Spearhead Analysis – 06.09.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
In a country where the average Pakistani earns US$1,513 a year per capita income (Rs. 158,500/- per annum), it appears mind boggling that the CEOs of Banks earns Rs.95 Million a year at average. In fact, the highest paid CEO from United Bank Limited, made a whopping Rs.146 Million in 2016. This is apart from other benefits such as Club Memberships, Household Appliances, use of Company Vehicles, other perks, and in some cases Bonuses and Options. Do these CEO’s actually add shareholder value to their organisations?
Table-1 illustrates the range of salaries for the Presidents of 10 Banks in Pakistan based on their Gross Salaries as reported in the Audited Annual reports.
TABLE-1: BANK CEO SALARIES
One would expect that with such handsome payouts these CEO’s would be busy creating and maximizing wealth for their shareholders. Unfortunately, that is not true in some cases. At an average the salaries rose by 9.17% in 2016, (a figure perhaps skewed by the extraordinarily high drop in the salary of the NBP CEO of 30% in 2016). Removing that outlier, the salaries rose at a rate of 13.53% in 2016. During this period the share price rose by 4.18% for the 10 Banks. It would therefore appear that the CEO salaries outpaced the actual value creation for shareholders.
Table-2 illustrates the Year-over-Year (YoY) change in salary and the change in average share prices.
TABLE-2: YEAR-OVER-YEAR CHANGES
- Allied Bank CEO received a salary boost of 11.18%, while the Bank’s share price declined by 1.33%.
- The Standard Chartered CEO received a salary increase of 3.28%, but the Bank share price dropped by 12%.
- MCB CEO received a 5.25% salary increase, while the share price dropped by almost 20%
- Soneri Bank CEO received a salary increase of 7.36%, while the share price increased by some 21%.
- Askari Bank CEO received a hefty salary increase of 14%, while the share price only rose by 3.13%
- Bank Alfalah CEO’s salary appears to be roughly in line with the share price improvement – perhaps indicative of a performance based pay.
- Habib Bank CEO due to a one-time Rs.30 Million pay adjustment had a salary increase of 48.12%, while the share price was up by 12.02%.
- There was a cut of 30% in the salary of the National Bank CEO but the share price rose by 6.52%.
The chart below shows the trends in terms of YoY change in salary and share price for the Banks. There are wide variations in terms of the salaries and the changes in average share prices, and apart from Bank Alfalah it does not appear that the salary increases are aligned with the share price performance.
In the case of loss of employment by a CEO, it is not unusual to have built-in clauses in their contracts, which entitle them to hefty end of service packages. Warren Buffet once remarked: “Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can ‘earn’ more on that single day, while cleaning out his desk, than (a) worker earns in a lifetime of cleaning toilets”.
Given the attractive salary packages one would assume that Bank CEO’s would be extra vigilant when it comes to dealing with potential losses. In recent months there have been a spate of events where the banks have been slapped with heavy fines or have lost money due to inherent risk management and compliance issues. This has led to management shuffles as in the recent case of United Bank where the CEO was replaced after the Bank suffered heavy losses. Ironically, it was the UBL CEO who topped the charts in terms of salary. With heightened global financial surveillance, the Pakistan based Banks need to step up their act and ensure that their systems and procedures are calibrated to meet global risk management standards. In addition, with the rising trend towards online banking there is increased risk from hacking of Bank systems – a potential threat that the Banks need to be aware of and take measures to avert a catastrophic event.
Despite the attractive salaries for Bank CEO’s and the top management, since 2016 a number of cases have surfaced where the Banks have been slapped with heavy fines by Regulators, which has potentially impacted their financial performance.
In January 2016 the State Bank of Pakistan (SBP) Foreign Exchange Adjudicating Court imposed a cumulative penalty of Rs.7.331 Billion under the FER Act 1947 on seven banks and a textile mill for non-repatriation of export proceeds. This is presumably the highest ever penalty imposed in any case of foreign exchange non-repatriation.
The following penalties were imposed:
- Rs 3.83 Billion fine on Fateh Textile Mills,
- Rs 1.95 Billion on Allied Bank Limited (ABL),
- Rs 1.02 Billion on National Bank of Pakistan (NBP),
- Rs 0.267 Billion on MCB Bank
- Rs 0.257 Billion on United Bank Limited (UBL).
