Why did IndusInd Bank delay disclosing forex accounting discrepancies?

More than five weeks after releasing December quarter's earnings report, IndusInd Bank on March 10 informed exchanges about huge accounting discrepancies in its forex derivatives portfolio, which is expected to have an adverse impact on its net worth and profitability.

Based on preliminary findings, the accounting flaws are estimated to have an impact of 2.35% on its net worth, amounting to ₹1,580 crore. However, the final figures may vary following completion of the external audit in Q4 FY25.

Domestic brokerage house Nuvama has raised concerns over delayed disclosure, saying that it would impact credibility and earnings of the bank promoted by Hinduja Group. “The time line is discomforting—the CFO resigned just before the Q3 earnings, the CEO recently got a one-year extension instead of three and now a derivatives-induced dislocation,” it said in a note.

“While the bank has assessed the impact at 2.4% of net worth, it could change following the audit. The bank did not clarify which department is responsible, but we believe it is treasury/global markets. The bank will disclose this post-audit,” Nuvama said in a latest report.

IndusInd Bank's CFO Gobind Jain had resigned on January 17, just before the Q3 FY25 earnings, which was released on January 31, 2025. Adding to the woes, the Reserve Bank of India (RBI) granted only a one-year extension to its incumbent CEO and MD Sumant Kathpalia, instead of the three-year term recommended by the board.

Why the delayed disclosure

The report mentioned that the bank wanted to “give out a best-case estimate of the impact”, so it was not disclosed during the Q3 FY25 earnings call. “The RBI is aware of the issue.  The loss is not related to the diamond business or any other lending segment; it is related to balance sheet borrowings.”

In an exchange filing on March 10, IndusInd Bank said that during internal review of processes relating to other asset and other liability accounts of the derivative portfolio, it observed some discrepancies in the account balances. These internal trades pertain to 5–7 years up to March 31, 2024. The gap came up in an internal review, and the bank appointed an external auditor in Q3 FY25, whose report will be out by end of March 2025.

The bank disclosed it used internal derivative trades against its foreign currency borrowings as well as deposits up to March 31, 2024 (stopped from April 1, 2024). The bank in Q2 and Q3 FY25 found a gap, amounting to 2.35% of net worth—or ₹2,100 crore pre-tax and ₹1,580 crore post-tax. The hit will have to be reversed through income statement, mostly through net interest income (NII), and will be done in March quarter of FY25.

Earlier in FY22, a technical glitch was reported at its microfinance subsidiary, Bharat Financial Inclusion Limited (BFIL), and the bank had hired an external auditor. The requirement of frequent external audits impacts credibility and valuation.

Brokerages downgrade stock

The back-to-back adverse events, including shorter term for MD and unveiling of past accounting discrepancies, have badly hit shares of IndusInd Bank. The stock plunged as much as 23% to hit a record low of ₹695.25 on the BSE today, eroding its market value by ₹15,242 crore to ₹63,146 crore. 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 March 2020.

Several brokerages have downgraded IndusInd Bank shares and lower target price amid these negative developments. Nuvama has downgraded IndusInd Bank shares to ‘Reduce’  from ‘Hold’, and cut the target price to ₹750 per share.

Emkay Global has downgraded the stock to ‘Add’ from ‘Buy’ from the medium-to-long term perspective, slashing price target by 22% to ₹875 from from ₹1,125 earlier. “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. However, we recommend ADD from the medium-to-long term perspective, taking comfort from the reasonable valuations for a bank capable of delivering higher RoA (1.4-1.6%) over FY26-27E as the asset quality tide takes a turn for the better,” it said in a report.

Earlier on Monday, foreign brokerage house UBS downgraded the stock to "sell" from "neutral" and also lowered price target to ₹850 from ₹1,070 earlier. The agency opined 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.

Another global brokereage BofA Securities also downgraded the stock to an "underperform" from its earlier rating of "buy", cutting the price target to ₹850 from ₹1,250 earlier.

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

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