Explained: Why Rs 1,577 crore discrepancy made Rs 15,000 crore hole in IndusInd Bank market value

About 6.4 lakh shareholders of private sector lender IndusInd Bank were in for a rude shock this morning as the shares crashed 26% after it disclosed accounting discrepancies of about Rs 1,577 crore in its forex derivatives portfolio in a late evening call with analysts on Monday.

IndusInd Bank said the accounting discrepancies will have an adverse impact of 2.35% on its net worth as of December 2024. The post-tax impact comes to Rs 1,577 crore, based on preliminary findings, and will be reflected in its earnings for the fourth quarter.

What went wrong at IndusInd Bank?

During an internal review of processes relating to other assets and other liability accounts of the derivative portfolio, IndusInd Bank noted some discrepancies in its derivative portfolio pertaining to transactions done over the past 7-8 years (FY24 and earlier).

"The bank mentioned that these derivative positions pertain to foreign currency deposits/borrowings conversion. In simple words, while the MTM on external hedge reflected true picture, the internal hedge had different methodology; leading to the bank over-reporting NII / trading gains and thus overall profits. The discrepancy was visible in cases where the actual tenure of the internal and external legs was not similar due to premature rundown," said ICICI Securities analyst Jai Prakash Mundhra.

Since April 2024, IndusInd Bank has stopped the internal hedging, post which, around September 2024, it identified the discrepancies.

The bank has informed the RBI and is conducting an external audit to pinpoint the source of the discrepancies. It also told analysts that the bank wanted to give out a best-case estimate of the impact; hence, it was not disclosed during the Q3FY25 earnings call.

Why the impact on IndusInd Bank shares was so severe

The news was negative enough to send IndusInd Bank shares on a freefall as it plunged 22% to a fresh low of Rs 702.60, eroding around Rs 15,000 crore in market value after most brokerages downgraded the stock and reduced target prices.

Also read | IndusInd Bank shares crash to 52-week low

While the financial impact of the discrepancy might be minimal, the issue has raised concerns about credibility, analysts say.

"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. In the interim, we do not want to see any fresh negative outcomes emerge, as the bank has already seen negative, resulting in significant underperformance," Kotak Equities said.

Pointing out that it reflects poorly on internal controls, ICICI Securities said the hit is likely to run through P&L, and the bank could even report a loss in Q4FY25.

Nuvama said the negative derivatives' disclosure has the potential to unnerve investors more than a back-dated NPL disclosure.

"The timeline is discomforting—the CFO resigned just before the Q3 earnings, the CEO recently got a one-year extension instead of three and now a derivatives-induced dislocation. We believe IndusInd Bank's credibility and earnings shall be impacted," it said.

Analysts at Elara Securities raised 5 questions - 1) Why was this not highlighted earlier, 2) How is such a lapse possible despite concurrent audits, 3) Why did the auditors not share any qualifications, 4) Are there any additional challenges, and 5) How did this issue go undetected for more than five years?

"This poses a series of questions on lapses in terms of processes and sanctity of book value," Elara said, adding that while valuation look low, book value sanctity is under question.

IndusInd Bank investors are now left wondering whether the worst is over or if there is still more in store.

Also read | IndusInd Bank shares hit by downgrades, target price cuts. What investors should do

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)