IndusInd Bank: CLSA, Investec downgrade stock as fresh accounting issues crop up

Foreign brokerages including CLSA and Investec have downgraded their recommendations on IndusInd Bank Ltd shares after the lender flagged two more accounting issues in its internal audits.

IndusInd Bank on Thursday said its internal audit department had found  ₹674 crore to be “incorrectly recorded as interest” in its microfinance book over three quarters of fiscal 2024-25. This amount was, however, fully reversed as on 10 January, IndusInd Bank informed the stock exchanges.

The audit team also revealed ₹595 crore worth of unsubstantiated balances in the bank’s ‘other assets’ account, adding that these balances were set off against corresponding balances in the lender’s ‘other liabilities’ account in January.

The audit team had launched a separate investigation on this following a whistleblower complaint alleging concerns in IndusInd Bank’s ‘other assets’ and ‘other liabilities’ accounts. 

CLSA on Friday downgraded its recommendation on IndusInd Bank shares to ‘hold’ from ‘outperform’ and lowered its target price to ₹780 per share from Rs900. Investec has downgraded the IndusInd Bank stock to ‘sell’ with a target price of ₹650.

Shares of IndusInd Bank have fallen by more than 15% since 10 March, when the lender flagged discrepancies worth about ₹1,530 crore in its derivatives account balances. On Friday, the stock was down by about 2% at ₹764.30 per share at 1:30 pm on BSE, while the broader Sensex was down 0.30%.

Also read | How IndusInd Bank spotted a ₹600-crore error in its microfinance book

Profit and margins under pressure

The accounting issues at IndusInd Bank eventually resulted in a financial hit of ₹1,960 crore on its balance sheet for fiscal 2024-25.

Apart from its stock downgrade, CLSA also sharply cut its profit outlook for IndusInd Bank for FY25 and FY26.

“Adjusting for the Rs6.74bn ( ₹674 crore) additional interest income implies its core NIM (net interest margin) was 17bps (basis points) lower than its reported NIM,” CLSA said in its report on Friday. “We cut our FY25 PAT (profit after tax) estimate 22% due to this ₹6.74bn reversal, and cut our FY26-27 PAT estimates 13%-17% due to NIM compression and lower growth. We expect the bank to deliver a 9%-10% ROE (return on equity) over the next two years,” 

Investec said it was cautious “in this period of heightened uncertainty at the bank, which should also see structural impairment in core profitability and business growth”. 

Kotak Institutional Equities has also lowered its earnings outlook for IndusInd Bank following the latest disclosures and retained its stock recommendation at ‘reduce’.

Also read | Mint Explainer: How IndusInd Bank slipped up on foreign currency hedging

Last week, credit rating agencies lowered their outlook on IndusInd Bank’s credit.

Crisil placed IndusInd Bank’s long-term debt instruments on ‘rating watch with negative implications’, and the bank’s ₹4,000-crore Tier II Bonds (Under Basel III) and ₹1,500-crore infrastructure bonds at ‘Crisil AA+/Watch Negative’.

Moody’s placed IndusInd Bank’s baseline credit assessment on ‘review for downgrade’.

Following its initial disclosures, IndusInd Bank instituted a forensic audit by Grant Thornton and an accounting review of its derivatives portfolio by PwC. As a result of these investigations, IndusInd Bank’s chief executive Sumant Kathpalia and deputy CEO Arun Khurana announced their immediate resignations in April.

Also read | What the Grant Thornton audit found at IndusInd Bank