IndusInd Bank Faces ₹2,000 Crore Net Worth Hit from Derivative Gaps
IndusInd Bank, a prominent financial institution backed by the Hinduja group, is currently grappling with a significant blow to its net worth, amounting to a staggering ₹2,000 crore. This substantial loss stems from the need to rectify accounting discrepancies linked to derivative transactions dating back several years.
The bank recently disclosed this impending financial setback to analysts, revealing that it anticipates absorbing the loss either during the current quarter or the subsequent one, pending a final audit review. This revelation comes at a critical juncture marked by mounting concerns regarding leadership stability within the organization and the erosion of the bank’s market value.
Net Worth Dips Due to Derivative Transaction Discrepancies
IndusInd Bank is bracing itself for a noteworthy decline in its net worth, ranging between ₹1,600 crore and ₹2,000 crore, equivalent to approximately 2.35% of its total net worth. These discrepancies have been attributed to derivative transactions spanning a period of five to seven years, prompting the bank to make necessary adjustments in either its fourth-quarter earnings or the opening quarter of the ensuing fiscal year.
CEO Sumant Kathpalia shed light on the situation during a late-night discussion with analysts, stating, “We began reviewing our internal trade book and noticed some discrepancies in our business, which were identified between September and October. We then hired an external agency to conduct a review.” He further affirmed, “We are confident that by the end of March or early April, we will have a clearer understanding of the situation. Although the initial findings seem in line with what we’ve stated, we want to ensure complete validation.”
A Preliminary Update for RBI and Market Response
Kathpalia confirmed that an initial update had been shared with the Reserve Bank of India (RBI), with a final report also submitted for scrutiny. The bank is eagerly awaiting the external auditor’s comprehensive report by the end of March. In response to these developments, shares of IndusInd Bank witnessed a 3.87% decline in value on Monday, closing at ₹900.50. This downward trend has translated into a 37% loss in market value over the past six months, with a significant 16% dip in the most recent month alone. Consequently, the stock is currently trading at levels last recorded in late 2022.
CEO’s Tenure Extension and Market Speculations
Addressing the extension of his tenure by one year, Kathpalia expressed, “I don’t know what is the rationale for them (RBI) to give me one year, but I think they’re uncomfortable with the way my leadership skills of running the bank is, and we have to respect that.” He affirmed his unwavering commitment to the bank for the upcoming year and disclosed that the board would evaluate both external and internal candidates for the CEO position.
Despite these assurances, market analysts remain cautious about the bank’s future trajectory. Bernstein forecasts that the stock is unlikely to undergo any rerating until a CEO with a full three-year term is appointed. Additionally, Macquarie Capital suggested the possibility of Kathpalia stepping down prematurely or the bank considering a public sector banker as his successor, viewing the one-year extension as a sub-optimal outcome.
In conclusion, the unfolding events at IndusInd Bank underscore the critical importance of transparent financial practices, effective leadership, and prudent decision-making in the banking sector. As stakeholders await further developments, the broader implications of this financial setback on the bank’s operations and market standing remain subjects of keen observation and analysis.