What happens to a bank with a stellar performance if the leader behind the strong run has to leave? Investors of HDFC Bank Ltd have a year and a half to find the answer.
HDFC Bank’s chief Aditya Puri may have to hang up his boots midway in FY21 due to a rule that sets 70 years as the maximum age for top banking executives to hold office.
Some analysts fear that Puri’s shoes are too large to fill, and a fitting successor is yet to emerge after his deputy Paresh Sukthankar left last year. Under Puri’s watch, HDFC Bank became the largest lender and even the most valued. It has consistently bucked the broad sector trend for many years now.
Even in FY19, when most other lenders had a troublesome run, HDFC Bank reported profit growth of 20.5%, something investors have taken for granted now.
Its March quarter and full-year results released on Saturday show that its bad loan stock is under 2% of its loans and its net interest margin remained at 4.4%. Its comparable private peers are likely to report ratios far worse and public sector lenders even more so.
It is no surprise there is a view that the Reserve Bank of India (RBI) should perhaps look at the age limit again. Ashvin Parekh, an independent banking expert, says that since public sector lenders are still not out of the woods, chiefs of private lenders should be allowed to continue, simply because continuity is critical for sustained balance sheet performance.
After all, a moot point in the dismal performance of public sector lenders is that their chiefs have short tenures. But tenures too long haven’t gone without their issues too. A case in point is ICICI Bank, the head of which is under investigation for violation of lending norms. Chanda Kochhar was chief of the lender for a decade before she quit against the backdrop of allegations of granting loans to the Videocon group as a quid pro quo for the business group’s dealings with her husband Deepak Kochhar.
But the biggest challenge in allowing bank chiefs to serve too long is succession planning.
“Extending is just postponing the issue for some future date. Succession planning is more critical. There is no point in having a dilemma over a successor, especially if you are a listed company," said Abizer Diwanji, partner and national leader of financial services at EY India.
A sense of continuity can be given to investors through succession planning. Parekh says talent always emerges either from within or outside the organization and succession planning isn’t a make-or-break event. For instance, both ICICI Bank and Axis Bank found new chiefs despite sudden departures. Investors have taken a sanguine view on the lenders after the new executives took over. In that regard, HDFC Bank is in a far better place as Puri’s exit date is known.
To be sure, HDFC Bank has kick-started the process to find a successor to Puri.
But talk that RBI should consider extending the tenure of bank CEOs must be nipped in the bud. As Chuck Noll, the famous coach who won a record four Super Bowl titles once said, “Everyone’s job is important, but no one is indispensable."
HDFC Bank’s rich valuations on the Street also show that investors aren’t worried too much about its prospects despite the impending change of guard.