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IndusInd Bank's shares experienced a dramatic plunge of 27% on March 11, 2025, closing at ₹655, triggered by the revelation of a significant impact on the bank's net worth due to discrepancies discovered within its derivative portfolio. This unexpected disclosure sent shockwaves through the market, prompting widespread concerns about the bank's internal controls and risk management practices. The fallout extended beyond the immediate stock price decline, dragging down overall bank indices and casting a shadow over the institution's future prospects. The timing of the revelation, coinciding with a shorter-than-expected tenure extension for the CEO and the recent resignation of the CFO, amplified anxieties among investors and analysts alike, leading to a flurry of downgrades and target price reductions from various brokerage firms. The core of the issue revolves around internal derivative trades that were not marked-to-market (MTM) and spanned a period of five to seven years, ceasing on March 31, 2024. These trades were primarily related to foreign exchange (FX) derivatives linked to the bank's FX borrowings, predominantly from multilateral sources, and deposits. The magnitude of the discrepancy is estimated to negatively impact the bank's net worth by 2.35%, a substantial blow that has raised serious questions about the oversight and governance within the institution. Macquarie, despite maintaining an 'Outperform' rating, highlighted the negative development and questioned the robustness of the bank's internal processes and compliance mechanisms. They suggested that these issues might have contributed to the suboptimal CEO tenure extension. Channel checks indicated that such losses are plausible when the derivative book is not fully covered, and some treasury heads of other banks argued that the Reserve Bank of India's (RBI) new accounting rules alone cannot account for the discrepancy. Morgan Stanley (MS) downgraded IndusInd Bank to an 'Equal Weight' call, citing reduced visibility on the stock. The recent series of events, including the CFO's resignation, the CEO's shorter tenure extension, and the derivative losses, have collectively eroded investor confidence and increased the perceived risk associated with the stock. MS anticipates downside risks to the bank's financial performance and is awaiting further clarification on the nature and extent of the discrepancy. Citi also weighed in on the situation, maintaining a 'Buy' rating but significantly cutting the target price from Rs 1378 to Rs 1160. Citi acknowledged that the derivative position discrepancy would negatively impact earnings and net worth. They lowered their earnings estimate by 25% to account for the anticipated financial fallout. The bank's current trading value, below its FY26E book value, reflects the near-term concerns and uncertainties surrounding the bank's future performance. Nuvama took a more decisive stance, downgrading the rating to 'Reduce' from 'Hold' and slashing the target price to 750. Nuvama expressed concerns about the timing of the disclosure, particularly in relation to the CFO's resignation and the CEO's limited tenure extension, suggesting a potential lack of transparency and accountability within the bank. They anticipate that the credibility and earnings of IndusInd Bank will be negatively impacted by the ongoing controversy.
IIFL echoed the concerns, highlighting that the discrepancies in derivatives accounting would likely hit the bank's net worth by 2.35%. They anticipate that the resultant impact will be routed through the profit and loss (P&L) statement, potentially leading to a loss in the fourth quarter of fiscal year 2025 (4QFY25). IIFL also factored in the expected rise in microfinance institution (MFI) slippages and the anticipated contraction in net interest margins (NIMs) in 4Q. While they estimate a ~35bps hit to the Common Equity Tier 1 (CET1) ratio, they believe that the proforma CET1 ratio of 14.8% should preclude the need for a capital raise. Emkay downgraded the rating to 'ADD' from 'BUY', reducing the target price by approximately 22% to Rs 875 from Rs 1125. Emkay highlighted the significant accounting discrepancies observed in the bank's forex derivatives portfolio, which are expected to have an adverse impact of 2.35% on its net worth as of December 2024 (post-tax: ~Rs 15.8 billion). They cautioned that these findings are preliminary and that the final impact may vary following the completion of an external audit in Q4FY25. Emkay expects the past accounting discrepancies in forex derivatives to negatively impact the bank's return on assets (RoA) and net worth in FY25. Despite the current Managing Director's assurance of staying for one year, Emkay anticipates that MFI stress will peak in Q4FY25. Jefferies maintained a 'Buy' rating but lowered the target price from Rs 1080 to Rs 1040. Jefferies characterized the accounting adjustment as a surprise that reflects weak internal controls. They acknowledged that while the issue is specific to certain types of transactions and relates to past years, it underscores a fundamental lack of oversight within the bank. This, coupled with the shorter CEO term extension and challenges in the MFI sector, will likely limit the bank's potential for rerating. Jefferies lowered its FY25 earnings estimate by 25% to reflect the anticipated financial impact of the discrepancy. They noted that management had informed the RBI earlier but found the situation a negative surprise, reinforcing concerns about internal controls. They anticipate a one-time earnings impact but believe that it could lead to a short-term derating of the stock.