- Rs 1.0 Million on Meezan Bank,
- Rs 4.0 Million on Askari Bank
- Rs 2.0 Million on Deutsche Bank.
Almost all the ‘aggrieved’ parties to the case have filed constitutional petitions in the Sindh High Court, and obtained stay orders.
In January 2016 a fine of Rs.1.2 Billion was imposed on some banks by the State Bank of Pakistan on the direction from a committee headed by Interior Minister for allegedly helping banned groups in the country. The SBP fined banks for violating its regulations on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). In past, the central bank imposed Rs.117.3 Million penalties on banks in FY2013-14, Rs.136.5 Million in FY2012-13, and Rs.26.9 Million in FY2011-12 for violating AML/CFT regulations.
In March 2017 news surfaced about a financial scam of Rs.12 Billion involving the top management of United Bank Limited (UBL) and National Bank of Pakistan (NBP). Apparently some 160 bankers from State Bank of Pakistan, UBL, and NBP are involved in the scam and the Chief Executive Officer (CEO) of UBL as well as some senior management personnel were removed, and investigations are underway.
Earlier a scam of Rs.18 Billion surfaced in National Bank of Pakistan. In this scam officers of NBP deputed at the Bangladesh office were involved in giving loans of Rs.18 Billion to Bangladeshi nationals without any guarantee after receiving heavy commissions. While investigations are underway, NAB has not filed a reference.
In the most recent case, it would appear that Habib Bank Limited (HBL) is closing down its sole Branch in New York, on the back of significant breakdowns of risk management and compliance identified in the bank’s New York branch, where US regulators highlighted deficiencies in the risk management and Bank Secrecy Act (BSA)/anti-money laundering (AML) compliance in the branch.
- In 2015 there was news that since 2011 the US Federal Reserve barred Habib Bank Limited from conducting any dollar-clearing transactions or accepting any new accounts for US dollar clearing because the bank was not in compliance with US Anti-Money Laundering (AML) Laws. As per the Fed’s assessment HBL’s risk management and its compliance systems had broken down and it was in violation of laws such as the Bank Secrecy Act and regulations issued by the US Treasury Department. Additional remedial and risk management requirements were placed on the Bank.
- In August 2016 there was news that the only US branch of Habib Bank Limited was slapped with a strict enforcement order by United States Federal Reserve after significant breakdowns were identified in the Branch’s anti-money-laundering (AML) program, which was found to be not in compliance with US federal laws. As per the Wall Street Journal, following the enforcement order Habib Bank had been stopped from opening new dollar-clearing accounts, which were one of the US services to send and receive dollars from abroad, or even correspondent accounts with foreign banks.
Now as per a notice issued at the Pakistan Stock Exchange (PSX), the State Department of Financial Services (DFS) USA has sent a notice to Habib Bank Ltd (HBL) seeking to impose civil monetary penalty of up to US$630 Million on the bank. It would appear that despite a considerable amount of time having elapsed the bank was unable to take remedial actions, in terms of being able to devise appropriate risk management and compliance systems to meet the requirements of the US regulators. The bank at the time of identification of operational deficiencies by the US Regulators had categorically stated that it would conduct a review and enforce remedial actions.
Monetary fines on banks are a drain on the profits and the Banks in Pakistan need to be vigilant in the face of increasing scrutiny by Regulators. The CEO’s are receiving extremely attractive salary packages and in turn need to ensure that they are creating the risk management structures and processes to manage the organisations effectively. Losses need to be minimized by improving the compliance and risk management environment and shareholder wealth needs to be maximized. The salaries need to be justified in terms of improved performance for the Banks. Apart from the obvious financial cost, there is considerable reputational loss for the Banks from non-compliance and other losses. There is a need for structured and regular training programmes and implementation of compliance and risk management systems to combat the scourge of Anti-Money Laundering and Terrorist Financing and for improving efficiency within Banks. The banks are willing to pay the right people to do the right job, and it is imperative that the CEO’s deliver what they are assigned to deliver – bank performance and shareholder wealth.