Banking on continuity

Mr Puri's successor has to match his stellar track record

There’s a change of the guard at HDFC Bank, which is among the highly valued lenders in the world with a PE multiple of 23. After a long stint that took the private lender to the top in the financial sector league, Aditya Puri is retiring as managing director in October this year, and will be replaced by Sashidhar Jagdishan. The latter is also a long-term HDFC Bank insider, having been associated with the bank since 1996 in various capacities. The bank has grown to become one of India’s three largest banks, and it has consistently improved its financial performance since its launch. At various points of time, it has been India’s most valuable listed company, and consistently among the five most valuable for over a decade.

Mr Puri’s stint, which started in September 1994, was marked by excellent financial performance. The private sector bank has delivered double-digit growth since its launch the same year. This has been aligned to very low bad loan ratios and very high profitability, which makes it a standout performer in a sector that has suffered terrible bad loan problems overall. The stock market returns for HDFC Bank have been truly extraordinary, with shareholders having received over 25,000 per cent returns since the initial public offering and the listing in mid-1995. The return on capital employed, which is a key ratio for a financial business, is a whopping 15 per cent. There were concerns about the uncertainty caused by Mr Puri’s retirement but the appointment of Mr Jagdishan and its clearance by the regulator seem to have been well-received by the market. The transition should be marked by continuity, given that Mr Jagdishan understands the internal nuts and bolts of the organisation, apart from being a veteran banker. It helps that Mr Puri strongly preferred him, appointing him a “change agent” in August 2019.

HDFC Bank has not only been successful in terms of bringing careful due diligence to its lending operations and restricting the bad loans, it has also been notable for the innovation it brought to the table. It started with an advantage in that the HDFC brand was already highly respected in the mortgage space. But the bank was also among the first lenders to focus on the retail customer segment, and also in terms of setting up an easy online interface for its customers. This allowed it to tap into household savings and it was also a major enabler and beneficiary of the growth story of the Indian consumer class.

Alongside lending operations, HDFC Bank also moved into related fee-based businesses, such as insurance, securities, and mutual funds. All of this enabled it to diversify revenue streams and also eventually led to the creation and spinning off of the HDFC insurance business, for example. Mr Jagdishan takes charge at what could be a turning point for the Indian banking sector. The economy is struggling to cope with the impact of the pandemic and lockdown. The Reserve Bank of India’s latest Financial Stability Report assumes that gross non-performing assets (NPAs) across the banking sector could expand to over 12.5 per cent by March 2021 from 8.5 per cent in March 2020. HDFC Bank is better off than most, with its own NPAs at well under 2 per cent. But Mr Jagdishan will have the twin tasks of driving growth and avoiding stressing the balance sheet until when there is an economic turnaround. His other challenge is formidable — something everybody would watch keenly: How to avoid being overshadowed by a predecessor who has set a gold standard for HDFC Bank.