There has been a sharp fall in the recently reported quarterly profits of Yes Bank and ICICI Bank. Their quarterly profits fell by over 50% and did not even meet the tapered down expectation of the street analysts. This collapse of quarterly profits coincides with the change of guard at the two banks. Both, Ms. Chanda Kochhar the former MD/CEO of ICICI Bank, as well as Rana Kapoor, the truncated founder CEO of Yes Bank, have been found guilty of accounting malpractices, violation of corporate governance norms and regulatory failures by the RBI, all of which make the financial statements of the two bank, authored under their tenure, to be suspect. While a new CEO has already taken charge at ICICI Bank, upon the resignation of Ms Chanda Kochhar, a new one is being recruited by Yes Bank, upon the truncation of Rana Kapoor’s tenure by the RBI.
The timing of the sharp fall in quarterly profits of these two private sector banks is directly correlated with the departure of their MD/CEOs. It is no unrelated coincidence. The new CEO has merely brought on the surface, what his predecessor had kept hidden so far. The fall in profits at these banks, is the start of a cleanup, by the new CEO after the departure of their CEOs, who have come under a cloud for having concealed NPA losses of over Rs.10000 crores each and for having indulged in corporate malpractices.
This sharp fall in profits, upon the departure of a bank MD/CEO, during the very first quarter of a new one taking charge, is a very routine phenomena that we see in India, whenever a new MD/CEO is inducted, whether in the case of a public sector bank, or a private sector bank. The incoming CEO obviously does not wish to carry forward the baggage of questionable accounting malpractices of his predecessor and it is thus imperative for him to start a clean-up of the bank’s financial statements, as soon as he takes charge of the bank. The best and the most opportune time for him is to write off bad loans/investments, which were not disclosed by his predecessor and come clean, is when he takes charge. It also serves as a testimony to the fact that an incorrect and window dressed financial statement was handed over to him in legacy. Even when Arundhati Bhattacharya exited as the MD of SBI, its profits fell sharply for the next few quarters, absorbing the huge NPAs that were not recognised during her tenure.
It is indeed ironical that when a new CEO takes charge at a bank in India, he needs to spot out the hidden legacy issues so that he is not later blamed for them. So instead of a CEO handing over the proud legacy of a robust institution, with very sound finances, India witnesses the reverse and that too concealed in accounting malpractices and sadly no action is taken against the retiring CEO, for the accounting malpractices done under his watch. It is very likely that the profits of ICICI Bank and Yes Bank will fall during the next quarter too.