Moody's Flags Leadership Transition Risk at HDFC Bank as CEO Jagdishan Steps Down

In a recent assessment, Moody's Ratings pointed out the leadership transition risk stemming from HDFC Bank's CEO Sashidhar Jagdishan stepping down at the end of his term in October. The agency insisted that ensuring a smooth succession is vital for upholding confidence, even as the bank's strong brand and capable management team work to lessen these risks amid challenges related to deposit practices and bond mis-selling.

New Delhi: Moody's Ratings on Monday said HDFC Bank CEO Sashidhar Jagdishan's exit brings a degree of "leadership transition risk", and an orderly succession process and continuity in strategy execution will be key to sustaining stakeholder confidence and limiting any negative credit implications.

HDFC Bank's MD & CEO Sashidhar Jagdishan had on Saturday said he will not seek reappointment when his current term ends on October 26. Jagdishan, 61, is serving his second three-year term as the lender's head and had taken charge of the CEO post in October 2020.

Also Read: HDFC Bank faces governance test as CEO exit raises questions

Moody's Ratings AVP Devang Rajkotia said while leadership changes at systemically important banks can create uncertainty around strategy execution and risk management, HDFC Bank's strong franchise, deep senior management bench and one of the strongest financial profiles among Moody's-rated banks in India mitigate these risks.

"An orderly succession process and continuity in strategy execution will be key to sustaining stakeholder confidence and limiting any negative credit implications," Rajkotia said.

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However, since the succession was not previously anticipated, the exit of HDFC Bank's CEO introduces a degree of leadership transition risk.

Shares of HDFC Bank closed at Rs 709 apiece on Monday, down 1.53 per cent over the previous close on BSE.

Jagdishan's tenure as HDFC Bank CEO

After spending nearly three decades at the lender, Jagdishan in October 2020, took over as the CEO of the bank from Aditya Puri, who had led the bank since its founding in 1995.

Within months, the bank announced the merger of its mortgage major parent, HDFC, with itself, leading to asset book expansion and worries over business performance, HDFC liability payouts and compressed net interest margins of the combined entity.

The management, however, said the merger will accrue benefits over the long term.

The issue of Jagdishan's reappointment has been a subject of intense speculation, especially after the surprising resignation of non-executive chairman Atanu Chakraborty in March this year, citing concerns on ethics and governance practices at the lender.

Also Read: Jefferies cuts HDFC Bank share price target but retains Buy after CEO opts out of new term. Here’s why

In late July, the bank board found shortcomings in the deposit arrangements with the Maharashtra State Road Development Corporation (MSRDC) and also slapped a fine of Rs 1 lakh each on Jagdishan and other key executives, even though it said that their actions were not mala fide.

It was alleged that the bank paid interest, over and above the card rate, for getting high-value deposits from the state-run body and routed the higher interest amount as marketing spends.

Besides, the bank has also faced allegations of mis-selling Credit Suisse's AT-1 bonds to diaspora clients from its Dubai DIFC branch, which led the local regulator to prohibit the bank from onboarding new customers or conducting new business last year.

In an interview after his sudden exit, Chakraborty rued that the bank did not act in time in the AT-1 bonds case, and compensation practices have to be in sync with value systems to ensure that any mis-selling does not happen.

There have also been reports of non-resident Indians being stuck with over USD 100 million in investments in a platform floated by Carlisle Asset Management, sold as a high-yield product, but clients are unable to redeem their investments.

During his tenure, Jagdishan had also faced allegations of graft in the Lilavati Hospitals matter, which was eventually dismissed by the Bombay High Court.