Anup Bagchi's big test at HDFC Bank is winning back investor trust

Mumbai: New HDFC Bank chief executive Anup Bagchi faces the task of restoring investor confidence, analysts have advised. Loan growth and return on equity have plummeted to industry norms, prompting investors to demand a clearer roadmap for recovery. Bagchi, 56, will assume the role of managing director and CEO on October 27, succeeding Sashidhar Jagdishan.

He has been granted a three-year tenure, contingent upon shareholder approval. His primary responsibility is to provide investors with fewer, more transparent indicators of progress. HDFC Bank has set forth targets, including accelerating loan growth, maintaining stable net interest margins, reducing the cost-to-income ratio to 30%, and lowering the loan-to-deposit ratio to 90%.

However, the range of objectives and unclear timelines have made it challenging for investors to gauge if performance is enhancing. Bernstein, a brokerage firm, suggests that consistent achievement of one or two clearly defined metrics would be more effective in rebuilding investor trust than inconsistent progress across multiple ambitious goals.

Bagchi's appointment satisfies several investor criteria - the long-term commitment indicates regulatory satisfaction with the selection, while his age affords him the opportunity to pursue a comprehensive turnaround. As an external hire, Bagchi also possesses the chance to redefine internal dynamics and investor expectations. Bernstein points out that loan growth and return on equity have aligned with industry averages, diminishing the valuation premium HDFC Bank previously enjoyed.

However, the bank's deposit franchise and higher return on assets may aid in regaining superior performance. A seamless transition, with the new chief financial officer already in place, and minimal significant cleanup in the initial quarters could further alleviate the governance concerns, according to the brokerage. Suresh Ganapathy, managing director at Macquarie, notes that Bagchi brings experience in both retail and wholesale banking at ICICI Bank, as well as insights from managing listed insurer ICICI Prudential Life.

His foremost challenge at HDFC Bank will be retaining senior executives. Macquarie predicts that an external appointment may lead to some departures, with industry whispers hinting at exits among long-serving branch managers. The top priority for the new CEO is to stabilize senior management and manage attrition rates. In addition to leadership transition, Macquarie identified five operating priorities for Bagchi: reviving retail lending, particularly unsecured credit; halting the decline in low-cost current and savings account deposits; enhancing technology; improving service and maximizing the utilization of the bank's subsidiaries to sell products to existing customers. Bagchi must transform these priorities into tangible results that investors can monitor.