Posted on 01/15/2012. Filed in Education, Money & Business,.

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Before the re-vamping and ensuing success of the National Commercial Bank (NCB), the Bank of Nova Scotia Jamaica (BNS) stood as the undisputed commercial bank titan in Jamaica. During the financial meltdown in the 90’s and into the early parts of the decade BNS prospered as other banks struggled and the banking sector went through a period of consolidation.

Similar to the United States of America achieving the status of the only super power after the cold war, for a long time BNS was the sole super power of the Jamaican Banking Landscape. Enter Michael Lee Chin and his band of jolly men lead first by Aubyn Hill (Mr. Clean up mess left by previous administration) and currently Patrick Hylton.

They have managed to knock BNS off their pedestal and NCB now holds the biggest bank title when measured by profit, assets, branch network and capital base. They have transformed the banking industry into a duopoly, the “top two banks”, then everybody else some far distance behind.

The subsequent rise and victory of NCB in such a relatively short period has begged the question, “was the former dominance and success of BNS a result of them being a great organization or was it just sheer luck!!”. To properly answer this question we must first analyze in the banking world what is considered a great organization and does BNS meet these criteria or was it just a case of being in the right place at the right time to luckily benefit from the demise of other banks.

First let us define a “great organization”. A great organization or a “good bank” is any bank that maximizes the wealth of its shareholders. In this context we are not concerned with how the bank is aiding in national development, its philanthropy, support to entrepreneurs, small and medium enterprises or even how long you have to wait in the teller line. Instead we are concerned with the bank’s ability to generate profits year over year and consistently grow.

Consequently good banks locally or internationally have been found to have two critical characteristics in common. They are, quality management and active participation by ownership. These critical characteristics have caused them to survive and prosper from those that have failed and existing banks having problems serving their customers and remaining competitive.

Good banks are the most efficient banks and are those making a concerted effort to control all aspects of cost, including salary expenses, fixed costs, and other noninterest expenses. At the same time, these banks remain focused on generating income and serving customers. Controlling expenses while continuing to generate and serve customers can only be done by quality bank managers and personnel, through their ability to utilize resources effectively. In essence quality management is critical and accounts for 50% of why a bank is doing well.

The other half of the equation in banking success is active involvement by major stockholders. They ensure the presence of managers and policymakers that either have a strong financial stake in the bank or have the appropriate incentives and monitoring to ensure that stockholder interests are followed. They make certain of the active involvement by directors and a commitment to controlling bank risk exposure.

These are the characteristics of “good banks” and will all be important as banks continue to deal with financial competition, technological change, and consolidation. Quality bank management and active participation by ownership will be the keys to success.                                                                                   

Does BNS possess these characteristics? Undoubtedly they do. Let’s check the figures. In their latest annual report BNS’s productivity ratio (operating expense as a percentage of total revenue) was 52.72% below the international benchmark of 60%. This indicates that their management has been effective in controlling expenses while still continuing to deliver quality services.

Their annual profit for 2010 was J$10.4 billion, and with just over 1800 staff, that equates to a profit per employee of J$5.7 million, now that’s efficiency and speaks highly of the quality management. Whatever BNS’s detractors want to say they must realize that at least the organization has a structure in place that generates J$28.5 million in profits every single day. In terms of active involvement of major shareholders, BNS’s parent company its largest shareholder has institutionalized the conservative nature and operations of its local operations that BNS Jamaica has come to be known primarily for its conservatism.

It is this conservatism and perceived safety in the eyes of Jamaicans that BNS benefited from during the financial meltdown in the 1990’s and why many say BNS’s success was just luck. A popular adage says success occurs where preparation meets opportunity. BNS being the good organization that it is was fully prepared to welcome droves of investors presented to it on a platter by the banking debacle of the 90’s. They realized what was happening, their position in the market and with a tag line of “You’re safe with us” gained the upper hand in the financial sector for some time.   

So in analyzing the question “was the former dominance and success of BNS a result of them being a great organization or was it just sheer luck!”, the answer is both. BNS was lucky in the fact that the financial meltdown of the 90s augured well for its growth. However it could not have benefited as well as it did if it was not a great organization. Perhaps one of the best examples where success occurs when preparation meets opportunity.

Contributed by The Trying Farmer…

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