Barely three days after its CEO got a shorter extension from the regulator, IndusInd Bank, the country’s fifth-largest private lender, said on Monday that an internal review of its derivative portfolio revealed discrepancies, which could hit its net worth by approximately 2.35% as of December 2024. With its net worth at Rs 65,102 crore as of December 31, the impact is likely to be around Rs 1,530 crore – more than Rs 1,401.3-crore net profit in the third quarter of the current financial year.
The bank informed the exchanges that it has appointed an external agency to independently review its internal findings and is now awaiting the final report, which will determine the accounting treatment of any resulting impact on its financial statements.
“During internal review of processes relating to other asset and other liability accounts of the derivative portfolio, post implementation of RBI Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023, issued in September 2023, including accounting of derivatives, applicable from April 1, 2024, the bank noted some discrepancies in these account balances,” said the exchange notification.
The lender also added that its profitability and capital adequacy remained healthy to absorb this one-time impact.
Earlier in the day, shares of IndusInd Bank plunged nearly 6% intraday to their lowest level since July 2022 after the RBI granted MD & CEO Sumant Kathpalia only a one-year extension, against the board application for three years. Investors were jittery about the bank’s near-term earnings outlook. The stock closed at Rs 900 apiece, down about 4% on the BSE on Monday.
Speaking to an analyst on Monday evening, Kathpalia said the RBI was aware of this issue, which may have influenced its decision to grant an extension for only one year. “I don’t know what is the rationale for them to give me one-year (extension). But I think they are uncomfortable with my leadership skills and we have to respect that,” said Kathpalia. The board will evaluate both external and internal candidates for the CEO position, he added.
Reacting to the RBI’s decision, multiple analysts downgraded the stock and cut its price targets. UBS downgraded the stock to ‘sell’ from its earlier rating of ‘neutral’ and also cut its price target to Rs 850 from Rs 1,070 earlier. The one-year tenure is negative for the bank’s near-term earnings outlook as the focus will shift back to regulatory prescriptions, said the brokerage.
Of the 51 analysts covering IndusInd Bank, 30 maintain ‘buy’ rating, 15 have ‘hold’ and six have ‘sell’ rating.
BofA Securities downgraded the stock to an ‘underperform’ from its earlier rating of ‘buy’ and cut its price target to Rs 850 from Rs 1,250 earlier. The brokerage expressed concerns that it might take 12-18 months to gain clarity on the bank’s management and future strategic decisions, noting that a re-rating for IndusInd Bank is unlikely until further clarity emerges.
Jefferies cut its price target on IndusInd Bank to Rs 1,080 from Rs 1,200 earlier but maintained ‘buy’ on the stock. The brokerage said the RBI’s decision may prompt the bank to begin the succession process and expects the stock to remain rangebound until succession clarity emerges, and stability is seen in the microfinance and auto loan segments.