HDFC Bank CEO exit lifts shares 2.5% as succession takes focus

HDFC Bank shares rose 2.5% Monday as investors bet a credible successor to outgoing CEO Sashidhar Jagdishan could re-rate India's largest private lender.

HDFC Bank shares opened 2.5% higher Monday after Chief Executive Sashidhar Jagdishan said he would not seek reappointment, with analysts betting a credible successor could reverse a 27 percent slide in the stock this year.

"A credible successor could become a meaningful rerating driver, but the stock will remain under pressure in the near term until there is clarity on the next chief executive and the direction in which he will steer the bank," Nomura said in a report Sunday.

HDFC Bank shares have fallen 27 percent since the start of the year, versus an 8 percent drop in the benchmark Nifty 50 index, according to LSEG data. The stock trades at 1.5 times price-to-book, Jefferies said. The board accepted Jagdishan's decision at a meeting Aug. 29 and said it would fast-track the selection of his successor, who takes over when his term ends Oct. 26.

The exit is the second leadership crisis this year after part-time chairman Atanu Chakraborty resigned in March, flagging governance and ethical concerns. Jagdishan, 61, was among three senior executives fined Rs 1 lakh each in July after an internal review of the bank's arrangement with the Maharashtra State Road Development Corporation. The next chief executive will need to accelerate growth, improve deposit mobilization and returns, and rebuild confidence around governance and senior-management stability, Nomura said.

Succession candidates line up

Kaizad Bharucha, the bank's deputy managing director, is the most likely internal choice to replace Jagdishan, Citi and Jefferies said. Other candidates named in a Jefferies report Monday include Anup Bagchi, chief executive of ICICI Prudential Life; Paresh Sukthankar, a former HDFC Bank deputy managing director; Vibha Padalkar, chief executive of HDFC Life; and Amitabh Chaudhry, chief executive of Axis Bank.

Citi said the new chief executive needs to demonstrate strategic competence to deliver a credible path to scale up net interest margins and return on assets, and a decisive growth trajectory with market share gains. During Jagdishan's tenure, HDFC Bank completed a $40 billion takeover of the country's largest mortgage lender, the benefits from which analysts say are yet to be fully realized.

Governance overhang persists

The leadership change comes as HDFC Bank faces a US securities class action alleging it camouflaged roughly Rs 45 crore ($4.7 million) as marketing spend to pay higher interest to the Maharashtra State Road Development Corporation. The bank's American depositary shares fell more than 11 percent cumulatively after Chakraborty's resignation and the May 27 report on the alleged payment irregularities.

Jagdishan took over from founding chief executive Aditya Puri in October 2020, steering the bank through the pandemic and the $40 billion merger with mortgage lender HDFC Ltd. Analysts caution the current backdrop differs, with governance scrutiny and margin pressure weighing on the shares.

What's at stake

The successor's profile is the key monitorable, with Jefferies maintaining a buy rating and saying the risk-reward is balanced at 1.5 times book value after this year's share drop. A credible appointment could lift the stock, while prolonged uncertainty risks a higher cost of equity and a lower valuation, the brokerage said.

HDFC Bank shares closed at 720.30 rupees Friday, up 1.31 percent, but remain down 26 percent over the past year. The board has said it will complete the succession process "well within time" to ensure continuity in leadership.

This article is for informational purposes only and does not constitute investment advice.