IndusInd Bank's Share Plunge Stuns Investors: Impact Of Crash Explained & How The Bank Is Responding
Shares of Mumbai-based private lender IndusInd Bank Ltd. have plunged 25% on Tuesday; Know impact of the crash and what is the bank doing about it
IndusInd Bank Stock Fall: Shares of Mumbai-based private lender IndusInd Bank Ltd. have plunged 25% on Tuesday, March 11. The stock touched a 52-week low of Rs 674.55, following the bank’s disclosure of accounting issues related to its derivatives. This marked the sharpest decline in the bank’s stock since March 2020, as investors and analysts expressed concern over potential earnings impacts and weak internal controls. But what exactly happened, and what does it mean for the bank and its investors?
What Happened?
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IndusInd Bank revealed accounting discrepancies in its derivatives portfolio, which caused its stock to plummet by 20%. An internal review uncovered that the bank had underestimated hedging costs tied to past foreign exchange (forex) transactions. This revelation suggested a potential impact of Rs 1,600-2,000 crore on the bank’s net worth—approximately 2.35% as of December 2024.
Following this announcement, investor confidence sharply declined, sending the stock to its lowest point since November 2020. Analysts also raised alarms about potential governance issues and weak internal controls within the bank.
Who is Affected?
The most significant impact is on IndusInd Bank and its investors. The bank’s stock has already fallen 42% over the past year. Analysts now have concerns about the bank’s internal controls and compliance measures, as these discrepancies point to deeper operational issues.
When Did This Issue Surface?
The discrepancies were identified between September and October 2024, following updated guidelines on derivatives from the Reserve Bank of India (RBI). The bank disclosed the issue on March 10, after a board meeting. Additionally, the stock saw a nearly 4% drop on Monday, reacting to the RBI’s decision to extend the CEO’s tenure by only one year instead of the requested three.
The Impact Of The Crash
Apart from the steep decline in IndusInd Bank’s stock, the Indian banking sector also experienced minor setbacks. The Nifty Bank index fell 0.7%, and the broader Nifty 50 dropped by 0.27%. Investor confidence in banking stocks, particularly regarding risk management practices, could be negatively affected by the situation.
Rs 18,000 Crore In Investor Wealth Wiped Out
As a result, IndusInd Bank’s valuation has now dropped to levels comparable to many mid-sized state-run banks. At its current price, the bank’s shares are trading at just 0.71 times their 12-month forward price-to-book ratio, making it the only private lender with a multiple below 1.
In comparison, state-run banks such as Bank of Baroda (BoB), Punjab National Bank (PNB), and Canara Bank are valued at 0.74 times their book value.
What Caused The Issue?
The discrepancies arose from past forex transactions where the bank underestimated the hedging costs, leading to an incorrect valuation in its accounts. The issue is tied to compliance with the RBI’s updated guidelines on managing derivatives portfolios.
What is IndusInd Bank Doing About It?
The bank has launched an internal review and appointed an external agency to verify its findings. It has assured investors that its profitability and capital adequacy remain strong enough to absorb the one-time impact, which will be accounted for in Q4 FY25 or Q1 FY26.
The Reserve Bank of India may be uncomfortable with his leadership skills, IndusInd Bank chief executive officer Sumanth Kathpalia said during an analyst call after the Reserve Bank of India approved only a year’s extension to his tenure.
“I don’t know what the rationale is for them to give me one year (tenure). I think they are uncomfortable with the way my leadership skills with the bank have been, and I respect that. This is a litmus test for the bank and a succession point," Kathpalia said during an investors call March 10. He was responding to analysts’ questions on why the regulator may have given him a shorter than expected extension.
Kathpalia also sought to assuage concerns arising out of bank’s disclosure of an accounting discrepancy in its forex derivatives portfolio.
Analysts’ Reactions
– Nuvama Institutional Equities downgraded the stock to “Reduce" from “Hold" and slashed its target price from Rs 1,115 to Rs 750 per share, citing concerns about earnings uncertainty, weak internal controls, and challenges in the microfinance sector.
– Motilal Oswal also downgraded the stock to “Neutral" and adjusted its target price to Rs 925 per share. The firm highlighted the weakened operating performance, leadership changes, and the risk posed by the accounting discrepancies, which may lead to losses in Q4 FY25.
– Macquarie maintained an “Outperform" rating, with a target price of Rs 1,210. They acknowledged the concerns but suggested the losses were an expected outcome given the incomplete hedging coverage and noted that the RBI’s decision to approve only a one-year extension for the CEO might be connected to concerns about internal processes.
– Kotak Institutional Equities downgraded the stock to “Reduce" from “Buy" and cut its fair value estimate to Rs 850 per share. They emphasized that while the financial impact of the discrepancies is relatively minor, the damage to the bank’s credibility would take time to rebuild, affecting investor confidence in the short term.
IndusInd Bank’s credibility and investor confidence now face significant challenges, and it remains to be seen how the bank will handle this situation in the coming months.
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