Increased scrutiny, market performance — What challenges face the next HDFC Bank CEO after Sashidhar Jagdishan's exit

HDFC Bank CEO Sashidhar Jagdishan's surprise decision to step down from the position the lender informed on 29 August, stating that it has fast-tracked the process to find his successor.

According to the HDFC Bank filing, “despite persuasion” 61-year-old Jagdishan has decided not to seek reappointment when his term ends on 26 October this year. The board thanked his “commitment, leadership, contribution to growth, stability of the bank and role in successful completion of one of the largest mergers in corporate India”.

Jagdishan joined HDFC Bank in 1996 as a manager in the finance division and has worked his way to CEO position over a period of 30 years.

HDFC Bank faces a series of crisis

Notably, the bank's first jolt came in March, with the resignation of Chairman Atanu Chakraborty, who in his letter to the board cited “certain happenings and practices within the bank” that were “not in congruence” with his personal values and ethics.

The second crisis hit in May, when The Indian Express reported that HDFC Bank paid ₹45 crore to the Maharashtra State Road Development Corporation (MSRTC) for purported marketing expenses, but effectively offered higher returns on its deposits. The bank had then said it strongly rejects any assumptions of wrongdoing or culpability based on selective material.

Last month, Deputy MD Kaizad M Bharucha said HDFC Bank's governance, nomination and remuneration committee and the board are completely seized of the matter, and this (CEO appointment) is work in process.

Now, the board is moving fast to replace Jagdishan as his sudden exit puts strain on the typical timelines. Bank boards' usually approve reappointments and seek the Reserve Bank of India's nod, six months in advance. Jagdishan’s current term itself was approved by the board in March 2023 — seven months before the deadline.

What challenges will the next HDFC Bank CEO face?

Earlier today, Reuters cited sources to report that Bharucha is among the top two candidates to replace Jagdishan. He has a banking career spanning 35 years and has been the Deputy MD at HDFC Bank since 19 April 2023. They added that the second option would be external, to comply with RBI rules which require submission of multiple names for CEO post, as per the report.

Governance issues, investor confidence

Given the ongoing crisis mode for the lender, whether it be Bharucha or another person, the next CEO will have their plate full to restore investor confidence and move past lingering governance concerns.

Among key challenges that will need to be addressed include governance practices that have come under intense scrutiny as the bank also grapples with the historic fallout from Credit Suisse’s Additional Tier‑1 bonds, Bloomberg reported.

Rikin Shah, senior vice president at IIFL Capital told the publication that Jagdishan's decision to step down has removed “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”. Shah added that a credible external candidate could be the way to go.

Market performance, share price

There is also the matter of share price that the next CEO would have to tackle. As India's largest private sector bank, with market capitalisation of around $116 billion, HDFC Bank's stock has underperformed the broader banking index and some of its biggest peers, the report added.

HDFC Bank's share price has fallen 27% this year, against a 3.5% decline in the Nifty Bank Index, marking their worst relative under-performance since 2003, it said.

Increased scrutiny over series of crisis

As the series of crisis mentioned above — Chakraborty's abrupt resignation, concerns over how the bank handled the Dubai regulatory issues, penalty imposition on three top executives including Jagdishan for “business overreach” in the MSRTC matter, and a potential United States shareholder lawsuit and allegations of mis-selling from investors, which the bank said it intends to “vigorously” defend — the bank's next leader will have to navigate increased and intense scrutiny over a number of issues.

Improve investor confidence, remove uncertainty

The next CEO will have to address shaken investor confidence and uncertainty that has been growing since Chakraborty’s exit. This will include

assure investors that the bank’s governance systems are robust, that focus is on growing the business, and that weight on liquidity and margins from the 2023 merger with Housing Development Finance Corporation will not drag the combined entity's financials, the report added.

“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,” Ponmudi R, CEO at brokerage Enrich Money told the publication.