Shares of IndusInd Bank Ltd. faced a staggering 27% decline on March 11, 2025, marking its largest single-day fall ever. This drastic drop followed the revelation of discrepancies in the bank’s derivatives portfolio, potentially impacting its profitability by approximately Rs 1,500 crore. As a result, multiple brokerage firms have reassessed their target prices and downgraded the stock.

Discrepancies in Derivatives Portfolio

IndusInd Bank, in an internal review mandated by the Reserve Bank of India (RBI), uncovered anomalies in certain account balances within its derivatives portfolio. According to a regulatory filing made by the bank on March 10, these discrepancies could negatively impact its net worth by 2.35%. While the bank has initiated an external review to assess the full extent of the issue, initial estimates indicate that the financial hit could be substantial.

During an analyst call, the bank’s Chief Executive Officer (CEO) and Managing Director, Sumant Kathpalia, acknowledged the potential impact, stating, “General reserves cannot be touched, and we’ll have to take it to the P&L (Profit and Loss statement).” This suggests that the bank may have to absorb the losses directly, which could significantly affect its quarterly earnings.

Market Reaction and Stock Performance

Following these revelations, IndusInd Bank’s stock took a significant hit, closing at Rs 656.8 on the National Stock Exchange (NSE), a steep decline from its previous closing price. The trading volume surged to over 101 million shares as investors reacted to the unexpected financial irregularities. The broader market sentiment surrounding the banking sector also turned cautious, with investors closely watching the unfolding developments.

Brokerage Reactions and Target Price Adjustments

Several brokerage firms promptly revised their outlook on IndusInd Bank in response to these disclosures:

• Nuvama Institutional Equities downgraded the stock to a ‘reduce’ rating, slashing its target price to Rs 750 per share. The firm expressed concerns over the bank’s credibility and earnings potential, citing the timing of key management changes as a significant factor in their decision.
• IIFL Securities, while maintaining an ‘add’ rating, reduced its target price from Rs 970 to Rs 910 per share. The firm highlighted that the impact of the derivative discrepancies would likely be reflected in Q4FY25 earnings, potentially leading to a loss for the quarter.
• Other brokerage firms have indicated that further downside risks remain if the external audit report, expected by the end of March 2025, uncovers additional financial irregularities.

RBI Scrutiny and Leadership Concerns

IndusInd Bank’s regulatory challenges do not end with the derivatives issue. The RBI has been closely monitoring the bank’s operations, and concerns over leadership have also surfaced. CEO Sumant Kathpalia recently revealed that the RBI had approved his reappointment for only one year instead of the three-year term initially proposed by the bank. He stated during the analyst call, “The Reserve Bank of India is not comfortable with my leadership skills of running IndusInd Bank.”

This development has raised concerns among investors and analysts regarding the bank’s governance and future stability. Additionally, the resignation of the Chief Financial Officer (CFO) just before the Q3FY25 earnings report has further fueled uncertainty surrounding the bank’s financial health.

Potential Implications on Profitability

The bank has stated that the financial impact of these discrepancies will likely be absorbed in the Q4FY25 earnings, affecting Net Interest Income (NII). Given that the discrepancies were identified during an internal review, the actual financial damage might be higher than current estimates once the external audit is completed.

Furthermore, the bank’s microfinance segment is expected to experience increased slippages, potentially exacerbating the situation. Analysts predict that the bank’s Capital Adequacy Ratio (CET1) could take a hit of approximately 35 basis points, though it remains at a proforma level of 14.8%, which should prevent an immediate capital-raising requirement.

Future Outlook and Recovery Plans

IndusInd Bank has reassured investors that it is taking corrective measures to address these discrepancies. The appointment of an external auditor and ongoing discussions with regulators indicate a commitment to transparency and rectifying financial inconsistencies. However, the uncertainty surrounding the bank’s leadership, coupled with regulatory scrutiny, means that recovery may be gradual.

In the near term, investors will closely watch the external auditor’s findings and the Q4FY25 earnings report to gauge the extent of financial damage. If the external review confirms additional irregularities, further stock depreciation could be on the horizon.

Conclusion

IndusInd Bank’s recent financial turmoil underscores the importance of strong internal controls and regulatory compliance in the banking sector. The sharp 27% decline in its stock price highlights investor apprehensions regarding corporate governance, leadership stability, and potential financial losses. While the bank is taking steps to address these concerns, its long-term recovery will depend on how effectively it navigates regulatory challenges, restores investor confidence, and implements robust financial controls.

For now, the banking sector remains on high alert as stakeholders await further updates on the external audit and subsequent regulatory actions. Investors are advised to exercise caution and closely monitor developments before making investment decisions regarding IndusInd Bank shares.