IndusInd Bank stock crashes as derivative portfolio hit invites downgrades

IndusInd Bank share price: With Tuesday's fall, IndusInd Bank's market capitalisation sank to Rs 51,102 crore, less than YES Bank's m-cap of Rs 51,357.42 crore

IndusInd Bank share came under heavy selling pressure on Tuesday after a massive discrepancy in the private bank's derivative portfolio invited a string of downgrades from analysts amid low earnings visibility, with brokerages expressing concerns over the bank’s credibility.

 

The stock crashed 27.9 per cent to hit an intraday low of ₹649 per share, lowest since November 2020. This was the stock's sharpest intraday fall since March 24, 2020, when it had tumbled 30 per cent intraday.

 

Approximately 105.27 million shares changed hands on the counter, collectively, on the NSE and the BSE. By close, the stock stood 27.17 per cent lower at ₹655.95 per share, clocking its biggest one-day fall since listing. With this, IndusInd Bank's market capitalisation sank to ₹51,102 crore, less than YES Bank's m-cap of ₹51,357.42 crore.

 

 

By comparison, the BSE Sensex index ended 13 points or 0.02 per cent lower on Tuesday.

 

Analysts at Nuvama Institutional Equities have downgraded the scrip to 'reduce' from 'hold', feeling uncomfortable with a series of negative developments at the bank, and fearing a hit on the lender's “credibility”.

 

“IndusInd Bank has faced multiple negative events in the current financial year (FY25), including microfinance stress, resignation of the chief financial officer (CFO) ahead of the December quarter results, only a one-year extension for the incumbent chief executive officer (CEO) instead of three, and now a potential hit on the net worth due to the portfolio discrepancy. A negative derivatives' disclosure has the potential to unnerve investors more than a back-dated bad loan disclosure,” analysts at the brokerage said. They have cut the target price on IndusInd Bank to ₹750 from ₹1,115.

 

Those at Kotak Institutional Equities concurred that the issue has raised concerns about the bank's credibility. 

 

“Trust is a crucial part of any investment thesis, and it may take some time to rebuild this trust and make the stock investable again. We downgrade the stock to 'reduce' from 'buy' and cut the target price to ₹850 (from ₹1,400). We cut our FY2025E earnings by 25 per cent to reflect the recent development,” they said. 

 

On Monday, India's fifth largest private bank said that, during an internal review, the bank identified certain discrepancies where accounting of losses on forex derivatives/swap transactions executed prior to April, 2024 (over the past 5-7 years), to hedge forex deposits/debt via prop-desk (not related to clients), were not recognised through net interest income (NII).

 

The bank, however, recognised the corresponding treasury gains in the Profit and Loss (P&L) account.

 

Notably, the practice of derivatives/swap transactions was stopped after the Reserve Bank of India prohibited banks from conducting internal trades/hedging effective April 1, 2024.

 

The bank's internal committee, now, estimates the losses to be worth ₹2,100 crore (pre-tax) and roughly ₹1,580 crore (post-tax), which may hit the net worth by 2.35 per cent.

 

Further, IndusInd Bank said that it shall take the hit through P&L, which, coupled with accelerated provisions on the MFI portfolio, shall push the bank into losses during the January to March quarter (Q4) of the current financial year.

 

The bank has appointed an external auditor to confirm the actual impact. The RBI, it added, is aware of the issue.

 

While the bank said it would disclose all the information, relating to these trades, transparently once the external audit is over, analysts see the need of frequent external audits, impacting credibility and valuation.

 

“Given the back-to-back adverse events, including a shorter term for MD Sumant Kathpalia, and unveiling of past accounting discrepancies, we cut our target on IndusInd Bank to ₹875 from ₹1,125. We believe the stock to stay under pressure in the near-term, owing to the recent events as well as due to the elevated stress in MFI,” said analysts at Emkay Global Financial Services.

 

They, however, have reduced their rating from 'buy' to 'add' due to reasonable valuations (1x FY27 revised adjusted book value).

 

Higher MFI stress

  Apart from the one-time hit due to the derivative portfolio hit, the management anticipates elevated MFI stress and credit costs in Q4FY25.

 

While the management expects stress levels in the microfinance pool to improve in Q1FY26, analysts expect MFI stress to normalise Q2FY26 onwards.

 

Analysts at Motilal Oswal Financial Services have downgraded the stock to 'neutral' and cut the target price to ₹925.

 

That said, analysts believe the bank's board will expedite the process of evaluating both internal and external candidates for a suitable successor to alleviate investor concerns and improve confidence in the bank’s operations.