Commercial banks, their personnel expenses and it's comparative impact in Total operating income; Banks with Government stake seem inefficient in utilizing personnel expenses

Mon, Feb 18, 2019 6:09 PM on Economy, Exclusive, Stock Market,

All the listed commercial banks have published their unaudited balance sheet for the second quarter of FY 2075/76. Everyone has already seen their net profit, earnings per share and other financial indicators, however in case of banks it is equally important to look at their investment in Human Resource and their proper utilization.

Nepal Rastra Bank (NRB), the central bank of Nepal, has mandated that the commercial banks need to spend at least 3% of personnel expenses on training and development of the employees.

According to the latest reports, banks with government stakes seems to have higher personnel expenses than the private banks. The first on the list is Rastriya Banijya Bank (RBB). RBB has the highest branch network with presence in all 77 districts of the country. The other two banks with government stake, Agricultural Development Bank (ADBL) and Nepal Bank (NBL) come in second and third place respectively.

Similarly, NIC Asia bank (NICA) has the highest personnel expenses among all the private banks and has surpassed Nepal Bank. NICA has been moving ahead with aggressive expansion and heavy recruitment, which explains higher personnel expenses.

However, only looking at the absolute figures won’t be enough to see if the bank is using its money in the most optimum way. To analyze that, we can look at a few ratios. They are:

Personnel expenses to operating income

Higher number of staffs leads to higher level of personnel expenses but that isn’t necessarily good or bad. The higher expenses are good if it is justified by similar increment in the operating income. Therefore, the personnel expenses to operating income reflects the personnel expenses of commercial banks with respect to their operating income.

 

The industry average, as shown above, is 25% where 12 banks have personnel expenses above the industry average, 3 are at the average and 13 are below industry average.

RBB, ADBL, NBL, NICA and PRVU despite having huge personnel expenses, don’t seem to exhibit similar performance in operating income generation. However, more concern should be directed to NCCB. It has below average personnel expenses but a higher personnel expense to operating income ratio.

Personnel expenses and other operating expenses to total operating income ratio:

The industry average for the personnel expenses and other operating expenses to total operating income ratio is 39%. From the below table, we can see that 2 banks are operating at industry average, 10 banks are below industry average and the rest are above industry average.

Once again, NBL despite having huge personnel expenses has above average ratio in this category. Similarly, others in the list are NABIL, EBL, NIB and HBL. NCCB’s performance is not so good in this indicator too.

Personnel expenses to paid-up capital ratio:

After the NRB hiked the minimum paid-up capital requirement to Rs 8 arba, the ratio of personnel expenses to paid-up capital has gone down. However, comparing amongst the banks, the industry average stands at 8%.

As seen in the table above, 6 banks are at industry average, 13 below and 9 above industry average. Once again RBB, ADBL, NICA, NBL and NABIL report high on this indicator despite having larger personnel expenses account.

Finally,

Most of the big banks haven’t performed as expected in the ratio discussed above. We can also see that the banks with government stake haven’t been able to generate as much income in proportion to the level of personnel expenses they incur.

As an investor, now its time to ask yourself if these ratios are significant while making your investment decision. What do you think of the banks who aren’t generating income in proportion to the expenses they incur in terms of Human resources?