IndusInd Bank Shares Plunge 20% Amid ₹1,500 Crore Profit Risk from Derivatives Discrepancies

Shares of private lender IndusInd Bank Ltd. plummeted by 20% during the market's opening session on March 11, following the revelation of discrepancies in its derivatives portfolio.

As of 9:50 AM, IndusInd Bank share price was trading at ₹720.35 on the NSE, reflecting a sharp 20% decline. This significant drop has raised investor concerns about the bank’s risk management practices and overall financial health.

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Internal Review Uncovers Discrepancies

According to a company filing on March 10, an internal review of specific processes related to its derivatives portfolio uncovered inconsistencies, leading to an estimated negative impact of 2.35% on the bank’s net worth.

A source familiar with the situation indicated that the potential financial hit could amount to approximately ₹1,500 crore. However, the final loss may be even higher as an external review is still in progress, as previously reported by Moneycontrol.

During an analyst call, Sumant Kathpalia, the bank’s CEO and MD, stated, “I think general reserves cannot be touched, and we’ll have to take it to the P&L.”

The internal review was conducted in response to RBI’s September 2023 guidelines on lenders' investment portfolios, particularly concerning ‘Other Asset and Other Liability’ accounts.

IndusInd Bank has also engaged a reputed external agency to independently validate its internal findings, according to the official statement.

Potential Financial & Market Impact

The financial impact is expected to be addressed through the income statement, mainly via Net Interest Income (NII), and will be reflected in Q4FY25E. The discrepancy surfaced during an internal review, prompting the bank to bring in an external auditor in Q3FY25. Their report is anticipated by the end of March 2025, as noted by Nuvama Institutional Equities.

Commenting on the situation, the brokerage stated, “The timeline is concerning: the CFO resigned just before Q3 earnings, the CEO received only a one-year extension instead of the expected three years, and now there’s a derivatives-related disruption. We believe this will impact IndusInd Bank’s credibility and earnings.” Consequently, the brokerage downgraded the stock to ‘reduce’ and revised its target price to ₹750 per share.

Meanwhile, IIFL Securities maintained its ‘add’ rating but reduced its price target to ₹910 per share, down from ₹970. The firm anticipates that the financial impact will likely be recorded in the profit and loss statement, potentially leading to a loss in Q4FY25.

Additionally, the bank's microfinance slippages are projected to increase quarter-on-quarter, and net interest margins (NIMs) are expected to shrink in Q4. Despite a projected ~35 basis points (bps) reduction in the CET1 ratio, IIFL Securities believes that the proforma CET1 ratio of 14.8% should eliminate the immediate need for a capital raise.

Concerns Over Leadership & Governance

During an analyst call on March 10, Kathpalia remarked that the Reserve Bank of India was “not comfortable with my leadership skills” in managing IndusInd Bank.

His comments followed the RBI’s recent decision to approve his reappointment as MD & CEO for only one year instead of the three-year term initially requested by the bank.

The RBI’s decision to shorten Kathpalia’s tenure has sparked concerns among analysts and investors about governance issues within the bank. A shorter term may indicate that the central bank wants to closely monitor the leadership transition and assess the bank’s ability to rectify operational inefficiencies.

Additionally, the sudden resignation of IndusInd Bank’s CFO just before Q3 earnings has only added to the uncertainty. Investors are now questioning whether there could be deeper structural or compliance issues that have yet to come to light.

Market Outlook & Investor Sentiment

The sharp decline in IndusInd Bank’s stock price has also impacted the broader market sentiment. Banking sector stocks often serve as key indicators of financial stability, and a major setback for a prominent lender like IndusInd can trigger volatility in related stocks.

While some brokerages remain optimistic about the bank’s long-term recovery, the immediate future remains uncertain. Analysts believe that the outcome of the external review and the RBI’s future stance on the bank’s leadership will play crucial roles in shaping investor confidence.

Given the circumstances, investors are expected to closely monitor the bank’s Q4FY25 performance, along with any regulatory actions or further management changes.