Retail loans have kept HDFC Bank’s books clean for 24 years. But they may not be in focus for long.
The resignation of Paresh Sukthankar, presently deputy managing director and a CEO probable, has raised many eyebrows, with a possible shift in HDFC Bank’s lending strategy — from retail to corporate — being seen as a reason.
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Madhavankutty G
21 Aug 2018
PARESH SUKTHANKAR, OUTGOING HEAD OF CREDIT RISK, HDFC BANK; PHOTO BY ABHIJIT BHATLEKAR/BLOOMBERG/GETTY IMAGES
It is ‘too big to fail’ and its combined market capitalisation exceeds that of all public-sector banks put together. Its assets exceed 2% of India’s GDP, earning it the tag of a domestic systemically important entity. That’s HDFC Bank for you.
Apart from an enviable balance sheet, it has the DNA of a retail lender, and infrastructure lending was never its priority. Well, things could change soon. But more on that later.
Let’s get on to the leadership aspect of the story first.
It came as a surprise to many when Paresh Sukthankar, its deputy managing director and a CEO probable, resigned recently.
Sukthankar was a member of the founding team at HDFC Bank and has been with the lender since its inception in 1994. During his 24-year association, he has handled key portfolios, including HR, credit, and risk management. He has been widely acknowledged as a hardcore risk manager who played a key role in the bank’s growth story. Being 55, he had a long tenure ahead, and was expected to take up the CEO’s role someday.
Hence, many link Sukthankar’s departure with a possible shift in the bank’s lending strategy.
But before we probe that further, let’s take a look at the bank’s fundamentals:
Sequential profit growth of 20%-25%
Enviable asset quality with delinquency levels below 2%
A current and savings account (CASA) ratio of 45%
Net interest margin above 4%
Return on assets of close to 2% even in the current challenging environment
There could be three reasons behind Sukthankar’s resignation.
The USD3 billion link
Sukthankar’s resignation came soon after HDFC Bank raised more than USD3 billion in capital. A back-of-the-envelope calculation shows that with this capital infusion, incremental credit deployment should be at least INR2 lakh crore. Notably, 70% of the banks (read public-sector banks) is capital starved and 11 of them, accounting for a fifth of the credit market, are under the prompt corrective action (PCA) framework of the Reserve Bank of India (RBI).
This is a huge opportunity for HDFC Bank to take up the slack and expand its corporate-credit portfolio. A recent RBI study has shown industry capacity utilisation slowly inching up from 70% to 75% levels — evidence that demand for growth capital is indeed on an upswing.
Till now, HDFC Bank has had a strong retail thrust. The corporate-retail mix has been in the ratio of 55:45 most of the times. Sukthankar is said to have built the retail focus of the lender. According to sources, he was not in favour of infrastructure financing, a reason why the bank has a superior asset quality compared to its peers.
But having raised over USD3 billion, a retail push alone would be insufficient to achieve the desired incremental credit growth. Big-ticket corporate and infrastructure funding would need to be given a major thrust. This would require a gradual shift from the bank’s highly retail-centric business model.
An executive from the Indian Banks’ Association tells ET Prime on the condition of anonymity, “Sukthankar is a hardcore risk manager and has not been in favour of infrastructure lending. Maybe he was under pressure to do more of corporate lending. This would have created discomfort.”
To be sure, HDFC Bank’s term-loan profile in its overall corporate book has risen to 30%. Term loans as a share of total loans has also seen a steady rise from 55% during 2013-14 to 70% by the end of March 2018The investor link
In its latest fundraising round, the bank raised INR8,500 crore from its parent, HDFC, through a preferential allotment. It also launched a qualified institutional placement or QIP, and an American depository receipt (ADR) to raise INR15,500 crore on July 31, 2018, according to stock exchange filings.
In June 2018, the government permitted 74% foreign direct investment (FDI) in the bank. So, essentially it is a foreign-owned entity. Since the investment is in the FDI format, most of the investors would be strategic about their interest in the day-to-day functioning of the bank.
Capital Group, Fidelity Investments, Soros Fund, and Highbridge Capital — the major investors in the ADR issue — are focused on sectors like healthcare, industrials, IT, and energy for their portfolio funds. Being FDI players, they might not be amenable to an overly retail-focused approach. Also, investors may not like the fact that a board member from the bank (Sukthankar in this case) is not comfortable with this proposition.
An e-mail sent to HDFC Bank seeking comments on new investors and their sectoral approaches did not elicit any response.
The external-candidate link
Reportedly, Sukthankar was told that he was indeed one of the candidates for the CEO’s post but external candidates would also be considered. A senior executive at HDFC Bank says, “This was more than enough to hint that Sukthankar might not be in the race for the post. Moreover, nowadays, it is very rare to see upward mobility from within the ranks and somebody making it to the top post. He has been with the bank for 24 years. Promoters might want fresh ideas and, hence, they could be looking for an external candidate. Also, after a point, those at CXO levels exit to pursue their own ventures or passions.”
