Discrepancies in Derivatives Portfolio Trigger Market Panic
Shares of IndusInd Bank Ltd. suffered a significant setback on March 11, plunging 20% in early trading following the disclosure of discrepancies in its derivatives portfolio. The bank estimated that these issues could have an adverse impact of approximately 2.35% on its net worth, with a potential hit of around Rs 1,500 crore to its profitability.
Internal Review and RBI Directive
The internal review, prompted by the Reserve Bank of India’s (RBI) September 2023 directive on investment portfolios, uncovered inconsistencies in the bank’s ‘Other Asset and Other Liability’ accounts. The bank has since engaged an external auditor to independently assess these findings, with a report expected by the end of March 2025. During an analyst call, CEO and Managing Director Sumant Kathpalia confirmed that general reserves could not be used to offset the impact, and the adjustment would need to be recorded in the Profit & Loss (P&L) statement. The correction is set to take place in the fourth quarter of FY25 (Q4FY25), primarily through net interest income (NII).
Stock Price Decline and Brokerage Downgrades
At 9:50 AM, IndusInd Bank’s stock was trading at Rs 720.35 on the National Stock Exchange (NSE), hitting its 20% lower circuit. By 10:53 AM IST, the stock further dropped to Rs 706.90, marking a decline of Rs 193.60 (-21.78%). The stock has now declined 53% over the past year due to ongoing concerns regarding financial management and corporate governance. Brokerages have responded to these developments with widespread target price reductions. Kotak Institutional Equities downgraded the stock to ‘Reduce’ from ‘Buy’ and cut its target price to Rs 850 from Rs 1,400. Motilal Oswal Financial Services (MOFSL) revised its target price to Rs 925. ICICI Securities set a target price of Rs 850. Nuvama Institutional Equities downgraded the stock to ‘Reduce,’ with a revised target price of Rs 750. Nirmal Bang pegged the stock at Rs 900, while PL Capital maintained a target of Rs 1,000.
Leadership Uncertainty and Governance Concerns
Investor sentiment has also been shaken by leadership changes within the bank. The CFO’s resignation just before the Q3 earnings release, followed by the RBI granting CEO Sumant Kathpalia only a one-year extension instead of the expected three, has raised concerns about internal governance. Analysts believe these factors played a role in the RBI’s decision regarding Kathpalia’s tenure. “This episode had a bearing on RBI’s decision to extend the MD & CEO’s tenure only for one year,” stated PL Capital.
Financial Performance and Potential Losses
Market experts anticipate a significant impact on IndusInd Bank’s financial performance in Q4FY25. Pre-tax losses are estimated to be around Rs 2,100 crore, mainly affecting interest expenses, with the remainder adjusted against trading income. Potential quarterly losses are expected, as suggested by ICICI Securities, which emphasized that the bank could report a net loss for Q4FY25 due to the required adjustments. Stress in unsecured loans and microfinance segments could further contribute to weaker earnings.
Future Outlook and Investor Confidence
The ongoing review and final report from the external auditor will be critical in determining the bank’s next steps. MOFSL stated, “We believe the board will expedite the process of evaluating both internal and external candidates to hire a suitable successor, which should help alleviate concerns and improve investor confidence.”
In the near to medium term, the bank’s stock is expected to remain under pressure due to slower loan growth, governance concerns, and the additional impact from derivatives accounting adjustments. As investors and analysts await further clarity, IndusInd Bank faces a crucial period in restoring credibility and stabilizing its financial position.
