Lead Story

Crowning or fading glory: What will the new HDFC Bank chief deliver?

The bank is facing a perception crisis with high-level exits and the RBI stricture, just as the competitive landscape is changing with freshly-minted fintech companies  

In his 26-year-long illustrious stint, at the helm of the country’s premier private sector bank, Aditya Puri won innumerable accolades. They came not just from India, but from across the world. The Economist in its November 2020 edition acknowledged Puri as the “world’s best banker” for “creating something from nothing and delivering long-term shareholder return while supporting the economy”.

HDFC Bank was incorporated in 1994 under a strategic alliance between HDFC and the UK-based NatWest Markets. In March 1995, it went public raising Rs.50 million, through an at-par IPO, which was oversubscribed 55x. The ‘something from nothing’ remark can be gauged from this one statistic — since May 1995, the stock has delivered a whopping 33.64% CAGR. Simply put, Rs.10,000 invested then, would be Rs.14.1 million today. Not to mention the Rs.457,950 worth of dividends. At its listing price of Rs.40 in 1995, on equity of 2 billion shares, the bank was worth Rs.8 billion. Today, it is worth Rs.7.91 trillion! The bank has the highest weightage in the Nifty 50, at 11.21%.

Just as it seemed to be reaching another pinnacle, the bank began being weighed down. First, there were market whispers when the outgoing CEO cashed out his entire holding. Then, the market began getting antsy about top-level executives resigning in significant numbers and, finally, the RBI came down hard on HDFC Bank, when the latter’s digital services stalled a few times. And, all of this was happening against the backdrop of the pandemic, which has given rise to concerns over the possibility of retail loans turning bad. 

Editor's Note

Why replicating Aditya Puri's iconic leadership could be a tough ask

While HDFC Bank’s culture is one of performance with conservatism, the next couple of years will be defining for India’s most admired bank

As much as the banking business seems lucrative, every few years it goes through a turmoil that takes down a few players. That has been pretty much the case across the world. Despite a fairly high level of regulatory scrutiny, it’s prone to frauds. But, even if you keep that aside, lending has proved to be a messy business. 

The Indian banking sector has had its own share of woes, and for a good part of this decade it has been in the dumps with asset quality problems that has spared no player, be it in the private or public sector. Except a couple – HDFC Bank and Kotak Bank, who have managed to grow, while maintaining a clean book. Kotak has managed to do so by largely steering clear of the risky credit business. That leaves only HDFC Bank, which has truly created a large credit business, grown consistently every year, and remained nearly unaffected by any kind of economic upheaval over its 26-year history.

This achievement is a clear reflection of the bank’s leadership. But iconic leaders are often difficult to replace and history tells us that leadership transitions are often tough no matter how well they may have been planned. The problem for the new leader often is not only that the benchmark is set high but also that setting the direction for the next phase of growth may need time amid disruption. A risk factor that is already playing out with the RBI pulling the bank up for lapses in its digital business. 

While analysts still expect HDFC Bank to continue its stellar performance, scaling up and maintaining quality growth will not be easy. So far, HDFC Bank has steadfastedly avoided sectors and entrepreneurs that landed other banks in trouble. But can it continue to do so in the future is one key question. 

Amid this transition, the exodus of top-level executives and stake sale by outgoing CEO Aditya Puri, too, seems discomforting, but the market has hardly been swayed by these factors as the rest of the banks continue to disappoint. Analysts right now are simply extrapolating the past and expecting the glorious story to continue. 

While HDFC Bank has certainly not been a one-man show, and the culture is one of performance with conservatism, the next couple of years will be defining for India’s most admired bank.