For most commercial banks in Nigeria, one metric keenly followed is the cost to income ratio. The cost to income ratio is basically a measure of the banks operating cost to it’s operating income.
Over the years, one bank has led the way for being cost efficient, churning out a cost to income ratio of under 50% whilst most others grapple with the cost to income ratio of above 60%. That banks is Guaranty Trust Bank and the reasons are very well documented.
They operate a lean operating structure that is well engraved in the culture of the bank and hard to replicate by rival banks as most of the cost are so engraved in the bank operating framework it’s hard to cut.
Bank’s operating cost include stuff like depreciation (amortized cost of fixed assets), other operating expenses (such as travel, printing and stationery, electricity bills etc.) and personnel expenses. As mentioned, they are difficult to cut thus giving the likes of GTB the edge it has had over the years. The situation is probably even worse for smaller commercial banks or Tier 2 banks as they are called.
One area however worth looking at is the bank’s personnel expenses. Personnel expenses are the single largest expenses banks make and one they often target when they want to cut cost. Before you get into a senior management position in most commercial banks in Nigeria, there is every likelihood that you may have worked in at least two of these banks.
This makes a cursory look at bank’s personnel expenses worth discussing especially from the point of view of shareholders.
Personnel Expenses of Banks
A look at the personnel expenses of some of Nigeria’s tier one reveals a stark disparity between their salary structure and how much they get from per revenue of staff employed. According to data from the bank’s 2015 FY results, UBA had the least average salary per staff at about N4.5 million per staff. Next up was GTB at an average of N5.39million per staff.
However, FBNH, Access Bank and Zenith Bank all incurred a higher personnel cost per staff. FBNH paid N8.16 million per staff, Zenith paid N9.1 million per staff and Access Bank the highest at N9.1 million per staff.
The result is no different in 2016 for Zenith Bank, Access Bank and GTB who all disclosed personnel expenses in their results (UBA is yet to release its half year results). GTB spent about N2.59 million per staff during the period compared to 5.47 and 4.67 incurred by Access Bank and Zenith Bank respectively.
ROI of employees
Employee compensation is as much a sensitive issue as it is a strategic one. Banks adopt pay structures that they believe will help them generate as much revenue as possible. For shareholders who are on the other end of the stick, the question is whether this actually translates to higher returns at the end of the day. We also analysed the amount spent by the bank on its employees viz a viz how much they earned from employees during the period.
We used the Operating income (gross of loans impaired) which is basically the bank’s net interest income plus commission and fees and other income divided by the number of staff each bank had. This was now put side by side the average personnel expense per staff.
As the table above depicts, GTB was getting about 7.53x for every Naira it is spending on its employees. UBA which spent the least was getting about 4.5x every naira spent on its employees. Access Bank which spent the most on employees was getting about 5.5x and Zenith Bank 4.5x.
On the basis of the above, it appears Zenith Bank and First Bank are either spending too much on personnel expenses or just have too many employees. Zenith Bank had about 7,416 employees compared to FBN’s 9,856. UBA, on the other hand, is paying far less but had a lot more employees. UBA had about 12,770 employees but paid the least in terms of headcount per staff.