IndusInd Bank, one of India’s largest private lenders, warned that derivative losses could erode up to 2.35 percent of its net worth, potentially impacting 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, the person added.
“I think general reserves cannot be touched, and we’ll have to take it to the P&L,” chief executive and managing director Sumant Kathpalia of the bank said during an analyst call.
Kathpalia attributed the potential loss to derivative instruments used to manage foreign currency exposure from international deposits and borrowings. He added that the hedging instruments are used by the balance sheet management desk, which is also the bank’s ALM (asset-liability mismatch management) desk.
IndusInd Bank, in a filing on March 10, said that an internal review of its derivative portfolio uncovered a potential 2.35 percent hit to its net worth, which stood at approximately Rs 62,000 crore as of March 31, 2024.
The review was undertaken following RBI’s directions on investment portfolio of lenders, issued in September 2023, relating to ‘Other Asset and Other Liability’ accounts of the portfolio.
The bank said it has noted some discrepancies in these account balances. The bank did not reveal the process undertaken to discover this discrepancy in the investor call.
“Bank’s detailed internal review has estimated an adverse impact of approximately 2.35 percent of bank’s net worth as of December 2024. The bank has also, in parallel, appointed a reputed external agency to independently review and validate the internal findings,” the IndusInd Bank statement said.
However, the lender said that a final report from the external agency is awaited, based on which the bank will appropriately consider any resultant impact in its financial statements. Despite that, IndusInd Bank also reassured investors that its profitability and capital adequacy remain healthy to absorb this one-time impact.
Kathpalia said that the closure of the external agency review will end by around the fourth quarter of the current financial year.
Further, the management of the bank said that the bank would make external trades with counterparties to hedge the entire balance sheet.
“We now only do external trades with counterparties, market counterparties, for hedging our entire balance sheet,” the bank said during the analyst call today.
The management also added that effective April 1, the bank can confirm that there’ll be no internal trades in the book.
“We have not entered into any internal trades. The internal trades that were there prior to that period, have been unwound” in accordance with mark-to-market valuations, the management said.
A spokesperson for the bank did not immediately respond to a request for comment. This story will be updated when a response is received.
IndusInd Bank’s shares fell 4 percent to Rs 900.50 on the NSE. The stock has shed nearly 16 percent in the last month.
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