On Monday, IndusInd Bank had notified the stock exchanges that it had found accounting mistakes in its foreign exchange derivatives portfolio, which could reduce its earnings and net worth. It said an internal review of processes relating to Other Asset and Other Liability accounts of the derivative portfolio found that the bank had underestimated hedging costs related to forex transactions over a five- to seven-year period. The bank had used internal derivative trades against its foreign currency borrowings as well as deposits up to March 31, 2024. The review was in line with the Reserve Bank of India’s (RBI) circular on valuation and operation of the investment portfolio of commercial banks, including derivatives portfolio management.
The potential impact of the discrepancy is estimated to be 2.35% of the net worth of the bank as of December 2024, which comes to about Rs 1500-1600 crore. The bank’s net worth was Rs 65,102 crore as of December 31, 2024.
What was the impact in the markets?
With investors worried about corporate governance and future earnings clarity at the bank, shares of IndusInd Bank recorded their steepest decline ever on Tuesday, and ended down 27.2% at Rs 655.95 on the BSE after hitting an intra-day low of Rs 649, the lowest since November 2020. On the NSE, it tumbled 27.06% to Rs 656.80. On Monday also, the shares ended nearly 4% lower after its CEO Sumant Kathpalia got only a one-year extension from the RBI till March 2026, against the three-year term sought by the bank.
The IndusInd Bank stock has been falling for the last five consecutive sessions. The stock has experienced a decline of 58% from the 52-week high of Rs 1,576.35 on the NSE on April 8, 2024. Tuesday’s crash has eroded around Rs 19,000 crore worth of market capitalisation for IndusInd Bank.
The IndusInd Bank shares fall also dragged down bank indices on Tuesday. Nifty Private Bank index declined 1.38% to 23,817.20 and Nifty Bank index fell 0.75% to 47,853.95.
What are analysts saying?
The discrepancies arose from internal trades with low liquidity that were on swap contracts and not marked-to-market, Motilal Oswal Financial Services said in a note, indicating the trades were to do with 3/5-year yen and 8/10-year dollar borrowings. Until new investment norms kicked in from April 1, 2024, banks’ asset liability management (ALM) and treasury desks could do internal swaps, where typically one cash flow is exchanged for another.
“When currencies became volatile and the dollar strengthened, the treasury department booked these gains,” Reuters quoted a senior analyst as saying. “The bank should have reported the loss that the ALM desk faced due to the swap, but that was not done. Whether that was deliberate or a systemic goof up is yet to be determined,” the person told Reuters.
Domestic brokerage Nuvama also expressed concern over the delayed disclosure. “The bank said that they wanted to give out a best-case estimate of the impact; hence, it was not disclosed during the Q3FY25 earnings call,” it said.
What will the bank do now?
IndusInd Bank has already appointed an external agency to independently review and validate the internal findings. A final report of the external agency is awaited, based on which the potential impact may need to be revised. Media reports say PwC is most probably the external agency doing the review. The loss will be likely accounted for in the March, 2025 quarter or June quarter of FY 26. The bank has said that its profitability and capital adequacy are strong enough to absorb the one-time impact.
The promoter of the bank, Ashoka Hinduja, also assured investors that the bank’s financials remain healthy, and the promoters would inject capital if any capital requirement arose. “Shareholders shouldn’t panic. These are normal routine problems. I under-stand their concern is over why they were not informed earlier. Banking businesses are based on integrity and trust,” he told CNBC-TV18, emphasis-ing that it was the bank which had brought the issue to attention.
Will worse follow?
Multiple brokerages have downgraded the IndusInd Bank stock and reduced price targets. Pointing out that the bank’s estimates of the adverse impact is post tax, ICICI Securities said the pre-tax hit would be higher at Rs 2,000-2,100 crore. “The hit is likely to run through P&L, and the bank could even report a loss in Q4FY25,” it said. This would hit overall earnings by 25%.
The inherent risks in banking make picking a bank stock difficult. In recent years, Yes Bank, RBL Bank, Bandhan Bank have all faced their share of trouble. As Devina Mehra, founder & CMD of First Global, wrote in her LinkedIn post, it is in the structure of the business where negative surprises outweigh positive surprises. “This is one business where higher than expected growth may not be a good thing at all except that you come to know of the problems created only some years later,” she said.
The key question now is whether this is a one-off event or the start of something bigger.