HDFC Bank – What exactly is required to turn around the bank’s fortunes

For a long time, HDFC Bank was the gold standard for Indian private sector banks. It had attractive NIMs, high ratio of CASA deposits, strict control over costs, and low NPAs. Some things have changed, but the real issue is sentiments.

How to get back the market mojo?

For nearly 27 years, Aditya Puri ran the bank like a true-blue bank. It was always conscious about costs, the spreads, asset liability mismatch, and the level of NPAs. In fact, one of the biggest advantages of HDFC Bank was that it had remained a predominantly low default bank, despite its size. The asset quality focus still remains, but the NIMs have taken a hit. More importantly, it is the image of HDFC Bank as a safe bank that has taken a hit in recent quarters. Corporate governance issues in the last couple of years has not done much to help. Now they have a new man at the helm of HDFC Bank.

The importance of being Anup Bagchi

Anup Bagchi comes into HDFC Bank as a rank outsider. Two of India’s largest private banks have given tough competition to each other. In the last few years, ICICI Bank had stolen a march over HDFC Bank in terms of net interest margins, growth, and market perception. That is what makes the role of Anup Bagchi important. He is not a career banker like many others. He brings substantial exposure to capital markets, financial services, and insurance. On the banking front, Anup has exposure to corporate and retail banking. It is this rather eclectic mix that can actually help HDFC Bank in these tough times. HDFC Bank, today, needs a different approach to running the bank.

The irony of HDFC Bank valuations

For a long time, HDFC Bank enjoyed premium valuations with P/E ratios at over 25X, and at a premium to industry averages. Today, the P/E ratio of HDFC Bank is not only lower than ICICI Bank and Kotak Bank, but also lower than Axis Bank. One can argue that the compression in NIMs was triggered by the HDFC merger, but that is not something the shareholders and investors will really care about. Apart from the merger overhang, the recent events like the resignation of the chairman earlier this year, the payouts to MSRDC, the mis-selling of bonds in the Middle East have all been factors in subduing the valuations of HDFC Bank. Investors need a reason how things can get back to normal.

There are 4 agendas to focus at HDFC Bank

Sentiments around a large company are normally determined by institutions. Most institutions have been cautious about HDFC Bank, without being bearish. That has to change, and the bank needs more positive cues. Secondly, the overhang of corporate governance has to be addressed, especially the issues raised during the previous tenure. Thirdly, employee morale has hit a low post-merger, and that needs an urgent boost. Lastly, the new CEO has to engage with regulators in India and abroad, to present a clean picture. The sum total of these factors can help HDFC Bank regain its past valuations. It may not happen immediately, but it is important to be on the right track!