Shares of private sector lender IndusInd Bank seem to be in a free fall. The stock hit a 20 per cent lower circuit limit on Tuesday at Rs 720.50 on the BSE in morning trading. This plunge comes on top of the 4 per cent decline on Monday. Since hitting a 52-week high in April 2024, IndusInd Bank's shares have declined nearly 43 per cent.
While overall markets have been in a correction phase over the past few months, what's driving the sharp decline in IndusInd Bank in recent days is a double whammy of sorts.
The first blow came when the Reserve Bank of India approved only a one year extension for the bank's MD and CEO Sumant Kathpalia. IndusInd Bank's board had requested a three-year tenor. This uncertainty on the CEO succession expected over the coming months had investors worried on Monday.
Add to that, the lender informed that it had noted discrepancies during an internal process review related to its derivatives portfolio and that it expected a hit on its networth. This has only worsened investor appetite for the stock.
Indusind Bank says it's had to revalue its derivatives and has a loss of 2.35% of net worth, potentially. For a net worth of 65,000 cr. that's about 1,500 cr. in losses. pic.twitter.com/9dcnOu0Pts
— Deepak Shenoy (@deepakshenoy) March 10, 2025
"During internal review of processes relating to other asset and other liability accounts of the derivative portfolio, post implementation of RBI master direction - classification, valuation and operation of investment portfolio of commercial banks (directions), issued in September 2023, including accounting of derivatives, applicable from April 01, 2024, bank noted some discrepancies in these account balances. Bank's detailed internal review has estimated an adverse impact of approximately 2.35 per cent of bank’s net worth as of December 2024," said the lender.
IndusInd Bank said it has appointed a reputed external agency to independently review and validate the internal findings and once it gets the final report, it will appropriately consider any resultant impact in its financial statements.
Derivatives are used by a bank's treasury to convert foreign exchange deposits or borrowings into rupee. Prior to April 1, 2024, both internal and external trades were conducted. Internal trades were being hedged basis swap-cost while external trades were marked-to-market (MTM). If forex borrowings were repaid during the contract, internal trades were unwound triggering differences between swap-cost and MTM which was unaccounted, explained Gaurav Jani, research analyst at Prabhudas Lilladher.
The discrepancy spanned across a 5-7 year period till March 31, 2024. Analysts expect a potential impact of around Rs 1,580 crore, which is more than the Rs 1,402 crore net profit that IndusInd Bank had reported in the October-December quarter. The bank is expected to absorb this impact through a one-time charge in the January-March quarter earnings.
Analysts at Motilal Oswal Financial Services said IndusInd Bank's stock has been on a downward trajectory, facing multiple setbacks, including weakened operating performance and the MD receiving only a one year term versus a three-year regular term proposed by the board. The recent accounting discrepancies related to derivative transactions have further dampened sentiments and are likely to drive losses in the fourth quarter as the bank absorbs the impact through its P&L.
Jani of Prabhudas Lilladher also expects the bank to now report a loss in the fourth quarter, which will impact its full-year earnings by around 25 per cent.
ICICI Securities analyst Jai Prakash Mundhra said the incident "reflects poorly on internal controls".
On the issue of MD getting only one year extension by RBI, he said that it may lead to deliberation on how the regulator could be "construing individual capability/suitability or governance of the institution, or both".
"We see heightened uncertainty in the near term on possible kitchen sinking, and probable names of MD and CEO candidate," said Mundhra.
Motilal Oswal analysts believe the bank's board will now expedite the process of evaluating internal and external candidates to find a suitable successor for the bank's managing director.
