Brokerages say IndusInd Bank 'lost credibility', downgrade shares on discrepancies in derivatives portfolio

Kotak Institutional Equities said that the bank has lost credibility.

Global and domestic brokerages trimmed their target price outlooks on shares of private lender IndusInd Bank Ltd. as the bank shared discrepancies were found in its derivatives portfolio. Broking firms such as Kotak Institutional Equities, Motilal Oswal, and Morgan Stanley, in reports dated March 11, noted that the bank has lost credibility following the development.

With today's downturn, IndusInd Bank loses Rs 16,000 crore in market capitalisation on March 11, with the shares down by 55 percent in one year, making the bank among the worst performers on Nifty 50 index.

During an internal review of processes relating to parts of its derivatives portfolio, IndusInd Bank has estimated an adverse impact of 2.35 percent on its networth as a result of some discrepancies in these account balances, a company filing said on March 10.

This could potentially impact its profit by around Rs 1,500 crore, according to a person familiar with the matter. The final hit may be higher as an external review is underway, Moneycontrol earlier reported.

Following this update, all internal trades since April 2024 have been unwound, and the bank now holds no unhedged positions. It has ceased internal trades and transitioned to external trades with counterparties. All foreign currency borrowings converted to INR are now hedged based on tenor, ensuring no exposure on the balance sheet.

Follow our market blog to catch all the live updates

The hit will have to be reversed through income statement, mostly through NII, and will be done in Q4FY25E. The gap came up in an internal review, and the bank appointed an external auditor in Q3FY25, whose report will be out by end-March 2025, Nuvama Institutional Equities stated.

"The time line is discomforting: the CFO resigned just before the Q3 earnings, the CEO recently got a one-year extension instead of three and now a derivatives-induced dislocation. We believe IndusInd Bank’s credibility and earnings shall be impacted," said the brokerage. The broking house downgraded the stock to 'reduce', cutting its target price to Rs 750 per share.

According to Kotak Institutional Equities, the bank has lost credibility. "Although the financial implications are negligible, it raises the broader issue of credibility. As rebuilding the lost credibility is likely to take more than a few quarters, we downgrade the stock to 'reduce' from 'buy'. The brokerage cut its fair value assumption on the stock to Rs 850.

"Trust is a crucial part of any investment thesis, and it may take some time to rebuild this trust and make the stock investable again. In the interim, we do not want to see any fresh negative

outcomes emerge, as the bank has already seen negative, resulting in significant underperformance. We look forward to the board's future course of action in assessing these events and implementing measures to prevent any such recurrence in the future," added the brokerage.

Domestic brokerage Motilal Oswal also downgraded the stock to 'neutral'. However, the brokerage believes that the board will expedite the process of evaluating both internal and external candidates for a suitable successor, which should help alleviate concerns and improve confidence in the bank’s

operations.

IIFL Securities, on the flip side, maintained its 'add' rating, but cut its share price target to Rs 910 per share, down from Rs 970 earlier. The brokerage believes that the resultant impact will likely to be routed through P&L, potentially leading to a loss in Q4FY25.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.