Private sector lender IndusInd Bank today said it has noted some discrepancies in its derivative portfolio, which could lead to an adverse impact on its net worth by ₹1,530 crore. The Bank’s net worth stood at ₹65,102 crore as of December 2024.
“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, Bank noted some discrepancies in these account balances,” the lender said.
“Bank’s detailed internal review has estimated an adverse impact of approximately 2.35 per cent of Bank’s Net worth as of December 2024. The Bank has also, in parallel, appointed a reputed external agency to independently review and validate the internal findings,” it said, adding that the lender’s profitability and capital adequacy remain healthy to absorb this one-time impact.
Investigation underway
According to IndusInd Bank MD, CEO Sumant Kathpalia, the issue was first identified by the bank itself and while the adverse impact is likely to be closer to the bank’s estimate, a thorough investigation which will likely be completed by an external agency by April, will assess the complete impact.
The CEO said as a part of the RBI circular which came in September 2023, the lender started reviewing its derivatives book. Per the new guidelines effective April 1, 2024, the internal trades had to be discontinued.
“We started reviewing whatever our internal trade book was and started observing some discrepancies in our businesses, which were identified by September-October, and then we hired an external agency to examine our businesses. That is why we are comfortable that by March-end or early April we will be able to identify the gaps,” he said.
Arun Khurana, deputy CEO at IndusInd Bank, said the hedging instruments of derivatives are used by the balance sheet management desk. “What really emanates is on account of the foreign currency deposits and the borrowings in foreign currency which lead to balance sheet in foreign currency.. so for converting them into INR the derivatives are used…In most cases (the income line) went to the interest income line…,” he said.
Effective April 1, 2024, Khurana said, there has been no internal trades on the bank’s book. The internal trades made prior to that period have been unwound, and all mark-to-markets action has been taken.
The disclosure comes amid negative market commentary around IndusInd Bank’s stocks. Analysts have cut the target price on IndusInd Bank’s shares after the Reserve Bank of India (RBI) approved re-appointment of MD, CEO Sumant Kathpalia only for one-year as against the bank board’s recommendation of three years. This is the second time that the RBI did not approve a three-year term for Kathpalia.
Brokerage ICICI Securities said it sees heightened uncertainty in the near term on likely kitchen sinking, and the probable names for the MD & CEO candidature. In the near term, it believes the bank could enter soft growth patch along with bias on prudence.
“We cut our growth estimates to 9% YoY (vs. ~13% YoY) for FY26E. We prune our FY25/26/27 PAT estimates by 4/7/8%. We downgrade the stock to REDUCE (from Buy) with a revised TP of ₹850 (₹1,350), valuing the stock at ~0.9x FY26E ABV,” the brokerage said.
Succession
Analysts believe IndusInd Bank will now use the one-year period to find Kathpalia’s successor. While deputy CEO Khurana could be one of the candidates that the bank could consider for the top role, few external candidates can also be considered, sources say.
“We think IIB will likely use the one year to transition to a new CEO. The company already has a Deputy CEO, who can also be a contender should a new CEO have to be appointed in the next 9–12 months. But, given the RBI’s preference for an outsider in case of other recent appointments, the probability of an external candidate for a CEO of IIB to succeed Mr Kathpali is high,” said Nuvama Research in a note.
“The stock has corrected sharply on concerns pertaining to MFI and the CEO’s reappointment. But we believe that the stock could continue to underperform as visibility gets lower,” it added.
Weak earnings
According to Motilal Oswal, IndusInd Bank has reported a muted performance over the past few quarters, led by a combination of factors, including a slowdown in loan growth, asset quality stress and subdued margin performance, all of which have resulted in a 40 per cent correction in the bank’s stock price over one year period. Additionally, the speculation regarding the MD’s term extension has contributed to further de-rating in the stock price.
The lender, Motilal Oswal, said, has been navigating through the stress over the recent period amid stress in the micro loans and card businesses and a slowdown in the vehicle segment. While some early relieving signs are visible, slippages are likely to remain elevated in the near term, led by the forward flows witnessed in the prior quarters. Kathpalia, in an analyst call today, said the stress in the micro loan segment will likely peak in Q4FY25. The bank’s shares ended trading 4 per cent lower at ₹900.60 apiece on the BSE today.
