Shares of IndusInd Bank plummeted 27.17% on Tuesday, marking the largest single-day drop for the bank since March 2020. The sharp decline followed the bank’s disclosure of a ₹1,580 crore (A$288m) discrepancy in its derivatives portfolio, which could reduce its net worth by approximately 2.35% as of December 2024.
The stock crash wiped out ₹18,000 crore (A$$3.29bn) in investor wealth and brought IndusInd Bank’s valuation in line with mid-sized state-run banks, trading at just 0.71 times its 12-month forward price-to-book multiple—making it the only private lender valued below book.
IndusInd Bank is one of India’s significant private sector banks. Headquartered in Mumbai, it provides commercial, retail, and investment banking services across India.
Derivatives discrepancy raises governance concerns
The bank revealed on Monday that an internal review of its derivatives portfolio uncovered accounting issues that had gone undetected for years. The discrepancy stems from how the bank hedged forex borrowers by entering internal derivative contracts with its trading desk. While the external trades were marked to market, internal ones were valued using swap accounting, creating a mismatch that temporarily inflated reported net interest income while suppressing trading losses.
This revelation has triggered serious concerns among investors and analysts. Questions are being raised about why the issue was not flagged earlier, how it bypassed auditors, and whether additional discrepancies could emerge.
Elara Capital noted that the event highlights “lapses in processes and the sanctity of book value,” warning that IndusInd Bank could see further stock declines.
Leadership turbulence adds to uncertainty
The timing of the discrepancy disclosure comes just days after the Reserve Bank of India (RBI) granted CEO Sumant Kathpalia a one-year tenure extension—shorter than the three-year reappointment sought by the bank’s board. The RBI’s decision had already fueled speculation about concerns over IndusInd Bank’s governance.
Adding to the turmoil, CFO Gobind Jain resigned in January, just before the bank’s Q3 earnings release. Analysts believe the leadership uncertainty, combined with the derivatives mismanagement, could undermine investor confidence in the bank’s internal controls.
Promoter seeks to reassure investors
In an attempt to calm the market, Ashok Hinduja, chairman of IndusInd International Holdings—the bank’s founding company—said there was no immediate risk of a margin call on shares held by the firm.
“At the moment, there is no margin call,” Hinduja told CNBC-TV18. “The pockets of the shareholders and the pockets of the IIHL are very strong.”
The bank has appointed an external agency to review its findings, stating that it remains financially stable with enough capital to absorb the one-time impact.
Stock downgrade and outlook
Brokerages have reacted swiftly to the news, with several downgrading the stock:
- Emkay Global cut IndusInd Bank to ‘Add’ from ‘Buy’ and slashed its target price by 22% to ₹875.
- Nuvama downgraded the stock to ‘Reduce’ from ‘Hold’ and lowered its target price to ₹750.
- Motilal Oswal shifted its rating to ‘Neutral,’ with a revised target of ₹925, down from its previous estimate.
While the bank insists that its profitability and capital adequacy remain strong, analysts caution that governance concerns and investor distrust could weigh on the stock in the coming months.
What’s next?
IndusInd Bank is expected to account for the derivatives loss in either Q4 FY25 or Q1 FY26, but the broader impact on investor confidence and banking sector oversight remains to be seen.
