The SBI Saas-Bahu Saga

Last year, when Pratip Chaudhuri took over the role of chairman and managing director of India’s largest bank, he increased bad debt provisions and wrote off a large chunk of bad loans. As a result, in the fourth quarter of 2010-2011, the bank reported a profit of just Rs 22 Crores.

This year in Q4, 2011-12, SBI’s profits surged to 4050 Crores setting the stock price on fire.

A proud Chaudhuri on Friday described the results as a “blockbuster” and not a “flash in the pan”

But then old timers have seen this movie before.

In a prescient article written in Nov 2009, veteran banking analyst Tamal Bandyopadhyay wrote:

An analysis done by a banking consultant shows there is a correlation between a public sector bank’s performance and the retirement of its chairman. This consultant, who does not want to be named as it advises many banks on their business strategy, has reviewed the quarterly performance of public sector banks in the past eight years and the results are quite startling. In six out of 10 cases, there was a sharp drop in a bank’s net profit and rise in its bad assets after a change of leadership. Interestingly, this trend is evident in those cases where the chairman retires, but when the leader leaves one bank for another bank—normally the chairman of a relatively smaller bank gets promoted to head a relatively bigger bank after a few years—the balance sheet does not show any strain.

There are two reasons behind this trend. One, there is a tendency by the outgoing CEO to inflate profits as the leader always wants to leave the organization on a happy note. It’s like a cricketer wanting to score a century in his last innings (in the case of a batsman) or take a handful of wickets (in the case of a bowler). Two, the new CEO normally wants to begin with a clean slate.

Indeed, the quality of assets is seldom the headache of an outgoing chairman. His focus is on balance sheet expansion (higher loan growth earns higher interest income) and profits and in the process the bank may end up piling bad assets that eats into its profits in the future. Similarly, the new chairman often wants to tell the world, “I’m here holding the can” and embarks on a clean-up drive immediately after taking up the assignment. It is another matter that the incumbent retires one day and may repeat his predecessor’s exercise. I call this the saas-bahu syndrome in Indian banking. Many new brides feel unhappy about the way they are treated by their mothers-in-law, but they end up doing the same thing to their own daughters-in-law!

Maybe investors should track the comings and goings of Bank Chairmen to predict the results !!