MOSL downgraded IndusInd Bank's rating to 'Neutral' from 'BUY', setting a target price of Rs 925 compared to the previous Rs 1100. MOSL attributed the downgrade to the 2.35% damage inflicted on the bank's net worth by the accounting discrepancy and the prevailing near-term uncertainties. They noted that the discrepancies arose from internal trades with low liquidity (3/5-year yen, 8/10-year dollar borrowings) that were on swap contracts and not marked-to-market. The financial hit is expected to be absorbed in Q4FY25. DAM Capital also downgraded the rating to 'Neutral' from 'BUY', cutting the target price to Rs 920 from Rs 1200. DAM Capital highlighted the discrepancies in account balances discovered during the bank's internal review processes related to other assets and liabilities on the balance sheet. They estimate that the impact on the bank's December 2024 net worth could be 2.35%, or Rs 16.0 billion (post-tax). DAM Capital acknowledged that there are more questions than answers surrounding the situation but indicated that management has appointed an external agency to independently review and validate the internal findings. Assuming that the bank will account for the impact as exceptional items, DAM Capital adjusted the Q4FY25 profitability to reflect the losses and cut the FY25E earnings per share (EPS) by 25%. While valuations may appear cheap at 1.0x FY26 adjusted book value (ABV) after a 3% book value cut, DAM Capital does not believe that they present a compelling case given the ongoing issues. The uncertainty surrounding management continuity, asset quality, and the bank's business model, combined with the unclear outlook for FY26 ROAs, leaves the stock vulnerable to derating. The combination of these factors has created a perfect storm for IndusInd Bank, eroding investor confidence and casting a pall over its future prospects. The bank faces a significant challenge in restoring its credibility and demonstrating its commitment to robust internal controls and transparent financial reporting. The outcome of the external audit will be crucial in determining the full extent of the damage and guiding the bank's recovery efforts.
Furthermore, the bank's high reliance on NRI deposits, which grew by 39% year-over-year in Q3FY25 compared to an overall deposit growth of 11% YoY, adds another layer of complexity. Offering higher interest rates to attract NRI deposits may have contributed to the bank's vulnerability in the derivatives market, potentially incentivizing riskier strategies to maintain profitability. This reliance on a specific customer segment also raises concerns about the sustainability of the bank's funding model and its exposure to potential fluctuations in NRI remittances. The implications of the derivative discrepancies extend beyond the immediate financial impact. The erosion of trust and confidence in the bank's management and governance could have long-lasting consequences, affecting its ability to attract new customers, retain existing ones, and raise capital in the future. The bank's reputation has been tarnished, and it will require significant effort and transparency to rebuild its credibility in the eyes of investors, regulators, and the public. The ongoing investigation by the external agency and the subsequent actions taken by the bank's management will be closely scrutinized by all stakeholders. A comprehensive and transparent response to the issues raised by the derivative discrepancies is essential to restoring investor confidence and mitigating the long-term damage to the bank's reputation. IndusInd Bank must demonstrate a clear commitment to strengthening its internal controls, enhancing its risk management practices, and ensuring the accuracy and transparency of its financial reporting. The road to recovery will be challenging, but by addressing the underlying issues and demonstrating a strong commitment to ethical and responsible banking practices, IndusInd Bank can begin to rebuild its reputation and restore investor confidence. The future of the bank hinges on its ability to learn from this experience and emerge as a stronger, more resilient institution.