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Why HDFC Bank’s investors need to look beyond the Aditya Puri factor

At least 18 executives have exited HDFC Bank since FY17. Many of them had been with the bank for over a decade and were part of the private lender’s unparallelled growth story. Jagdishan will be off the blocks with a relatively new team.

October 22, 2020 / 08:33 AM IST
Aditya Puri, Managing Director, HDFC Bank

Aditya Puri, Managing Director, HDFC Bank

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Aditya Puri’s exit from HDFC Bank after serving 26 years as Managing Director is certainly a big event in Indian banking. The private-sector lender grew to become a powerhouse under Puri’s watch. Consistent years of growth and performance track-record on the asset quality front made HDFC Bank an outlier in an otherwise messy financial system.

But, when it comes to the question of what next for HDFC Bank, one shouldn't read too much into Puri's exit alone. A behemoth of HDFC Bank’s size and scale isn’t just a CEO’s creation. Puri had a strong team of professionals who helped him achieve the kind of growth the bank has exhibited so far.

Why the exits matter

It is in this context that a series of senior-level exits from the bank in recent years assume significance. Most of these executives were part of the bank’s senior leadership team. According to an Ambit Capital report, since FY17, there have been at least 18 senior-level exits from the bank, including key vertical heads who were with the bank for over a decade.

This means many in the founding team are gone already, and the new MD, Sashidhar Jagdishan, needs to rework the foundation to step to the next level of growth.


These include Group heads like Munish Mittal, Ashok Khanna, Abhay Aima, Nitin Chaugh, Rajesh Kumar Rathanchand, all of whom spent 18-25 years in the bank.

The list also includes Paresh Sukthankar, Deputy Managing Director, who was rumoured to be Puri’s successor at one point, K Manohara Raj (Business Head and Senior SEVP), Neil Percy Francisco (Group Head), Philip Mathew (Group Head), Ravi Narayan (Group Head), Aseem Dhru (Group Head), Govind Pandey (Business Head/SEVP), K Balasubramanian (Group Head), Nitin Subramanya Rao (Group Head), Rajendar Sehgal (Group Head), Deepak Maheshwari (Group Head), Harsh Dugar (Business Head and EVP), Kartik Jain (Business Head and EVP).

With Puri retiring and the new CEO taking charge, more exits cannot be ruled out, Ambit said in a note dated July 21.

Jagdishan era begins

Jagdishan will have to keep the core team intact, analysts say. That process, according to insiders, is already underway. The exercise assumes even greater significance in the face of some recent challenges on the corporate governance front. The bank has been dragged into multiple class action suits by a few US law firms after allegations surfaced on the lack of disclosures and irregularities in its auto loan division.

Allegedly, the bank’s auto loan sales team forced customers of the bank to purchase GPS devices as a precondition to sanction loans. The bank subsequently sacked a few officials following an internal probe.  HDFC Bank has denied the allegations saying it intends to defend itself vigorously in the lawsuit. “The bank expects its response to the lawsuit to be due in early 2021,” HDFC Bank said in a statement to exchanges early this year.

These allegations are seen as a worrying factor for HDFC Bank’s investors, among other things. The bank’s stock has taken a beating, falling 2.5 percent so far this year.

A late entry

The uncertainty about who would be taking over after Puri’s exit continued for a good four to five months till the RBI finally cleared the name of Jagdishan, an HDFC Bank veteran, in the first week of August.

Jagdishan is a safe bet for the bank.

Senior banking industry officials, including former colleagues of Puri, think Jagdishan is unlikely to ruffle feathers at the top. Also, being an insider, he can hit the ground running. Shashi, as he is called by colleagues in HDFC Bank, joined the institution in 1996 as a manager in the finance function.

HDFC Bank wasn’t a very well-known name back then. Jagdishan joined the bank after a stint in Deutsche Bank as senior officer in its Country Financial Control Division in Mumbai. His entry into HDFC Bank came two years after outgoing CEO Aditya Puri joined the bank in 1994.

“Maintaining the average 18-20 percent growth rate and keeping the core team intact during the top level management transition will be key for Jagdishan,” said Jaikishan Parmar, an analyst at Angel Broking. “Also, the commentary from the new CEO will be watched closely by markets to understand his priorities,” said Parmar.

Under Puri, HDFC Bank has had a great run. HDFC Bank was listed on the Bombay Stock Exchange on May 19, 1995. Between then and now, the market capitalisation of the bank has grown to Rs 6,77,808.6 crore from Rs 440 crore. During this period, total assets have grown to Rs 16 lakh crore from Rs 3,394 crore. Total deposits grew to Rs 12.29 lakh crore in March from Rs 642 crore in March 1995 and total advances swelled to Rs 1,0.38 lakh crore, from Rs 98 crore.

As Puri steps down this month, he goes with an unbreakable record as the longest serving CEO of a private bank. That record is unlikely to be broken since a new rule from the Reserve Bank of India caps the tenure of private bank CEOs .

Asset quality challenges

But beyond reorganising the core team and getting ready for the post-Puri era, the bank has other  challenges ahead. Among those, the big one is how to tackle the Covid pandemic.

NPAs are likely to increase going ahead as more loans will likely come under stress . In Q2, the bank’s proforma gross NPA ratio and proforma net NPA ratio would have been 1.37 per cent and 0.35 percent, if one adds the impact of the Supreme Court order that stayed tagging fresh NPAs post August 31. The reported NPAs in Q2, hence, do not reflect the full picture.

The bank has disclosed that loans worth Rs 15,743 crore were put under the moratorium and the benefit was extended (post May) to loans worth around Rs 4,639 crore. How these loans perform going ahead remains to be seen. The bank has guided that there is a likelihood of higher NPAs and resultant provisions ahead, even with a slight improvement in the economic situation. “The slowdown may lead to a rise in the number of customer defaults and consequently an increase in provisions,” said the bank in the Q2 earnings note.

The loan growth in retail has come down to just 5.3 percent, while the domestic wholesale loans grew by an unusually high 26.5 percent in the quarter. Wholesale loans are an easy bet to grow the book quickly but a dangerous gamble during a steep economic downturn.

Still, HDFC Bank is relatively better positioned to withstand the Covid impact compared to many of its peers. The bank has made aggressive provisioning (money set aside to cover likely losses from bad loans) and imposed controls over the quality of fresh disbursals. Even then, the Covid-effect would be hard to predict.

Jagdishan has his task cut out.
Dinesh Unnikrishnan
first published: Oct 21, 2020 04:03 pm

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