Aditya Puri, Sashidhar Jagdishan And HDFC Bank’s Karamchand Gang

How do you exit an organisation you built from scratch into the country’s largest private lender? Not without a few tears. And how do you take over the reins from a larger-than-life CEO who is stepping down after 26 years? Not without ensuring he leaves the team with some last bits of advice.

That’s the process that seems to be playing out at HDFC Bank Ltd., where Aditya Puri is handing over to Sashidhar Jagdishan, who takes over as chief executive on Oct. 27.

Puri, addressing his final post-earnings analyst call over the weekend, gave a peek into what that process has looked like.

“There is a gang in the bank called the Karamchand gang, which Sashi heads,” Puri told analysts, referring to a popular detective series from the 1980s. Even my wife is part of it, he said. “What they've done is, they have got together to give me the most poignant, emotional farewell, that I could see. But what it's done, it's brought the HDFC Bank family together. Well done, Sashi,” Puri said on the call, a transcript of which is available on Bloomberg.

The farewell process was more than just bouquets and souvenirs for Puri. Jagdishan seems to have ensured that Puri is working till the last day, pulling him into a series of review meetings.

“Sashi very cleverly over the last one month has been having two reviews a day with me leading them, basically so that everybody is on the same wavelength, which is very well done,” Puri said. According to a person familiar with these meetings, not only would Puri address any issues at each department, but he would also give some “goodbye wisdom” to the concerned team leader.

Alongside, Jagdishan has also started becoming the face of the bank. All that in the process of bidding Puri farewell.

While Puri was all praises for his successor, he had a word or two for the analysts who scrutinise every data point quarter after quarter. “It’s been a pleasure dealing with you. We’ve had our ups and downs. We’ve had our differences of opinion, but it’s been fun.”

Puri’s Last Quarter

The last quarterly earnings signed by Puri come against the backdrop of the Covid-19 crisis. Bank balance sheets have so far been protected by a moratorium and then restructuring relief offered by the regulator. But many believe a hit to the banking sector will come in time.

As peer banker Uday Kotak said at a recent event organised by Bloomberg, “restructuring and moratorium will postpone the problem. But we’ll have to face reality at some point”.

HDFC Bank reported steady asset quality this time around. But it appears, the bank’s management was worried about the message that may go out if bad loans start to rise after Puri’s exit, particularly since the outgoing chief has chosen to sell most of his stock options before he exits.

And so the bank decided to report pro-forma NPAs.

The team came and said “boss, do you mind, we create a pro-forma NPA and we'll create provisioning,” Puri said. The team didn’t want to violate any regulatory rules or the Supreme Court’s directions but also wanted to send the message that there was no underreporting of bad loans, which prompted the outgoing chief to sell his shares. “So we don't violate anything out of the RBI, [but] that also tells you Mr. Puri is not selling shares just because NPAs are going up,” Puri said, referring to himself in the third person as he often does.

Over the weekend, the bank reported a gross non-performing asset ratio of 1.08% at the end of the second quarter, as compared to 1.36% as on June 30. The pro-forma gross NPA ratio would have been at 1.37%, the lender said in a statement. Net profit for the quarter rose 18 %—just short of the 20% growth formula that HDFC Bank has come to be known for under Puri.

However, the bank’s NBFC unit HDB Financial reported a sharp drop in profits and a relatively higher level of gross NPAs at 4.3%.

‘Sashi’s View’

While the analyst call was littered with banter and praise for the outgoing and incoming chiefs, there was also real business to be discussed.

Jagdishan, called Sashi by both bank insiders and analysts, said the demand situation had improved significantly in the three months ended Sept. 30, that asset quality was better than feared and that the bank’s digital efforts had helped expand the liabilities base during the pandemic.

“...whilst on a year-on-year basis, there could be a bit of a base effect for a couple of quarters, but on a sequential basis, the trends will tell you that we are reasonably robust and strong vis-a-vis what the industry is going to do,” Jagdishan told analysts, adding that the bank will continue to nibble away at competitors’ market share.

The bank reported 15.8% growth in advances and a 20.3% increase in deposits in the second quarter of FY21 over a year ago. Sequential credit growth, however, was muted with retail loans growing just 2.1%.

According to Jimmy Tata, head of credit and market risk at HDFC Bank, the lender’s growth over the last six months has largely been in its wholesale lending book, which it achieved without diluting credit standards. According to HDFC Bank’s internal rating scale of one to 10, where one represents the least amount of risk and 10 the most, the average rating of the bank’s incremental loans stands at 4.4, which according to Tata corresponds to a AA rating.

According to the bank’s own stress test of the small and medium enterprises loan book, the bank now expects stress in only 3% of its book, compared to the previously estimated 9%, according to Tata.

In the bank’s retail lending portfolio too there has not been any large build-up of stress, he said. Among salaried customers, the number of people who have seen job losses or large pay cuts is low for HDFC Bank. Moreover, the bank has been following tight credit policies when lending to self-employed borrowers, which has helped keep defaults in control.

Apart from the longer-term challenge of managing a tricky macro environment, one of the bank’s first big announcements under Jagdishan will be the launch of a fully digital vehicle financing portal in the next 90 days. The facility will be available for HDFC Bank customers and others who might want to avail financing for their vehicles, according to Arvind Kapil, country head for retail assets at the bank. The bank is also in the process of digitising its open market acquisitions for the personal loan product in the next three to five months, Kapil told analysts.