IndusInd Bank Stock Plummets 27% on Derivatives Mess, Profit Hit Expected
Brokerages cut their target price on IndusInd Bank shares on the recent CFO resignation, the CEO getting only a one-year extension instead of three, and a derivatives-induced dislocation.
Mumbai– Shares of IndusInd Bank experienced a dramatic 27% drop on March 11th, marking the private lender’s largest single-day stock market crash ever. This sharp decline followed the bank’s announcement of significant discrepancies within its portfolio of financial derivatives.
IndusInd Bank revealed that an internal review uncovered irregularities in certain derivative account balances. The bank estimates that these discrepancies could negatively impact its overall financial health by around 2.35%, potentially reducing profits by approximately 1500 crore rupees. Sources suggest the final financial impact could be even greater as an external investigation is still underway.
During a conference call with analysts, IndusInd Bank’s CEO, Sumant Kathpalia, indicated that the losses would likely need to be accounted for in the bank’s profit and loss statement, impacting its earnings.
The internal review was initiated as a response to guidelines issued by the Reserve Bank of India (RBI) in September 2023, concerning the investment portfolios of banks and related account classifications.
Following the news, investors reacted sharply, causing IndusInd Bank shares to close at Rs 656.8 on the National Stock Exchange (NSE), a 27.06% decrease.
IndusInd Bank has stated they have also hired an independent external firm to further examine and validate the findings of their internal review.
Financial analysts at Nuvama Institutional Equities pointed out that the financial hit would likely reduce the bank’s income, primarily affecting its net interest income in the upcoming financial quarter (Q4FY25E). They also expressed concern about the timing of these events, noting the recent resignation of the bank’s CFO, the CEO’s shorter-than-expected one-year term extension, and now these financial discrepancies. Nuvama downgraded its rating for IndusInd Bank stock and significantly lowered its target price to Rs 750 per share, citing concerns about the bank’s credibility and future earnings.
Similarly, IIFL Securities, while maintaining a slightly more positive “add” rating, also lowered its target price for IndusInd Bank shares to Rs 910, down from Rs 970. They anticipate that the financial impact will likely result in a loss for the bank in the fourth quarter of the financial year. They also predict further increases in bad loans from the bank’s microfinance sector and a decrease in net interest margins. IIFL estimates this could weaken the bank’s core capital ratio but believes a capital raise should not be necessary.
Adding to the uncertainty, CEO Kathpalia mentioned during the analyst call that the Reserve Bank of India may have reservations about his leadership. This statement followed the RBI’s decision to approve only a one-year extension for Kathpalia’s term as CEO, instead of the three years the bank had requested.