On Monday, after market hours, the private sector lender informed the stock exchanges about discrepancies in its derivatives portfolio pertaining to transactions done in the past five to seven fiscal years (FY24 and earlier). Investors dragged the stock down more than 25% on Tuesday. “A negative derivatives’ disclosure has the potential to unnerve investors more than a back-dated NPL disclosure,” wrote analysts from Nuvama Research in a 10 March report.

IndusInd’s internal review estimates an impact of 2.35% on its net worth as of December due to the discrepancies. This would mean a post-tax earnings impact of about ₹1,600 crore. The management intends to absorb this one-time impact in the March quarter (Q4FY25) through its income statement. Thus, FY25 net profit estimates have been slashed by about 25%. Analysts have cut target prices and ratings for the stock, which hit multi-year lows on Tuesday.

Erosion of credibility

But should this development have wiped off IndusInd’s market capitalization by a whopping ₹19,000 crore in a single day? Perhaps, this is an initial knee-jerk reaction, but serious credibility concerns have surfaced.

It also raises the question of whether this issue could have been recognized earlier. In a call with analysts on 10 March, the management pointed out that the ongoing practice came to light as it began reviewing its derivatives book, and it took them some time to assess the impact of the said issue.

“Management clarified that it had informed the Reserve Bank of India (RBI) earlier, but to us, this comes as a negative surprise reflecting lack of internal controls,” said Jefferies India analysts.

An external auditor will independently review and validate internal findings by the end of March. In FY22 as well, IndusInd hired an external audit firm when it faced allegations that its subsidiary Bharat Financial Inclusion disbursed microfinance loans without seeking the consent of the customers. Although the financial impact of that event was limited, it should have been a trigger to re-assess all processes, reckon Nuvama’s analysts, adding: “Requirement of frequent external audits impacts credibility and valuation.”

No respite

For IndusInd, the latest development is one more in a series of discouraging news, including the resignation of its chief financial officer a couple of months ago. Plus, the RBI granted a shorter extension of one year instead of three years to IndusInd’s managing director and chief executive, Sumant Kathpalia. He indicated on the call that the derivatives issue may have weighed on the RBI’s decision on his tenure extension.

For now, IndusInd does not expect an adverse impact on its growth and business prospects. But it is not as if near-term earnings outlook is rosy, especially given the stress in its MFI portfolio—a reason why the stock has shed more than 50% of its value in the past six months. Thus, even though valuations have become further attractive at nearly 0.7 times price-to-book multiple based on FY26 estimates, as per Bloomberg consensus, it may not excite investors.

“If there is a sharp improvement in financials, particularly with better asset-quality performance in the MFI portfolio, it could help mitigate the current concerns,” said analysts from Kotak Institutional Equities. “In addition, if there are fewer worries on deposit growth and adequate liquidity available for growth, investors might eventually view this event as a less significant error,” they said in a report on 11 March.

The bank now faces the arduous task of rebuilding trust, and that’s not going to happen overnight.