Earnings watch: Why do PSU banks' profits take a beating with new chairmen?

 Anand Adhikari        Last Updated: February 6, 2013  | 11:03 IST

Anand Adhikari
Three months after Bank of Baroda (BoB) Chairman M.D. Mallya left the bank after almost five years in the corner office, the Mumbai-headquartered bank surprised everyone - its net profit for the third quarter of financial year 2012/13 dropped after a good run over almost 30 quarters.

After taking over, S. Mundra, the new BoB Chairman, who assumed office in November last year, raised the provisioning for non-performing assets (NPA) significantly. This had a significant bearing on the results.

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Mundra is not the first public sector banker to raise the provision for NPAs after taking over.

Many eyebrows were raised when O.P. Bhatt's five-year tenure as State Bank of India (SBI) chairman ended and Pratip Chaudhuri took over in 2011. A month after he took over, Chaudhuri declared the fourth quarter results for 2010/11. SBI's net profit had fallen nearly 100 per cent. He, too had raised the provision for NPAs substantially.

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Four years ago, after T.S. Narayanaswami retired as Bank of India chairman, net profit  for 2009/10 fell 42 per cent to Rs 1,738 crore. The bank subsequently saw massive provisioning for NPAs under its new chairman.

It has come to be expected that the new chairman of a public sector bank will make aggressive provisions to avoid any loan losses during his tenure. The blame for this naturally falls on the outgoing chairman, who is happily retired.

The most logical motive for such a sudden change in the bank's financials is the new chairman wanting to start on a clean slate. Therefore, in the very first quarter or year of assuming office, he begins cleaning the books as he doesn't want any uncertainty.

The easiest way to do this is by pressing the provisioning pedal at the very first opportunity. The blame naturally falls on the outgoing chairman.

The short tenure of public sector bankers and the fact that they come from an altogether different bank (Mundra, for instance, went to BoB from Union Bank) also influences this sudden change in risk perception.

On the other hand, private sector banks have seen stability at the top.

For instance, Aditya Puri has been at the helm of affairs at HDFC Bank for nearly two decades. K.V. Kamath handed ICICI Bank's reins to Chanda Kochhar after being in office for over a decade.

There are many unanswered questions over the sudden fall in profit when a new chairman takes over a public sector bank.

Does that mean the earlier chairman was not prudent in making provisions or is the new chairman too aggressive or has a higher but unrealistic perception of risk? How could the risk perception change so suddenly when almost the entire top management team of the bank remains in place? Are they more bothered about their next promotion than about speaking up? Clearly, it is also a reflection of their impotency. When did we hear a story of heroism in a public sector bank where a top professional, an executive director or a deputy managing director, differed with a bank's chairman?

The sudden change in financial performance also raises issues about financial reporting standards and the role of the Reserve Bank of India (RBI). The apex bank should investigate such issues so as to take corrective action in future. Looking the other way could affect the stability of the bank and the sector as a whole.

However, there are differences of opinion on particular provisions. SBI's new chief Chaudhuri agreed to make a provision for pension and other liabilities as well as teaser home loans (where the loan was on a fixed rate for the first three years). His predecessor Bhatt, on the other hand, had a running battle with RBI over these issues.

Bhatt's era coincided with high growth in the economy and hence the need for more capital to fund growth. He bought time to make more provisions and hence managed to save capital. Chaudhuri is grappling with a severe slowdown in the economy and hence the focus is on consolidation and more provisioning for NPAs while continuing to make profits for shareholders.

There are some who readily give the benefit of doubt to an outgoing chairman. They say he has a better picture of the bank and of its growth requirements in future. Being in office, he knows how a particular asset or asset class is performing or what the additional cost in terms of future capital requirements will be for additional provisioning.

BoB 's results have reopened the entire debate, which is unlikely to end anytime soon.

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