HDFC Bank’s next CEO faces growth and margin test

Mumbai: ’s next CEO would inherit an institution at a crucial inflection point — one that has made significant progress in fixing technology and integration challenges after its merger with HDFC Ltd, but is yet to fully capture the desired synergies necessary to drive growth, margins and returns the bank’s shareholders demand.

, who succeeded the lender’s talismanic first CEO six years ago, will step down on October 26 after deciding not to seek another term. The board of HDFC Bank, which is India’s most valued lender, is now accelerating his successor’s search.

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Analysts believe the immediate challenge will be to revive retail lending while protecting profitability. ’s loan growth recovered to around 15% in the June quarter but the lender was a relative straggler in the broader industry, with the retail basket trailing more aggressive peers. At the same time, the net interest margin (NIM), or core profitability from lending, fell 12 basis points sequentially to 3.26%. One basis point is a hundredth of a percentage point.

Bernstein analyst Pranav Gundlapalle said the bank’s recent margin weakness was driven by “sharper loan yield compression than any major disadvantage on cost of funds.”

The next CEO will, therefore, have to expand the loan book faster without buying that growth through lower pricing.

The other major balance sheet challenge is an elevated loan-to-deposit ratio. Bringing it down without sacrificing credit growth will require rebuilding HDFC Bank’s granular retail deposit and CASA franchise.

The new CEO will also have to lift core income and returns. Core income, as a percentage of assets, fell to 2.18% in the June quarter from 2.40% a year earlier. With operating expenses rising only 4%, the bigger challenge is revenue productivity rather than cost control.

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HDFC STOCK LOSES SHEEN

Investor confidence is another key pressure point. HDFC Bank shares have fallen about 27% this year, recently hitting a fresh 52- week low of Rs 706, with concerns ranging from the pace of benefits from the to governance issues and the proposed US class-action lawsuit, analysts said.

The valuation gap between ICICI Bank, its biggest private sector rival, and HDFC Bank shrank to the narrowest in a decade, with mutual fund holdings in the former recently overtaking HDFC Bank in value after a three-year gap, ET reported earlier this month.

Deputy managing director has emerged as the leading internal candidate to replace the incumbent. He is also being considered alongside an external candidate, in line with the Reserve Bank of India (RBI) requirements of multiple nominations for the regulator’s consideration.

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“The board could consider making Bharucha an interim CEO and then launch a larger global hunt for other external candidates,” a source aware of the developments told ET.

“Such an arrangement could give the bank more time to identify a permanent successor. Another name that could figure in the discussions is , one of the bank’s longest-serving professionals.”