Banks' shares surge on marginally lower than expected hit on net worth

Bank's shares jump 7%; focus now shifts to forensic audit report

Shares of private sector lender IndusInd Bank surged over 7 per cent on Wednesday, following its disclosure the previous day that the impact of discrepancies in its derivatives portfolio, ascertained by external agency PwC, would be marginally lower than its findings in the internal review.

 

IndusInd Bank shares closed at ₹788. 25 on the BSE, up 7.12 per cent from the previous day’s close. The private lender’s shares have bounced back nearly 24 per cent since reaching a low of ₹637.30 on March 25. Its shares had fallen over 27 per cent the day after it disclosed to the exchanges that an internal review had found discrepancies in its derivatives portfolio.

 

On Tuesday, the bank disclosed that PwC, appointed to validate the findings of its internal review, has identified discrepancies in its derivatives portfolio and estimated a negative impact of ₹1,979 crore as of June 30, 2024.

 

Based on the external agency’s report, the bank said that the discrepancies would have an adverse post-tax impact of 2.27 per cent on its net worth as of December 2024. In the October-December quarter (Q3) of 2024-25 (FY25), the bank’s net worth was ₹65,102 crore.

 

The bank has also indicated that it will appropriately reflect the resultant impact of the discrepancies in the financial statements for FY25. 

 

“IndusInd Bank recently disclosed that the external agency, which was appointed to ascertain discrepancies in derivative book accounting, has quantified the impact of the same. It amounts to 2.27 per cent (₹1,520 crore) of the bank's net worth (as of Q3FY25),” said Macquarie Capital in its report, adding that this (impact) is marginally lower than the number estimated in the bank’s internal review (2.35 per cent of net worth, or ₹1,580 crore).

 

“We believe this is incrementally positive in the near term as the impact of discrepancies will be limited to what was ascertained earlier by the management,” the report stated, adding that focus will now shift to the forensic audit report due from another external agency, where the focus is to ascertain the root cause for the discrepancies.

 

Additionally, in the near-medium term, the focus would be to obtain more clarity around management succession, the report further said.

 

The Reserve Bank of India (RBI) has only approved a one-year extension to the current managing director and chief executive officer (MD&CEO), Sumant Kathpalia, despite the bank’s board recommending a three-year extension. This was the second time the RBI did not approve a full three-year extension to Kathpalia.

 

During an analyst call following the disclosure of discrepancies in the bank’s derivatives portfolio, Kathpalia had alluded that these irregularities may have been one of the reasons why the RBI granted him only a one-year extension.

 

“IndusInd Bank has received an external agency report, quantifying adverse impact of derivative portfolio discrepancies as of June 2024 at ₹1,979 crore (post-tax impact of 2.27 per cent of net worth). This is marginally lower than internal review,” said Citi in a note.

 

“Will closely monitor findings from the comprehensive audit report for more clarity on discrepancies. Will closely monitor upcoming Q4FY25 earnings for insights into margin, growth, and asset quality outlook,” said Morgan Stanley in a note.

 

On March 10, the bank had disclosed to the exchanges that in an internal review it had found discrepancies in its derivatives portfolio, which would have an adverse impact of 2.35 per cent on its net worth as of December 2024.

 

The bank appointed external agency PwC to review the estimate of the loss in the derivatives portfolio. Later the bank disclosed that it has decided to appoint an independent professional firm to conduct a comprehensive investigation to identify the root cause of the discrepancies.