One of the prime reasons for the dip in HDFC Bank’s stock price was outgoing CEO and managing director Aditya Puri’s decision to sell shares worth Rs843 crore ($112 million) on July 21. Following the off-loading of shares, Puri’s stake in HDFC Bank fell to just 0.01%, adding to the Street’s concerns.

The bank still commands a market capitalisation of Rs57 lakh crore ($760 billion), highest among its peers. But if it wants to maintain its leadership, HDFC Bank needs to plug several holes, starting with finding a strong CEO to replace Puri.

Who’s to succeed?

Puri, who has been the CEO of HDFC Bank since 1994, is due to retire in October. For months now, the bank has been dodging questions about who will be appointed in Puri’s place after October.

Despite many names being thrown around in the media, the bank has not yet said anything concrete.

At the bank’s recent earnings call, Puri reiterated that there was a succession plan in place and at least three candidates, including two internal ones, are in the fray. The names have been submitted in order of preference to India’s central bank and the regulator’s nod is awaited.

But his explanation didn’t cut ice with analysts and investors, who worry why a well-managed firm like HDFC Bank left such a major decision to the last minute.

Calling the succession planning at HDFC Bank “a strategic failure,” independent analyst Hemindra Hazari said, “such a strong CEO, who presided over the bank for a quarter of a century, could not convince the board on his internal choice of successor, and that the bank had to finally appoint an outside agency to identify external candidates, reveals the actual state of succession planning at the bank.”

As per media reports, Sashidhar Jagdishan, the additional director of HDFC Bank is the frontrunner in the race and his name has been cleared by India’s central bank. The two other candidates in the list were Kaizad Bharucha, executive director of HDFC Bank, and Sunil Garg, CEO of Citi Commercial Bank, as per reports.

Beyond just finding a new CEO, HDFC Bank has to fill up several other senior management positions, which is a bigger risk at the moment, according to Abhinesh Vijayaraj, equity research analyst at Chennai-based financial advisor Spark Capital.

Over the past five months, HDFC Bank has seen the exits of Abhay Aima, group head of private banking; Ashok Khanna, group head of secured vehicle loans; and Munish Mittal, chief information officer for varying reasons.

It’s not just the flurry of these exits but the manner in which they happened that is worrisome.

For instance, in the case of Mittal’s exit, HDFC Bank did not inform its own staff and stakeholders. The news, in fact, came to light through a tweet by someone not related to the organisation. “There is something fundamentally wrong in the system when a prominent bank does not disclose senior-level management exits, and it is left to anonymous sources or whistleblowers to inform the market,” said Hazari.

And this isn’t where the bank’s misgovernance problems end.

Taint of misselling

One of the recent high profile exits—Khanna, who headed secured vehicle loans—was allegedly linked to business irregularities. In 2017, HDFC Bank had given Khanna an extension after he reached the retirement age of 60. In March, when his contract expired, Khanna was not given another extension.

Meanwhile, in July, six employees from the division that Khanna headed were sacked over allegations that they were forcefully selling GPS devices to customers along with auto loans. These devices would be allegedly used to keep track of customers in case of loan defaults. According to the norms of India’s central bank, a bank can enter into a partnership with a supplier to sell a product but can’t force customers to buy it.

“The improper practices detected in this division expose the leadership of this vertical and the board of directors’ blind faith in Khanna,” said Hazari. Auto loans make for 11.8% of HDFC Bank’s total loan book.

“Internal inquiries carried out in the matter on the complaints received have not brought out any conflict of interest issue nor does it have any bearing on our loan portfolio,” Puri said during a recent investor call. He added that the probe unearthed “personal misconduct” and appropriate action was taken.

While the bank has managed to keep a straight face about internal issues, things may go out of hand as India’s banking sector braces for a Covid-19-led slump.

Testing times

HDFC Bank has had a formidable track record when it comes to its loan book. In recent years, when its peers, including India’s largest state-owned lender State Bank of India, struggled with a massive bad loan problem, HDFC Bank’s non-performing assets remained minuscule.

The decision to focus on retail loans (housing, personal, and credit card) rather than corporate credit made sure that the bank wasn’t impacted by corporate defaults in India. “HDFC Bank commands a premium in the stock market because it has been able to not just outgrow its peers but do it with negligible bad loan problems,” said Hemang Jani, head equity strategy, Motilal Oswal Financial Services.

But now, as job losses and pay cuts hit households amid the pandemic, the bank might struggle.

HDFC Bank’s retail loan book growth declined by 4% quarter-on-quarter in April-June. But despite a drop in growth, the June quarter wasn’t a complete washout for the bank, unlike its peers.

The overall loan book grew by 1% quarter-on-quarter led by corporate or wholesale segment and the loans under moratorium stood at just 9%. “They are lending primarily to highly rated and public companies, which is a good decision in these tough economic times,” said Vijayaraj. He also added that the bank has an adequate capital buffer to tide over Covid-19 slump and won’t need to raise any fresh capital.

However, some analysts state that the corporate loan book growth will have to be monitored as the bank has been successful in the past by steering away from this segment.

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