We have had to cut salaries because of our unique cost structure.
City Bank is not a typical small-scale corporate bank with a focus on foreign trade only, nor does it run on a small number of branches.
We are into all sorts of businesses, including small and micro finance, credit cards, agent banking, alternate channels (nearly 400 ATMs and two call centres), supply chain finance, retail lending, commercial and corporate banking, women banking, priority banking and so on.
Our card business alone has 889 staff, which could be the total employee number of a small-scale bank. This supermarket-like operation is just the opposite of what is known as "boutique banking."
Moreover, our business model stands on major promotional drives and IT investments.
Coupled with that, there are issues of legacy too because we are an old institution – one of the oldest in the country. So, the number of staff is high; much higher than what is required. Therefore, staff related costs are very high too.
As a result of this unique cost structure which cannot be matched with or compared to most other banks, implications of the central bank capping loan interest rates at 9 percent and the Covid-19 pandemic have been quite significant for us.
Our income fell by 30 percent after April, yet costs shot up, naturally. Income from fees also suffered due to poor trade and card business amid Covid-19. All of this was reflected in the bank's cost to income ratio, which rose from 55 percent to 66 percent within just three months.
Then we had to undertake a comprehensive cost-cutting plan which aims to reduce our total cost by at least 20 percent.
Our goal is to reduce Tk250 crore from a Tk1,240 crore cost base within a year from now. That is important because our income is coming down fast.
Moreover, Covid-19 is still raging high, which further reduces the hope of income recovery. This will have a major effect in overall loan repayment too.
Reducing salaries of our staff by 10 percent and cancelling next year's increments and bonuses addresses only one-fourth of the problems at hand. Another way would have been to retrench 500 to 1,000 employees out of our staff pool of over 6,000 people.
But on humanitarian grounds, we decided not to take that course of action at this difficult time.
At the end of the day, it is a bank-specific issue. Problems loom large over the whole industry, no doubt, but taking such generally unpleasant measures will actually depend on a bank's cost base, business model and its profit target. All three vary from bank to bank.
We believe in posting a good profit because we value the need for ensuring a healthy "return on equity" for our investors and shareholders. We must also take care of the availability of adequate capital next year so that we can continue doing business smoothly.
An individual bank needs to take its decision individually.
I do not regard salary reduction as a good cost-cutting measure, but the situation has gone utterly beyond my making such fine judgements, especially when you take a little longer and unemotional view of what you see just right in front of you.
I personally feel that I have read the writing on the wall about what is inevitable for most of us in the industry. And instead of delaying a certain decision, we have taken it on time, before it is too late.
Our staff are not unhappy about the 10 percent salary cut. They not only understand the current challenges, but also, they know and understand how much over-staffed we are as a bank.
Additionally, we are one of the very few banks who have already – just before Covid-19 started – disbursed last year's performance bonus and gave all staff a 7-8 percent salary increment for the current year. So, the net effect of a reduction of 10 percent salary for a City Bank staff will never be the same as an employee of another bank which has not given the running year's increment yet.
We all will have to adapt to new realities. Net interest margin of banks can never go back to the previous level unless deposit rates come down too at the pace of loan rate reduction, which happened with a bang on April 1 this year.
So, cost optimisation is a must for any bank if it wants to keep a basic international level of quality of its balance sheet, P&L accounts, and other five to six fundamental performance and efficiency ratios.
But if a bank does not care about making profits in 2020 because it has been a Covid-19 year, I have nothing to say about that.
Mashrur Arefin is the managing director & chief executive officer (CEO) of The City Bank Limited.