Shares of IndusInd Bank crashed 20% on March 11 after the bank disclosed discrepancies in its derivatives portfolio, raising concerns among investors and analysts. The issue, which emerged during an internal review, could potentially impact the bank’s profit by approximately ₹1,500 crore, with the final impact yet to be determined as an external review is ongoing.
Derivatives Discrepancies and Financial Impact
IndusInd Bank’s internal review revealed an adverse impact of 2.35% on its net worth due to irregularities in certain account balances. The bank stated that it has appointed a reputed external agency to validate its internal findings, with a final report expected by the end of March 2025.
During an analyst call, IndusInd Bank’s CEO and Managing Director, Sumant Kathpalia, confirmed that the financial hit would have to be reflected in the profit and loss (P&L) statement, likely impacting the bank’s net interest income (NII) in Q4FY25.
The discrepancies were identified following the Reserve Bank of India’s (RBI) directives on investment portfolio reviews, issued in September 2023. These guidelines required banks to scrutinize their ‘Other Asset and Other Liability’ accounts, leading IndusInd Bank to uncover the issue.
Market Reaction and Brokerages’ Concerns
Following the announcement, IndusInd Bank’s stock plunged to ₹720.35 on the NSE, marking a 20% drop. Brokerages responded swiftly, downgrading the stock and adjusting target prices:
- Nuvama Institutional Equities downgraded the stock to “reduce” and cut its target price to ₹750, citing credibility concerns amid management instability. The resignation of the CFO before the Q3 earnings report, the CEO’s shortened tenure extension, and the derivatives issue have raised red flags for investors.
- IIFL Securities maintained an “add” rating but reduced its target price from ₹970 to ₹910. The brokerage expects the financial impact to be routed through P&L, potentially leading to a loss in Q4FY25.
Additionally, analysts anticipate further slippages in IndusInd Bank’s microfinance portfolio and a contraction in net interest margins (NIMs) in Q4. However, IIFL noted that the bank’s Common Equity Tier 1 (CET1) ratio of 14.8% should prevent an immediate need for a capital raise.
Leadership Uncertainty Adds to Investor Worries
Investor confidence took another hit after the RBI granted CEO Sumant Kathpalia only a one-year extension instead of the three-year term the bank had sought. Kathpalia acknowledged during an analyst call that the RBI is “not comfortable with my leadership skills” in managing the bank, further fueling uncertainty.
What’s Next for IndusInd Bank?
The coming weeks will be critical for IndusInd Bank as investors await the external review’s findings and clarity on the financial hit. The stock may continue to face volatility amid concerns over management stability and regulatory scrutiny. While some analysts believe the bank has the financial cushion to absorb the impact, the broader market sentiment remains cautious