HDFC Bank CEO search tests investor confidence, governance

[MUMBAI] HDFC Bank’s search for a new chief executive after Sashidhar Jagdishan’s surprise decision to step aside will test whether India’s largest private-sector lender can restore investor confidence and move past lingering governance concerns.

The announcement on Saturday (Aug 29) that Jagdishan – a three-decade HDFC Bank veteran –  won’t seek reappointment puts to rest months of speculation that he was eyeing an extension. His final day is Oct 26, and the board has to seek the regulator’s approval to appoint a new CEO, who can be an internal or external candidate.

Jagdishan’s exit comes as the lender confronts a slew of issues that have placed its governance practices under intense scrutiny recently. HDFC Bank’s part-time chairman made an acrimonious exit earlier this year, while the lender continues to grapple with the fallout from Credit Suisse’s Additional Tier‑1 bonds.

Jagdishan took charge in 2020, succeeding Aditya Puri, who was at the helm for more than 20 years. He oversaw HDFC Bank’s balance-sheet expansion and its merger with the country’s largest mortgage financier in 2023. 

“We believe that Jagdishan not seeking a reappointment removes the tail risk of him getting a truncated tenure by the RBI, which would have just prolonged the uncertainty and would have continued to weigh on the stock price,” said Rikin Shah, senior vice president at IIFL Capital. A credible external candidate could provide a leadership reset and a longer runway to steer the bank, he added.

While HDFC Bank is India’s most valuable lender, with a market capitalisation of about US$116 billion, its shares have underperformed the broader banking index and some of its biggest peers. They have fallen 27 per cent this year, against a 3.5 per cent decline in the Nifty Bank Index, marking their worst relative under-performance since 2003.

Jefferies Financial Group cut its 12-month price target by 16 per cent to 880 rupees after Jagdishan’s exit announcement, warning that further departures in top management could hurt revenue momentum on deposit mobilisation. It retained the “buy” rating on the stock. 

“This can impact business and performance in the near term,” Jefferies analysts Prakhar Sharma and Vinayak Agarwal wrote in a note on Monday. “Uncertainty can lift cost of equity, leading to lower valuation.”

Last year, the bank was barred from on-boarding new customers at its Dubai branch after a local regulator flagged process lapses. In March, chairman Atanu Chakraborty abruptly resigned, citing ethical differences. He later told Bloomberg News that concerns over how the bank handled the Dubai regulatory issues contributed to his departure.

SEE ALSO

India’s largest bank plans to raise 250 billion rupees in share sale

HDFC Bank has denied any wrongdoing, while the Reserve Bank of India – the regulator – has publicly said there are no governance issues at the lender.

The scrutiny intensified after a media report alleged that the bank had breached industry norms by effectively paying higher interest to a state-owned company and camouflaged it as marketing expenses. In July, the bank’s board penalised three top executives including Jagdishan after saying employees involved in setting deposit rates had engaged in “business overreach”.

The lender also faces a potential US shareholder lawsuit and allegations of mis-selling from investors, which the bank said it intends to “vigorously” contest.

Last week, analysts at Macquarie Group wrote that uncertainty around Jagdishan’s term was weighing on HDFC Bank’s stock. Vanguard Group and Blackrock are among investors who hold the lender’s shares.

Hiring a new CEO quickly is crucial as the lender seeks to move past uncertainty that deepened after Chakraborty’s exit. The new CEO will have to assure investors that the bank’s governance systems are robust, with the focus squarely on growing the business at a time when peers are eager to gain ground.

HDFC Bank has also struggled since it merged with Housing Development Finance Corp in 2023. The deal saddled the combined entity with a large pool of long-tenor home loans, which has weighed on its liquidity and margins.

The bank has a nearly 10 per cent weighting in the Nifty 50, making it the country’s most influential stock. But that meant its slump has had a significant drag on the broader market. The Nifty 50 has fallen 7.5 per cent, compared with a 22 per cent gain in the MSCI Asia Pacific Index.

“The market will closely watch who takes charge, how smoothly the transition happens and whether the new leadership can maintain the bank’s growth trajectory and governance standards,” said Ponmudi R, chief executive at local brokerage Enrich Money. BLOOMBERG