The banking landscape is indeed changing fast and to withstand competition while maintaining profitability and margin growth, focus on niche areas is a necessity. This requires a strong grip over emerging segments such as fintech, artificial intelligence, cloud, cybersecurity, and blockchain technology. The promoters and investors could be thinking along these lines as well while scouting for the next CEO.
The decision to abolish the post of deputy managing director, too, assumes significance. While the post was presumably created as a recognition for Sukthankar’s contributions, his replacement will now be an executive director, to be announced by the end of this month.
The potential successor for the CEO position is proposed to be identified by October 2019 and the candidate will be seasoned for a year before ultimately taking over the reins. Though the name of executive director Kaizad Bharucha is doing the rounds, for an internal candidate well versed with the nuances of the bank, such a lengthy seasoning might not be necessary. This once again strengthens the possibility of an external candidate as the CEO.
If an internal candidate has a chance to make it to the corner office, it is logical to assume his induction to a post apparently senior to that of executive director, like chief operating officer in the case of ICICI Bank. But Sukthankar’s replacement would be another executive director.
On its part, the bank maintains that it has not yet constituted a committee to identify potential candidates for the top post. An e-mail sent to the bank regarding the appointment of an external agency for identification of potential candidates did not receive any response.
What’s next?
Speculation is rife that Sukthankar will head another private lender, Axis Bank. Shikha Sharma’s term as CEO will come to an end by December 2018, just a month-and-a-half after Sukthankar’s 90-day notice ends at HDFC Bank. Axis is in dire need of a hardened risk manager as it is beset by power-sector and infrastructure woes. Sukthankar’s risk-management capabilities could come in handy.
There are also rumours that he could head ICICI Bank, but it has a culture of promoting from within the ranks.
While founding HDFC Bank, both Aditya Puri (current CEO) and Sukthankar came from Citibank. Considering the robust systems and processes that HDFC Bank has built over the years, a candidate from a foreign bank is likely to make the cut as the next CEO. Some of the possible candidates could be Pramit Jhaveri, CEO, Citi India, Zarin Daruwala, CEO of Standard Chartered India, and Ravneet Gill, CEO of Deutsche Bank, India.
These banks unarguably have some of the best systems and processes. They have also embraced fintech and emerging technologies in a bigger way, which HDFC Bank needs to adopt to become future ready.
The resignation of Paresh Sukthankar, presently deputy managing director and a CEO probable, has raised many eyebrows, with a possible shift in HDFC Bank’s lending strategy — from retail to corporate — being seen as a reason.
ShareGift this article
Madhavankutty G
21 Aug 2018
PARESH SUKTHANKAR, OUTGOING HEAD OF CREDIT RISK, HDFC BANK; PHOTO BY ABHIJIT BHATLEKAR/BLOOMBERG/GETTY IMAGES
It is ‘too big to fail’ and its combined market capitalisation exceeds that of all public-sector banks put together. Its assets exceed 2% of India’s GDP, earning it the tag of a domestic systemically important entity. That’s HDFC Bank for you.
Apart from an enviable balance sheet, it has the DNA of a retail lender, and infrastructure lending was never its priority. Well, things could change soon. But more on that later.
Let’s get on to the leadership aspect of the story first.
It came as a surprise to many when Paresh Sukthankar, its deputy managing director and a CEO probable, resigned recently.
Sukthankar was a member of the founding team at HDFC Bank and has been with the lender since its inception in 1994. During his 24-year association, he has handled key portfolios, including HR, credit, and risk management. He has been widely acknowledged as a hardcore risk manager who played a key role in the bank’s growth story. Being 55, he had a long tenure ahead, and was expected to take up the CEO’s role someday.
Hence, many link Sukthankar’s departure with a possible shift in the bank’s lending strategy.
But before we probe that further, let’s take a look at the bank’s fundamentals:
Sequential profit growth of 20%-25%
Enviable asset quality with delinquency levels below 2%
A current and savings account (CASA) ratio of 45%
Net interest margin above 4%
Return on assets of close to 2% even in the current challenging environment
There could be three reasons behind Sukthankar’s resignation.
The USD3 billion link
Sukthankar’s resignation came soon after HDFC Bank raised more than USD3 billion in capital. A back-of-the-envelope calculation shows that with this capital infusion, incremental credit deployment should be at least INR2 lakh crore. Notably, 70% of the banks (read public-sector banks) is capital starved and 11 of them, accounting for a fifth of the credit market, are under the prompt corrective action (PCA) framework of the Reserve Bank of India (RBI).
This is a huge opportunity for HDFC Bank to take up the slack and expand its corporate-credit portfolio. A recent RBI study has shown industry capacity utilisation slowly inching up from 70% to 75% levels — evidence that demand for growth capital is indeed on an upswing.
