IndusInd Bank's financials may stay weak; new CEO faces challenges

IndusInd Bank may face muted financials in the medium to near-term, and the new MD and CEO will have an "uphill task" of resurrecting the bank and regaining investor trust, brokerages said on Thursday after the beleaguered bank reported its biggest net loss in 20 years.

Most brokerages see downside in shares of IndusInd Bank, which posted a net loss of Rs 2,329 crore, marking one of the worst quarters in terms of both financial metrics and top level upheavals in the wake of accounting (derivative, MFI, other assets/liabilities) fraud.

Brokerage firm Emkay in its note said: "We believe these developments could hurt the bank's business and financials in the near-to-medium term."  Nirmal Bang, taking note of "uncertain outlook on various parameters", has cut the bank's earnings estimates by 23.6 per cent in current fiscal and 13 per cent for FY'27.

Lapses in derivatives accounting, slippages in microfinance portfolio, and fraud in balance sheet disclosures have rattled the private sector bank in the March quarter. The bank's internal audit review has found "involvement of senior Bank officials, including former Key Management Personnel (KMP), in overriding key internal controls".

The bank has reported likely involvement of the senior management in the accounting fraud to the central government.

IndusInd Bank Board is expected to submit names to the RBI for a new MD by June 30.

"We believe that given the series and intensity of frauds, the RBI may possibly consider appointing a nominee director on the Board and even push for a PSB banker as the MD, as has been seen in other beleaguered banks. Even in the event of a private banker being onboarded, as the new MD they will be faced with the uphill task of resurrecting the bank and regaining customer/investor trust," Emkay said.

Nuvama Institutional Equities in its note said the new CEO will have to tighten internal controls, strengthen governance and likely rebalance the asset mix, implying a sharp slowdown in earnings growth for next two years.

"Every other bank that has gone through accounting discrepancies or prior-period adjustments has taken 34 years to achieve a new normal. IndusInd, being a large bank, could take less time. Also, how retail depositors behave in the short term after back-to-back disclosures of prior-period adjustments is unknown," Nuvama said.

In January, the bank's CFO Gobind Jain resigned. On April 29, CEO Sumant Kathpalia and Deputy CEO Arun Khurana resigned from the bank, following which IndusInd Board appointed a Committee of Executives to oversee the operations of the bank, till a new MD and CEO assumes charge  ICICI Securities in its note said it believes IndusInd Bank would prioritise balance sheet stability vs. growth while the path to RoA revival remains uncertain, even if it was to get a signature hire.

"We expect a sharp EPS (earnings per share) downgrade in consensus estimates," ICICI Securities said, while retaining its 'sell' rating on the bank with a target price of Rs 650.

IDBI Capital has downgraded the scrip to 'sell' rating with a new target price of Rs 680.

Even after a dismal March quarter results, IndusInd Bank shares on Thursday afternoon bounced back after falling nearly 6 per cent in early trade. The shares were trading at Rs 777.25, up 0.80 per cent on BSE.