You can wish to be in the shoes of any shareholder in the world now, but not in those of a shareholder of IndusInd Bank. It seems as if the bank cannot catch a break from bad news. In a significant update to the stock exchanges yesterday, the bank disclosed that an internal review of processes relating to accounting for certain derivatives revealed discrepancies to the tune of about 2.35 per cent of the bank’s net worth as of December 31, 2024, or around ₹1,600 crore. It has also roped in an external agency to validate this.

This comes at a time when the bank is already grappling with the microfinance (MFI) crisis, an unusually abrupt CFO exit in mid-January, just about a week before release of Q3 results, and the bitter news of RBI allowing extension of CEO Sumant Kathpalia’s tenure by just one year instead of the asked for three years. Such repeated shocks have derailed the stock price, as it has fallen more than 40 per cent from the price on October 24, 2024 – the day preceding the day on which the stock fell a staggering 19 per cent, following the bank declaring poor results for Q2 FY25. That fall was its worst single day fall in twenty years (excluding the Covid dip). Today’s fall of 27 per cent at the time of publishing this, now takes pole position even after considering the Covid dips.

The stock now trades at a level last seen only in November of 2014 (excluding the Covid dip). During the same period (since November 2014), Nifty Bank has returned 168 per cent.

What went wrong

The internal review comes on the back of an RBI direction (RBI Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023) that directed banks to discontinue internal derivative trades, otherwise known as the derivatives desk, with effect from April 1, 2024. Such trades are taken to hedge currency risk emanating from conversion of foreign currency deposits and borrowings to rupees. Following RBI’s directive, the bank is now entering into hedging trades only with external market participants and not with the derivatives desk.

While the transactions entered after April 1, 2024 are all right, the discrepancies relate to how derivatives desk trades entered prior to FY25 were accounted for. The management note that the discrepancies are due to a certain accounting process, which has been in practice, ever since the inception of the desk and thus could pertain to five to seven financial years prior to FY25.

Financial impact

The adverse impact of these discrepancies translates to a one-time ballpark figure of ₹1,600 crore (2.35 per cent of net worth as of Q3 FY25), to be taken through the P&L account and is expected to impact the net interest income line. The management noted that the bank has enough reserves to bear this substantial impact and rightly so, as the bank’s average quarterly net profit in the elapsed quarters of FY25 is ₹1,626 crore. Nevertheless, the ₹1,600 crore figure is just an estimate and could vary following the audit by the external agency, which is expected to be complete by Q4 FY25.

On the other hand, according to the management, the bank’s microfinance portfolio (ex-Karnataka) has largely stabilised. The MFI provisions are expected to peak in Q4 FY25 and starting Q1 FY26, the situation is expected to get better.

Overall, there is little chance that Q4 FY25 bottom line will be in the black.

Investors’ confidence shaken

The CFO’s abrupt exit in January just about a week before release of Q3 results, on the pretext of a personal reason looked odd. At the time markets failed to acknowledge there can be no smoke without fire! Today the shares are bearing the brunt. Was lapses in internal control pertaining to these derivative trades, the reason the CFO departure was so sudden? Only time will tell.

Answering an analyst’s query, the management noted that the review was started way back in September of 2024, which the CFO was well aware of and that his resignation was due to personal reasons. The bank is also keeping the central bank in the loop. RBI not agreeing to a 3-year extension for the CEO – while it doesn’t establish a direct cause and effect with this discrepancy, it clearly shows its discomfort with the current CEO at the helm.

The bank now trades at a price-to-book value multiple of 0.8 times trailing book value. Investors will be better off not adding positions before the findings of the external audit are fully published.

Investor confidence has been shaken with a series of disappointing news. Cheaper valuation is not an offset for that.

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