Till now, HDFC Bank has had a strong retail thrust. The corporate-retail mix has been in the ratio of 55:45 most of the times. Sukthankar is said to have built the retail focus of the lender. According to sources, he was not in favour of infrastructure financing, a reason why the bank has a superior asset quality compared to its peers.
But having raised over USD3 billion, a retail push alone would be insufficient to achieve the desired incremental credit growth. Big-ticket corporate and infrastructure funding would need to be given a major thrust. This would require a gradual shift from the bank’s highly retail-centric business model.
An executive from the Indian Banks’ Association tells ET Prime on the condition of anonymity, “Sukthankar is a hardcore risk manager and has not been in favour of infrastructure lending. Maybe he was under pressure to do more of corporate lending. This would have created discomfort.”
To be sure, HDFC Bank’s term-loan profile in its overall corporate book has risen to 30%. Term loans as a share of total loans has also seen a steady rise from 55% during 2013-14 to 70% by the end of March 2018The investor link
In its latest fundraising round, the bank raised INR8,500 crore from its parent, HDFC, through a preferential allotment. It also launched a qualified institutional placement or QIP, and an American depository receipt (ADR) to raise INR15,500 crore on July 31, 2018, according to stock exchange filings.
In June 2018, the government permitted 74% foreign direct investment (FDI) in the bank. So, essentially it is a foreign-owned entity. Since the investment is in the FDI format, most of the investors would be strategic about their interest in the day-to-day functioning of the bank.
Capital Group, Fidelity Investments, Soros Fund, and Highbridge Capital — the major investors in the ADR issue — are focused on sectors like healthcare, industrials, IT, and energy for their portfolio funds. Being FDI players, they might not be amenable to an overly retail-focused approach. Also, investors may not like the fact that a board member from the bank (Sukthankar in this case) is not comfortable with this proposition.
An e-mail sent to HDFC Bank seeking comments on new investors and their sectoral approaches did not elicit any response.
The external-candidate link
Reportedly, Sukthankar was told that he was indeed one of the candidates for the CEO’s post but external candidates would also be considered. A senior executive at HDFC Bank says, “This was more than enough to hint that Sukthankar might not be in the race for the post. Moreover, nowadays, it is very rare to see upward mobility from within the ranks and somebody making it to the top post. He has been with the bank for 24 years. Promoters might want fresh ideas and, hence, they could be looking for an external candidate. Also, after a point, those at CXO levels exit to pursue their own ventures or passions.”
The banking landscape is indeed changing fast and to withstand competition while maintaining profitability and margin growth, focus on niche areas is a necessity. This requires a strong grip over emerging segments such as fintech, artificial intelligence, cloud, cybersecurity, and blockchain technology. The promoters and investors could be thinking along these lines as well while scouting for the next CEO.
The decision to abolish the post of deputy managing director, too, assumes significance. While the post was presumably created as a recognition for Sukthankar’s contributions, his replacement will now be an executive director, to be announced by the end of this month.
The potential successor for the CEO position is proposed to be identified by October 2019 and the candidate will be seasoned for a year before ultimately taking over the reins. Though the name of executive director Kaizad Bharucha is doing the rounds, for an internal candidate well versed with the nuances of the bank, such a lengthy seasoning might not be necessary. This once again strengthens the possibility of an external candidate as the CEO.
If an internal candidate has a chance to make it to the corner office, it is logical to assume his induction to a post apparently senior to that of executive director, like chief operating officer in the case of ICICI Bank. But Sukthankar’s replacement would be another executive director.
On its part, the bank maintains that it has not yet constituted a committee to identify potential candidates for the top post. An e-mail sent to the bank regarding the appointment of an external agency for identification of potential candidates did not receive any response.
What’s next?
Speculation is rife that Sukthankar will head another private lender, Axis Bank. Shikha Sharma’s term as CEO will come to an end by December 2018, just a month-and-a-half after Sukthankar’s 90-day notice ends at HDFC Bank. Axis is in dire need of a hardened risk manager as it is beset by power-sector and infrastructure woes. Sukthankar’s risk-management capabilities could come in handy.
There are also rumours that he could head ICICI Bank, but it has a culture of promoting from within the ranks.
While founding HDFC Bank, both Aditya Puri (current CEO) and Sukthankar came from Citibank. Considering the robust systems and processes that HDFC Bank has built over the years, a candidate from a foreign bank is likely to make the cut as the next CEO. Some of the possible candidates could be Pramit Jhaveri, CEO, Citi India, Zarin Daruwala, CEO of Standard Chartered India, and Ravneet Gill, CEO of Deutsche Bank, India.
These banks unarguably have some of the best systems and processes. They have also embraced fintech and emerging technologies in a bigger way, which HDFC Bank needs to adopt to become future ready.
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