KR Choksey's research report on IndusInd Bank
IndusInd Bank (IIB) disclosed a derivative accounting discrepancy, impacting 2.35% (~ INR 15.0-16.0 Bn) of its net worth as of December 31, 2024, arising from internal hedging trades linked to foreign currency borrowings and deposits. The discrepancy was discovered during an internal review of asset and liability accounts following the implementation of RBI’s new investment and derivative accounting guidelines, effective April 1, 2024. The financial impact will be recorded in Q4FY25E through the Profit & Loss (P&L) statement, affecting interest income and swap costs, while the general reserve remains untouched. The issue stems from internal trade practices used by the bank's Balance Sheet Management Desk (ALM Desk) to hedge foreign currency borrowings and deposits. Internal trades were conducted for illiquid markets, including 3–5-year Yen deposits and 8–10-year USD borrowings. These trades were used to manage foreign currency exposure but had an accounting mismatch due to: a) external trades being marked to market (MTM), b) internal trades accounted on a cost basis or swap valuation, leading to temporary valuation differences, and c) the difference between the internal and external trade valuations accumulated over 5-7 years.
Outlook
Given the leadership transition and pending external audit results, we lower our P/B multiple to 0.65x (earlier 0.95x FY27E), assigning it to the FY27E Adjusted BVPS of INR 1,065.2, leading to a revised target price of INR 687 (earlier INR 1,031), implying a 4.7% upside from the current market price. We maintain a HOLD rating on the stock, awaiting greater clarity on the final external review, business growth trajectory, and CEO succession planning before turning more constructive.
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