IndusInd Bank shares experienced a massive sell-off on Tuesday, plummeting by 21% in early trade and reaching a 52-week low of Rs 707.05. The stock, which had opened at Rs 810.55, rapidly declined by 20.71% to Rs 714.20, significantly eroding investor confidence. Over the past six months, IndusInd Bank's shares have faced a staggering 50% loss in value, with an alarming 32% decline in just the last four weeks. The sharp fall continued from the previous session, where the stock had already slipped by nearly 4% to Rs 900.50 on the National Stock Exchange (NSE).
The steep drop in stock price follows the bank’s recent disclosure of discrepancies in its derivative portfolio, which could have severe financial implications. According to IndusInd Bank, an internal review uncovered irregularities that might result in a 2.35% reduction in its net worth, translating into an estimated loss of nearly Rs 1,577 crore. The review was undertaken in response to the Reserve Bank of India’s (RBI) September 2023 guidelines regarding the classification, valuation, and operation of investment portfolios for commercial banks. These directions required a reassessment of the bank’s ‘Other Asset and Other Liability’ accounts to ensure compliance with updated regulations.
In a regulatory filing on March 10, the bank formally acknowledged these discrepancies, stating that they pertained to account balances linked to its derivative transactions. The impact of these financial inconsistencies will reflect in IndusInd Bank’s earnings for the fourth quarter of the ongoing financial year. The bank further disclosed that the discrepancies had been accumulating over the past five to seven years, raising concerns about the accuracy of its historical financial reporting.
"During an 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), September 2023, including accounting of Derivatives, applicable from April 01, 2024, Bank noted some discrepancies in these account balances. Bank's detailed internal review has estimated an adverse impact of approximately 2.35% of Bank's Net worth as of December 2024," IndusInd Bank stated in its regulatory filing.
Following this alarming disclosure, the bank quickly organized an analyst call to address investor concerns. During the call, it confirmed that an independent external auditor has been brought in to conduct a thorough review of the issue. The findings of this external audit are expected to be made public by the end of March 2024.
CEO Sumant Kathpalia, whose leadership has been under scrutiny, attempted to reassure investors, acknowledging the bank’s efforts to identify and rectify the inconsistencies. “We began reviewing our internal trade book and noticed some discrepancies in our business, which were identified between September and October. We then hired an external agency to conduct a review,” Kathpalia said, as quoted by the Economic Times (ET).
He also confirmed that the bank had provided an initial update to the RBI regarding the matter and had since submitted a final report detailing the nature and extent of the discrepancies. However, concerns over governance and stability have intensified following the RBI’s decision to extend Kathpalia’s tenure as CEO by only one year, instead of the three-year extension initially proposed by the bank’s board.
This limited extension has raised doubts among analysts and investors about the RBI’s confidence in Kathpalia’s leadership. Some experts speculate that the regulatory body may have reservations about the bank’s corporate governance practices and risk management framework, particularly in light of these recent financial irregularities. The uncertainty surrounding the bank’s leadership transition could further weigh on investor sentiment, potentially affecting its long-term growth prospects and market performance.
Market experts caution that IndusInd Bank’s stock may remain volatile in the coming weeks as investors closely monitor the outcome of the external audit and any additional regulatory interventions by the RBI. If the discrepancies are found to be more extensive than initially estimated, the bank could face additional financial penalties or corrective measures from the regulator, further exacerbating investor concerns.
Given the current scenario, analysts recommend that investors adopt a cautious approach toward IndusInd Bank’s stock, emphasizing the importance of clarity regarding the extent of the financial discrepancies and the bank’s corrective measures. The coming weeks will be crucial in determining whether the bank can successfully navigate this crisis and restore market confidence.
