IndusInd Bank faces a 2.35% net-worth erosion. What does it mean? EXPLAINED

IndusInd Bank's share price plunged 27.17 per cent on Tuesday, March 11, after the private sector lender flagged lapses worth nearly ₹1,530 crore in its derivatives portfolio. Estimates suggest these lapses could have an adverse impact of about 2.35 per cent on the bank’s net worth as of December 2024. The lender’s net worth stood at ₹65,102 crore as of December 31.

IndusInd Bank's shares have been falling for the last five consecutive sessions. So far in March, the stock has plunged 34 per cent.

The stock hit a 52-week low of ₹649 on March 11. It had scaled a 52-week high of ₹1,576 on April 8 last year.

Experts observe that IndusInd Bank has faced a lacklustre performance in recent quarters, characterised by a decline in net interest margins, slower loan growth, and deteriorating asset quality, particularly due to stress in the microfinance sector.

What happened at IndusInd Bank?

In an exchange filing after market hours on March 10, IndusInd Bank reported discrepancies in its derivative portfolio.

The bank said its detailed internal review has estimated an adverse impact of approximately 2.35 per cent of its net worth as of December 2024.

It has appointed an external agency to independently review and validate the internal findings.

"A final report of the external agency is awaited and basis which the bank will appropriately consider any resultant impact in its financial statements. The bank's profitability and capital adequacy remains healthy to absorb this one-time impact," said IndusInd Bank.

What does a 2.35% impact on the bank’s net worth mean?

According to brokerage firm Motilal Oswal Financial Services, the discrepancies arose from internal trades with low liquidity (three-to-five-year yen and eight-to-ten-year dollar borrowings) that were on swap contracts and not MTM (mark to market).

According to brokerage firm Nuvama Wealth Management, the internal derivative trades pertain to 5–7 years up to 31 March 2024 (stopped thereafter). These were internal forex derivatives on the bank’s forex borrowings (mainly multilateral) and deposits.

In its analysts' call, IndusInd Bank highlighted that the financial hit could be absorbed as a one-time charge in Q4FY25 through the profit and loss (P&L) statement.

Nuvama Wealth Management believes the recent developments will have a negative impact on IndusInd Bank's credibility and earnings.

"IndusInd Bank has faced multiple negative events in FY25, including MFI stress, the resignation of the CFO, and only a one-year extension for the CEO instead of three, and now this news. A negative derivatives’ disclosure has the potential to unnerve investors more than a back-dated NPL disclosure," said Nuvama.

Abhishek Pandya, a research analyst at StoxBox, explained that a 2.35 per cent net worth erosion for IndusInd Bank means that the bank's total shareholder equity will decline by this percentage due to discrepancies found in its derivatives portfolio.

"Since net worth represents a bank’s total assets minus liabilities, any reduction indicates financial stress. Based on estimates, this could translate to a loss of around ₹1,500 crore, impacting profitability as the bank will have to account for it in its profit and loss (P&L) statement," Pandya noted.

"This adjustment, expected to be made through net interest income (NII) in Q4FY25, could weaken the bank’s earnings and credibility," said Pandya.

Brokerages downgrade the stock

Several brokerage firms have downgraded the stock after the bank reported discrepancies.

"IndusInd Bank’s stock has been on a downward trajectory, facing multiple setbacks,

including weakened operating performance and the MD receiving only a one-year term versus a three-year regular term proposed by the board. The recent accounting discrepancies related to derivative transactions have further dampened sentiments and are likely to drive losses in Q4FY25 as the bank absorbs the impact through its P&L," Motilal Oswal pointed out.

Motilal Oswal expects the stock to react negatively to this development. However, it believes 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.

Motilal downgraded the stock to neutral with a revised target price of ₹925.

Nuvama has also downgraded the stock. 

"Given low visibility on succession and earnings (MFI stress, derivatives and change of guard), we are downgrading the stock to ‘reduce’ and cutting the target price to ₹750, valuing 0.8 times BV FY26E from 1.1 times earlier," said Nuvama.

Kotak Institutional Equities also downgraded the stock to a 'reduce' from a 'buy', trimming the fair Value to ₹850 from ₹1,400 earlier. The brokerage firm highlighted that although the financial implications are negligible, the derivatives portfolio lapse raises the broader credibility issue.

"While the financial impact of the discrepancy might be minimal, the issue has raised concerns about credibility. 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," said Kotak.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.