In many banks in India, it has been customary for profits to plummet in the immediate aftermath of a new CEO taking over. The latest example is Karnataka Bank Ltd. This is a well-run private sector bank headquartered in Mangalore. Mr.Ananthakrishna was its Chairman cum MD for nine long years till July 2009. Under RBI's prompting, the post was split into two and Mr.P.Jayarama Bhat took over as Managing Director in July. Earlier he was the Chief General Manager. Mr.Ananthakrishna continues as Chairman. Both are respected professionals in banking.
The quarter ended 30th Sept 2009 is seeing many banks declare healthy results. Year on year, Karnataka Bank has shown good progress in deposits, advances and low cost deposits. One would have expected profits also to fall in line (unintended pun conveying contradictory meanings). But that was not to be.
Profit after tax fell from Rs.73.60 crore for the quarter ended 30th Sept 2008 to Rs.16.35 crore for the quarter ended 30th Sept 2009. The figure for the latter period includes a tax credit of Rs.14.97 crore. So profit before tax was an abysmal Rs.1.38 crore.
Therefore what went wrong? Gross NPA has increased from 3.39% to 3.88% But this alone does not account for dismal results. It appears that the tendency of any new CEO to play safe in the first year is having its impact. (Credit-Deposit ratio has fallen steeply from from 62.6% to 57.8% perhaps indicating the preliminary cautionary approach of the new incumbent). The brighter side of this tendency is that Balance Sheets get cleaned whenever a new person becomes MD. There is a flip side also. Financial results cease to be consistent. Share prices become volatile.
Is there a remedy for this periodic event-based discontinuity? It will be worthwhile experimenting with having two CEOs (both outgoing and incoming) atleast for two quarters so that the outgoing CEO will get an opportunity to explain to the newcomer why he has done what he has done. Otherwise the new CEO may overplay the adverse impact of old CEO's managerial style. If we institutionalise the simultaneous presence of two CEOs for say two quarters, CEOs will become more accountable and it will also give a fair chance to the leaving CEO to justify his legacy. During the co-existence period the company will experience a salutary friction between the departing CEO's eagerness to post robust results and the incoming CEO's anxiety to avoid any window-dressing.