HDFC, Kotak CEO departures put succession planning at India’s private banks under scrutiny

Abrupt departures from some of India’s top private banks in recent months have exposed a need for better succession ​planning, prompting investors to question how likely such lenders are to stick with long-term business strategies.

India’s $3.3-trillion banking sector has drawn strong interest in recent years from foreign investors betting on its earnings prospects in one of the world’s fastest growing economies, marked by steady management and business strategies.

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The recent unexpected exits of CEOs from two of the largest private sector banks is set to test that confidence, even ‌as those lenders boast of ⁠strong balance ⁠sheets, with bad loans near multi-year lows and capital levels robust, analysts say.

“Several recent transitions at Indian private banks have appeared more abrupt than investors would like, particularly given the importance of leadership continuity in banking,” said Gary ​Tan, portfolio manager at Allspring Global Investments.

His remarks came after India’s largest private lender, , said over the weekend that Chief Executive Sashidhar Jagdishan would not seek reappointment when his term ends in two months, risking a surprise leadership transition.

Smaller rival is searching for a new head after its current CEO, Ashok Vaswani, said in June he would leave in December after serving a three-year term, a move that surprised analysts.

The focus on leadership transition at top private banks comes as external challenges and ​competitive pressure grow in India, where dominant state-owned banks and ambitious foreign banks are vying for bigger shares of ⁠the banking business.

“Greater ‌visibility around leadership succession can help reduce uncertainty and maintain in the bank’s strategic direction and execution,” said Tan.

Abrupt changes leave ​investors with questions about ​a bank’s strategic direction, added Tan, whose firm manages $642 billion of client assets, shares of some Indian banks among them.

SHALLOW POOL OF ⁠CANDIDATES

India’s central bank requires bank boards to submit the names of candidates for CEO appointments or re-appointments ​at least six months before the end of an incumbent’s term, a deadline HDFC Bank missed with the unexpected ​exit of its CEO.

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“The six-month rule is a regulatory minimum, not a governance standard,” said Steve Lawrence, chief investment officer at Balfour Capital Group, whose funds have invested in Indian banks including HDFC Bank.

“HDFC Bank and Kotak trade at premiums that assume continuity. Every surprise exit chips away at that premium,” he said, calling for boards to clearly document succession plans.

HDFC Bank trades at a 12-month forward price-to-book ratio of 1.46, while Kotak Mahindra trades at 2.65. Both trade at multiples well below the peak of four to five times book in the 2018-2019 period.

India freed up banking in the 1990s, spawning a generation of long-serving leaders such as HDFC Bank’s first CEO, Aditya Puri, and Kotak ‌Mahindra Bank founder Uday Kotak, who spent more than two decades at the helm.

CEO TENURES CAPPED, AGE LIMIT SET

Many of those leaders have since stepped down, after the capped CEO tenures at 15 years and set an age limit of 70 for bank chiefs.

Few large global ​regulators wield the kind of sway the ⁠RBI has over CEO appointments, Lawrence said.

“When the board’s choice is provisional until the regulator agrees, the board cannot credibly commit to a plan in advance,” he said.

Bankers and executive search firms say the departure of the founder-era executives, combined with an exodus of talent to fintech companies and non-bank lenders, has left a shallow pool of candidates.

“Banking ​itself is no longer the first choice it once was,” said Namrita Jhangiani, partner at leadership advisory Egon Zehnder.

“In banking, there are constraints on how much a CEO can be paid, and stock options form part of overall compensation. Twenty years ago, private-sector bankers created significant wealth through their options.”

The RBI imposes much tougher compensation rules on banks than on non-bank lenders, which has also spurred departures by top talent, said three bankers, who sought anonymity as they are not allowed to comment on regulatory matters.

“The leadership churn is a governance discount on a growth story,” Lawrence said. “Our view is that the banks which fix succession first will see that discount close, and the multiple re-rate well inside a five-year horizon.”