The financial services industry, reeling from Covid-19 shocks and its relay effects, has already adopted staff cost-cutting measures. With fear of a sharp decline in margins, a few banks are slashing employee benefits for the first time in recent history.
As they say, extraordinary times warrant extraordinary measures. I am an investment professional with a decade of experience of looking at the banking sector from an analyst's perspective. I do no audacity to judge whether a specific bank's salary cut was a good decision or not.
Rather, I will focus on some core areas of cost efficiency for the financial services industry that the senior management of a bank or financial institution in Bangladesh could give a thought to, as prudent banking norms in the post-coronavirus new normal period.
Broadly speaking, it is clear now that the recent cycle of easy credit and revenues for the last two decades or so has masked many serious underlying problems. The widespread focus on growth, combined with lack of discipline around operating models and margin controls, has left many banks in Bangladesh with organisational structures that are inefficient and costly. Such operational models of banks are most often inflexible and lengthy. Yet, they failed in checking non-performing loans.
As per the Department of Offsite Supervision sources of the Bangladesh Bank, expenditure to income ratio of private commercial banks is around 78.2 percent, one of the highest in the region. A decade ago, private commercial banks had a 72.6 percent cost to income ratio, while foreign banks had 59 percent. After a period of stress for the last ten years, private commercial banks have a 31.9 percent higher cost relative to income than foreign banks (46.3 percent) operating in Bangladesh.
As per company reports of 30 listed banks, some of the private commercial banks are doing quite a good job in managing costs, but many financial institutions are not. Looking ahead, we are estimating a rise in cost to income ratio of banks and financial institutions as the denominator will be affected severely due to Covid-19 deteriorations and post-coronavirus bleak prospects.
Now we may cross-examine two aspects in particular. Compared to local private commercial banks, how can foreign banks achieve a significantly lower expenditure to income ratio? Is there any room for gaining a more competitive cost efficiency?
No, I do not think ad hoc employee cost reduction is the answer. Cost-cutting is not a one-time phenomenon. Keeping a path clear through a jungle is a never-ending job. Arbitrary cost reduction attempts with the rationale of "sharing the pain equally across the organisation" is not a sufficient measure, and it risks cutting good muscles as fat.
Instead, banks and financial institutions in Bangladesh need to take a more strategic approach by viewing cost-cutting as part of a broader efficiency exercise. Banks must think of keeping their muscles intact or grow those while cutting their fat. This will keep banks competitive in the longer-time horizon and make their business sustainable.
Because boosting revenues in post-coronavirus environment will be very difficult banks must slash their costs. However, banks or financial institutions also need to ensure that cost reduction is not achieved at the cost of growth.
The focus should not just be on cost reduction; banks should instead strive for improving efficiency by simplifying products or offerings, eliminating paper, automating more processes, eliminating unnecessary physical infrastructure and promoting straight-through processing, self-service channels with the intention of implementing long-term, sustainable, and optimal cost measures.
In medium term, banks can think of outsourcing some non-core functions like training and human resources, and build scale through partnerships and acquisitions.
Balance sheet management in local financial institutions remains very weak compared to foreign banks. Identifying the right borrowing mix and restraining lending whenever needed is not practiced industrywide. A good interest rate prediction and better management of liquidity can save crores of taka for banks.
But in many banks or financial institutions, an asset-liability committee (ALCO) has just a regular job, not a dynamic one. Hence, in stressful episodes, banks lose a fair amount of money in the name of higher borrowing cost. A 70/80 basis point edge could save money equivalent to a 10 percent salary cut.
Even though it is a time-bound practice and cannot be achieved in a day, this is high time to focus on balance sheet – not only to take relative advantage over competitors but also to ensure sustainability in downward cycles. Banks need to be more careful about worker hiring, training and deployment. Without impacting morale, existing human resources can be re-evaluated to ensure better fit, and can be trained for higher productivity.
Some banks can opt for hiring part-time employees instead of full-time ones in order to gain more flexibility in staffing models and to save on employee benefit costs. Performance measurement and supervision practice remain weak in Bangladesh. Some of the most significant efforts should come in establishing performance management techniques, such as clearly-defined expectations and scorecards, improved motivation and rewards systems.
Eliminating unnecessary document printing and electricity usage can save a small bank lakhs of taka annually and can also help build its image as an environment-friendly one. In some cases, a paperless initiative in the back office can lead to reduction in the use of paper significantly.
Physical infrastructure costs, particularly branch costs, need to be managed to minimise the overhead of traditional operating models, and to allow banks to get more done with less cost. Banks need to address distribution cost through self-service and automation.
By leveraging fintech or using digital technologies, banks now can follow customer behaviour meticulously, and isolate places in the value chain where they can plug into the growing digital ecosystems that might yield higher in foreseeable future.
Banks or financial institutions responding to evolving customer expectations can tailor their product and service offerings to suit individual customer needs. Financial institutions can think of offering bundle products with multiple value-added services to clients with targeted marketing campaigns based on rich customer relationship management (CRM) data.
Such initiatives will increase high-quality leads and conversion of prospects into new customers. A process could be developed at origination level that will scrap weak files to trash at a very high speed. Bankers in Bangladesh must agree with me that high growth in books by sacrificing margins will not be a viable business model in years to come.
Banks during bleak economic prospects and extraordinary times adopt knee-jerk action plans. This can involve trimming the workforce, hiving off businesses, cutting down employee benefits etc. However, these measures can end up being counter-productive once the economy recovers from the downturn. They can also impede future growth.
Hence, the response to diminishing profits should not be ad hoc and reactive. Instead, it should be a proactive, organisation-wide attempt at improving cost efficiency.
The author is Chief Investment Officer at LankaBangla Asset Management. He can be reached at [email protected]