his successor had too many skeletons in the cupboard) and all efforts in the second year are directed towards showing higher profitability. The cycle continues with successive CEOs.

Often, after a CEO has retired, the Reserve Bank of India inspection team unearths unaccounted for non-performing assets for which no provision was made.

In other words, profits are inflated. Since Indian banks generally do not make dynamic provisioning, there is always a possibility that the P&L account is incomplete.

An asset goes through a series of migrations and there is always a lag effect in exposing the stickiness. By the time an asset is actually declared an NPA, the chairman is found occupying the office of an ombudsman in a state as a post-retirement gift from the regulator.

Market capitalisation: Can market capitalisation of banks be a true reflection of the CEO's performance? This is an indication of how much wealth he has created for the shareholders including the government. But in the Indian context, the market capitalisation theory may not be a sound parameter.

Historically, the shares of finance companies are discounted at around five to six times of their annual earnings. The banks' stocks are no exception to the rule, which has been followed by the stock investors for years.

At the trailing 12 months earnings, banks stocks are available at a price earning (P/E) of 5.3 times. The price-to-book value of banks are around 0.80 times. Which means almost all banks stocks are quoted below their book values.

One of the reasons for the poor showing is the growing NPAs. But there are other reasons too. For instance, the State Bank of India stock is suffering because the foreign institutional investors' investment limit is capped at 20 per cent.

With the global depository receipts holders accounting for about 9 per cent, the actual foreign institutional investor holding is restricted to 11 per cent or so. In contrast, in private sector banks the FII holding can go up to 49 per cent. Now, the CEO cannot be blamed for the anomaly.

Industry benchmarks: One way of judging could be comparing an individual bank's performance vis-à-vis the industry average.

For instance, one can focus on certain key business parameters like growth in deposits, advances, investments and other yardsticks like NPA, capital adequacy ratio, profitability and so on.

If the bank's performance matches the industry average, then the CEO could be considered to just about be doing his job.

If it's below the industry average, then he certainly needs to be told that something is wrong with his way of functioning. Similarly, if the bank's performance is better than the industry average, it is a clear indication that the CEO is doing fine.

Promise versus performance: A better way of judging could be monitoring the CEO's performance against the backdrop of promises he makes to his employees, shareholders and the board.

One innocuous announcement of a new business foray or technology drive or looking for a possible takeover of a bank can drive the stock up for a few days. But this cannot be sustained unless the CEO matches his promise by his performance.

In this case, the board needs to play an active role to measure every step the CEO is taking. In consultation with the chairman, the board can set up an agenda for transformation and then oversee whether the chief executive is capable of living up to it.

But all these ways of measuring performance can involve a string of procedures and even an element of subjectivity. The best and simplest way of judging a CEO could be, as ICICI Bank executive director Nachiket Mor has hinted, looking at the net asset value of a bank's portfolio.

The mutual funds have been doing this. They declare NAV on a daily basis. The public sector banks have not been able to computerise all their branches but at least the high-value branches have been networked. They may be small in number but account for over 80 per cent of their businesses.

It is possible to mark to market all assets and calculate the NAV at least on a monthly basis, to start with. Later, this can be extended as a fortnightly or even a weekly exercise. This is possibly the most objective way of judging the performance of a public sector bank CEO.

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