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Accounting discrepancy inflicts 2.35% damage on net worth

Near-term uncertainties prevail

* IndusInd Bank (IIB) has reported discrepancies in its derivative portfolio pertaining to transactions done over the past 7-8 years (FY24 and earlier). The bank’s detailed internal review has estimated an impact of 2.35% on its net worth as of Dec’24 (~INR15.8b).

* These discrepancies arose from internal trades with low liquidity (3/5-year yen, 8/10-year dollar borrowings) that were on swap contracts and not MTM.

* The bank began reviewing its derivative book following a new RBI circular in Sep’23, which led to the discovery of these discrepancies.

* All internal trades since Apr’24 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.

* The financial hit (approx. 2.35% of net worth) will be absorbed as a one-time charge in 4QFY25, routed through the P&L statement. The exact figure may vary slightly, with the final report expected from the external agency appointed by the bank for independent review and validation.

* The bank has informed the RBI and is conducting an external audit to pinpoint the source of the discrepancies. Detailed findings will be shared once the audit concludes, although the final impact is not expected to differ materially from the current estimates.

* The RBI has approved MD & CEO Sumant Kathpalia’s term for only one year. We believe the board will expedite the process of evaluating both internal and external candidates to hire a suitable successor, which should help alleviate concerns and improve investor confidence.

Valuation and view: Downgrade to Neutral with a TP of INR925

IIB’s stock has been on a downward trajectory, facing multiple setbacks, including weakened operating performance and the MD receiving only a oneyear term vs 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 4QFY25 as the bank absorbs the impact through its P&L. We expect the stock to react negatively to this development. However, we believe 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. We are downgrading the stock to Neutral with a revised TP of INR 925.

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