IndusInd Bank shares crash 23% as derivatives’ markdown hits credibility

Shares of IndusInd Bank plunged 10% in opening trade on Tuesday, continuing losing streak for the fifth straight session, after the private lender informed exchanges regarding discrepancies in its derivatives transactions. Extending opening losses, the banking stock crashed nearly 23% as investors turned jittery after it disclosed significant discrepancies in its derivative portfolio, resulting in an estimated adverse impact of 2.35% on its net worth. The estimated loss amounts to around ₹1,580 crore, based on the bank’s net worth of ₹65,102 crore as of December 2024.

Weighed down by the development, IndusInd Bank share price nosedived 22.8% to hit a record low of ₹695.25 on the BSE, eroding its market value by ₹15,242 crore to ₹63,146 crore. On Monday, the banking stock ended 3.87% lower at ₹900.50 apiece. The shares of IndusInd Bank are down 56% from its 52-week high of ₹1,576 touched on April 8, 2024, and lowest level since July 2022.

In an exchange filing last evening, IndusInd Bank said that during internal review of processes relating to other asset and other liability accounts of the derivative portfolio, bank observed some discrepancies in the account balances. “Bank's detailed internal review has estimated an adverse impact of approximately 2.35% of bank’s net worth as of December 2024.”

The bank further said that it has appointed an external agency to independently review and validate the internal findings. “a final report of the external agency is awaited and basis which the bank will appropriately consider any resultant impact in its financial statements. the bank's profitability and capital adequacy remains healthy to absorb this one-time impact,” it added.

Brokerages downgrade IndusInd Bank shares

Following this adverse development, Emkay Global has downgraded IndusInd Bank shares to “Add” from “Buy”, slashing target price by 22% to ₹875. This follows the bank hosting an analyst call on March 10 to discuss the impact of huge accounting discrepancies observed in its forex derivatives portfolio which is expected to have an adverse impact of 2.35% on its net worth as of Dec-24 (post tax of ₹1,580 crore). “This is based on preliminary findings, and the final impact may vary following completion of the external audit in Q4 FY25,” it said.

“Given the back-to-back adverse events, including shorter term for MD and unveiling of past accounting discrepancies impacting FY25 RoA/NW, we cut our TP further to ₹875 from ₹1,125, now valuing the bank at 1x FY27E revised ABV (earlier 1.2x),” Emkay said in a report.

“We believe the stock should react adversely in the near term, to the recent events as well as to the elevated stress in MFI and hence remain under pressure,” the report noted.

The development came days after the Reserve Bank of India (RBI) granted only a one-year extension to its incumbent CEO Sumant Kathpalia, instead of the three-year term recommended by the board. In an exchange filing on March 7, IndusInd Bank said that the RBI has approved re-appointment of Sumant Kathpalia as managing director & CEO of the lender for a further period of one year, effective from March 24 till March 23, 2026. In September 2024, the board of directors of the bank had approved the re-appointment of Kathpalia for a tenure of three years.

Earlier this week, foreign brokerages UBS and BofA Securities downgraded IndusInd Bank shares to "sell", and lowered price targets, after the RBI granted only a one-year extension to its incumbent CEO. UBS has cut price target to ₹850 from ₹1,070 earlier, citing that one-year re-appointment of Kathpalia is negative for the bank's near-term earnings outlook as the focus will shift back to regulatory prescriptions. BofA Securities has also downgraded the stock to an "underperform" from its earlier rating of "buy", slashing the price target to ₹850 from ₹1,250 earlier.

On the other hand, Jefferies and Citi have retained their "buy" rating on the stock, citing attractive valuations. While Jefferies has slashed its price target on IndusInd Bank to ₹1,080 from ₹1,200 earlier, Citi has given a price target of ₹1,375.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)